Conventional vs. VA loans

If you qualify for a Veterans Association (VA) home loan, it’s worth considering some of the benefits and drawbacks of a VA loan vs. a conventional loan. Surveys show that many veterans either don’t realize that VA loans exist or are misinformed about how they work. Before deciding which is right for you, find out how to get the best possible rates and options for your new home.

How do conventional loans differ from VA loans?

While VA loans are backed by the government, protecting lenders in case you can’t pay back your loan, conventional loans require borrowers to purchase private mortgage insurance (PMI) if the down payment is less than 20%. This can cost hundreds per month and offers you no protection. Rather, it protects the lender if you default on your loan.

Some other differences include:

Interest Rates

The rates for both types of loans are subject to market conditions and can be negotiated, but the guarantee on VA loans tends to make the interest rates lower.

Maximum loan amounts

A VA loan’s maximum amount is based on the maximum guarantee authorized by the VA. For 2020, that maximum guarantee is 25% of the loan up to $127,600, which makes the maximum loan amount $510,400.

That same limit is applied to conventional loans backed by Fannie Mae and Freddie Mac, which have a maximum loan limit of $510,400 for a one-unit property in most areas.

Mortgage insurance

Most lenders require private mortgage insurance (PMI) on conventional mortgages with less than 20% down.

But you don’t have to pay PMI on a VA loan, even with no down payment, because 25% of your loan is guaranteed by the VA.

Fees

There are standard fees that are charged for all conventional and VA loans. The VA, however, charges a one-time funding fee. This can range anywhere from 1.25% to 3.3% of the loan amount depending on the loan you get, your loan history and whether you choose to pay a down payment.

Down payment

Down payment requirements for conventional loans vary from lender to lender, but typically start at 3% of the loan amount.

The VA doesn’t require a down payment as long as the loan amount doesn’t exceed the loan limit for the county and the sales price doesn’t exceed the appraised value of the home.

Credit score

Your credit score is used to determine your level of risk in paying back the loan. The higher your score, the better your loan terms are likely to be. And while lenders tend to not set a consistent minimum, most banks look for a score of 620.

Restricted uses

Conventional loans can be used for both primary and secondary residences as well as investment properties, but VA loans come with more restrictions.

The VA requires you to occupy the property as your primary residence and must approve condos using a list of restrictions that include how many units are owner-occupied. The VA loans on properties under construction on a select basis with VA-approved builders.

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Features	Loan types: Conventional, Refinance, Home Equity, HELOC, Jumbo, Reverse, FHA, VA, USDA Minimum credit score: 620 Minimum down payment: 3.5%

Bottom line

Understanding your loan options is an important first step when buying a home or investment property. In most cases, if your home and property are eligible for a VA loan, the benefits outweigh the drawbacks.

If you don’t qualify for a VA loan, there are a number of conventional loan options and programs that can help make your new home as affordable as possible. Before making a decision, check out a few different lenders and compare all of your options.

Frequently asked questions

• What are the requirements to qualify for a VA loan?

  To qualify for a VA loan, you must meet one of these requirements:

  • Served for at least 90 consecutive days during active wartime
  • Served for at least 181 consecutive days during peacetime
  • Served for six or more years in the National Guard or Reserves
  • You’re the spouse of a service member who has died in the line of duty or as a result of a service-related injury

  The property you wish to purchase with a VA loan must be your primary residence.

• Can I reuse my VA loan?

  Yes. Because your eligibility for a VA loan is considered an entitlement, you can use your full loan entitlement over and over as long as you’ve paid off your previous loan in full. There is also a second-tier VA loan entitlement that allows you to possibly take out a secondary loan or get a new loan, even if you defaulted on a previous loan.

• Does PMI ever go away?

  Yes. Most lenders will remove your PMI requirement after you have at least 20% equity in the home. Ask your lender about requirements specific to your mortgage so you can build this potential savings into your budget.