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VA loan vs. conventional loan: Which is right for you?

Yahoo Personal Finance· Thom Lang via Getty Images
5 min read

The US Department of Veterans Affairs (VA) offers home loans to military service members, veterans, and their families. These VA loans often have more lenient eligibility requirements and lower costs than conventional mortgage loans, making them an attractive option for eligible borrowers. But that doesn’t mean a VA loan is necessarily the right choice for you, even if you qualify.

Here’s what you need to know about the differences between a VA loan versus a conventional loan so you can choose the right mortgage for your situation.

Read more: Types of mortgage loans

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One way the United States shows its gratitude to our military members is through the Department of Veterans Affairs mortgage loan program. Under this program, the VA insures the mortgages of eligible active-duty service members, veterans, or surviving spouses. By insuring VA loans, the VA offers financial protection to mortgage lenders in case you default on your mortgage or face foreclosure. As a result, lenders often have laxer requirements for getting a VA loan than a conventional loan.

Read more: The best VA loan lenders

A government agency does not insure a conventional loan. That means mortgage lenders have their own specific qualification requirements for conventional loans, unlike VA loans, which have requirements set by the VA.

However, even though the government does not back conventional loans, the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac purchase conventional mortgages from lenders to provide capital to those lenders.

Though mortgage lenders can set their own requirements for conventional loans, most will make sure their loans conform to Fannie Mae and Freddie Mac’s guidelines so they can eventually sell them to the GSEs.

Read more: The best mortgage lenders for first-time home buyers

Understanding the eligibility and mortgage qualification requirements for a VA loan versus a conventional loan can help you decide which one is right for you.

To qualify for a VA loan, eligible borrowers must have a Certificate of Eligibility (COE) from the VA. The VA will only issue a COE to you if you are an active-duty service member, an honorably discharged veteran who has met the minimum service requirements, an eligible National Guard or Reserve member, or the surviving spouse of a military member.

Conventional loans do not have any special eligibility requirements.

While both VA and conventional loans require borrowers to meet certain minimum financial requirements, the specifics vary.

These are rules of thumb, but remember that requirements may vary depending on which mortgage lender you choose and on your personal finances. For example, some lenders will allow a DTI ratio of up to 50% on either type of loan if your finances are strong otherwise.

A VA loan can be used for a home purchase, a VA Interest Rate Reduction Refinance Loan (IRRRL), a VA cash-out refinance, or a Native American Direct Loan (NADL) for a primary residence.

VA loans have an occupancy requirement, stating that the veteran borrower (or their spouse and/or dependents, if the military member is deployed) personally intends to occupy the home. This means that, as a general rule, you cannot use a VA loan for a second home or for an investment property.

It is possible to use a VA loan for a second home even if you still own your first VA loan-purchased property, provided you intend to occupy the second home. The most common situation that allows for this kind of VA loan purchase is if the active-duty borrower has a permanent change of station (PCS) away from the first home. But as long as you use the second VA loan for a home you intend to make your primary residence and give up residence of your original home, you are still entitled to a VA loan for the new purchase. Just remember that having two VA loans at once will limit the amount of money the VA will guarantee, which could limit your borrowing power.

Conventional mortgage loans, on the other hand, have no primary residence or occupancy restrictions, although purchasing a home as an investment property or as a second house may have stricter borrowing requirements and a higher interest rate.

Learn more: How to buy a second home

VA loans come with a funding fee ranging from 1.25% to 3.30% of the amount borrowed, depending on the size of your down payment and how many times you have received a VA loan.

Conventional loans, on the other hand, do not have a funding fee, but may come with an origination fee or other closing costs. If you put down less than 20%, you’ll pay for private mortgage insurance (PMI) until you acquire more equity in your home and have it canceled.

Whether you have a VA or conventional loan, you can either pay these fees out of pocket at closing or have them rolled into your total loan amount.

Learn more: How a VA loan funding fee exemption works

Eligible borrowers can qualify for a VA loan with a $0 down payment and no required PMI. Additionally, VA loans may have lower interest rates than conventional loans, and they generally have less stringent borrowing requirements. This can make home ownership more accessible to military members.

VA loans require a funding fee of between 1.25% and 3.30%. Borrowers who put down $0 will only have equity in the home once they have been making payments for some time.

VA loan interest rates are typically better than conventional loan interest rates for borrowers who make a small down payment. However, a borrower who is able to put down a 20% down payment on a conventional loan may qualify for a better rate than they would with a VA loan.

This article was edited by Laura Grace Tarpley.