If you're in the market to buy a home and you're a veteran, you have two big choices for a mortgage: a VA loan or a conventional loan.
If you don't have any money for a down payment, the choice is obvious: Choose the VA loan. But it may not always be quite so clear. We'll help you decide which loan is right for you.
- Unlike conventional mortgage loans, VA loans with full entitlement typically don't require a down payment or private mortgage insurance (PMI).
- Interest rates are often lower with VA loans, although they can take slightly longer to close than conventional loans.
- While VA loans don't have a set credit requirement, you will still need to meet the credit and income requirements of the lender.
- VA loans can only be used for purchasing a primary residence, whereas conventional mortgages can be used for a wide range of property types.
VA Loan vs. Conventional Loan Side By Side
You'll need to weigh the pros and cons of each loan type when deciding which one is right for you. As you go down this list comparing VA loans and conventional mortgage loans, consider whether each factor is important in your situation.
|VA Loan||Conventional Mortgage|
|Down payment||None required||Recommended 20%, but can go as low as 3%|
|Interest rates||Lower (average of 2.83% in August 2021)||Higher (average of 3.04% in August 2021)|
|Property type||Can only be used for primary residence||Can be used for primary residence, vacation home, or investment real estate|
|PMI||None required||Required if you're making a down payment of less than 20%|
|Credit required||No specific requirement, but the average credit score is 722 for most lenders||650, but the average credit score is 758|
|Average closing speed||55 days||49 days|
The biggest feather in the VA loan's cap is that it generally doesn't require any down payment. By contrast, with almost any other mortgage program, the minimum down payment is 3%. Using a VA loan, you can buy a home at any price with no money down if you have "full entitlement," which means that you've either never taken out a VA loan before, or you’ve reimbursed the VA for any past VA loans or foreclosures.
However, there are some cases in which you'll still need to use a down payment with a VA loan. If you only have partial VA loan entitlement, such as if you've used or defaulted on a VA loan in the past, you may only have a portion of your entitlement available to you. Your lender can help you determine how much your down payment will need to be. Most require that your entitlement, down payment, or both cover 25% of your loan.
Just because you can take out a no-money-down loan doesn't mean it's a good idea. You'll have a larger loan, pay more in interest and, possibly, fees, have less equity in your home to start, and have larger monthly payments.
The interest rates on a VA loan tend to be lower than on a conventional loan. In fact, according to data collected by The Balance, the average VA 30-year fixed-rate mortgage on August 25, 2021, was 2.83%, the same as a 20-year conventional loan. The rate for a 30-year conventional mortgage was 3.04%.
That might not sound like much, but on a $500,000, 30-year mortgage, that difference in interest rates would save you about $20,292 in interest charges alone. Your monthly payment would also be about $57 less.
Conventional loans are commonly used to buy homes. But you can also use them to buy other properties, whether that's a vacation home, a secondary home for your parents, or a rental investment property.
The sole purpose of VA loans, on the other hand, is to help veterans and active-duty servicemembers buy their homes. Thus, you can only use VA loans to buy your primary residence.
However, if you used a VA loan to buy your current home, you are allowed to use a secondary VA loan to buy another property to move into as your primary home, and rent out the first one for income. However, your VA loan entitlement will be reduced because of your first loan, which will affect the size of the down payment you may need, and possibly the VA loan funding fee.
Private Mortgage Insurance (PMI)
Normally, with conventional loans, you'll need to pay for private mortgage insurance (PMI) if you make a down payment of less than 20%. This insurance is designed to protect the lender in the event that you default on the loan. It's not a great deal for you, as it only increases the amount of your monthly payment.
With VA loans, however, a major benefit is that you don't have to pay PMI, even if you put no money down. That's because the VA will reimburse the lender for part of the loan if you default, so there’s no need for more insurance for the lender.
However, to pay for this service, the VA loan does charge a one-time, upfront funding fee. This fee ranges from 1.4% to 3.6% of the total loan amount, and it can be financed into the loan or paid upfront.
A VA loan funding fee may be waived in certain cases, such as if you are receiving compensation for a service-connected disability.
Most conventional loans require a credit score of 650 or higher, although this may vary by lender. In general, the higher your credit score, the easier it will be to get a mortgage.
VA loans, on the other hand, have no official minimum credit score requirements. However, just like with conventional loans, lenders can set their own internal requirements.
In June 2021, the average credit score for people approved for VA loans was 722, versus 758 for conventional loans.
Average Closing Speed
VA loans do take slightly longer to close than conventional loans, on average. That's because the home appraisal can only be done by a VA-approved appraiser, and it must pass certain inspections and requirements.
The difference in closing speeds isn't large, though. In June 2021, it took an average of 55 days to close on a VA loan, versus 49 days for a conventional mortgage. However, that might make an impact in a competitive market where sellers are more likely to choose offers that close quickly.
There are things you can do to speed up the process of applying for a VA loan, such as getting pre-approved and being proactive and responsive throughout the process to any lender requests.
VA Loan vs. Conventional: Which is Best For You?
If you don't have a down payment saved, then the decision is clear. Choose a VA loan, because you won't have to pay PMI.
If you have plenty of savings, however, it's a bit more of a challenge to choose. If you're concerned about getting the best rates, choose the VA loan. If you'd like to avoid the upfront funding fee of a VA loan, choose a conventional loan. You can always ask your lender to run the numbers for both scenarios to see which is more affordable in terms of monthly payments and overall loan costs.
Frequently Asked Questions (FAQs)
How long does a VA loan take to close vs. a conventional loan?
VA purchase loans take an average of 55 days to close, compared to 49 for conventional mortgage loans, according to June 2021 data from ICE Mortgage Technology.
When should you use a VA vs. a conventional loan?
Use a VA loan if you don't have enough money saved to make a down payment, or if you want lower interest rates. If you don't put anything down you'll be taking out a larger loan with bigger monthly payments, so it's important to make sure you're still able to afford them easily.
Are VA loans harder to close?
The time required to close either is very similar. Seventy-five percent of VA purchase loans typically close within three months, as opposed to 77% of conventional mortgage loans.
What are the benefits of a VA loan?
VA loans require no down payment, have lower interest rates, and don't require private mortgage insurance (PMI).