Are VA Loans Better Than Conventional Loans?

Homebuyers often choose between a VA loan and a conventional loan. Both options lead to homeownership but have distinct characteristics and requirements. This article compares VA and conventional loans, detailing their key elements and outlining the general process for navigating each.

Distinctive Features of VA Loans

VA loans are guaranteed by the Department of Veterans Affairs and extended to eligible veterans, active-duty service members, and certain surviving spouses. Private lenders issue these loans, with the VA guaranteeing a portion, which reduces risk for the lender. This backing allows for favorable terms.

VA loans typically do not require a down payment for eligible borrowers with full entitlement. They also do not require private mortgage insurance (PMI).

Instead of PMI, VA loans include a one-time VA funding fee. This fee generally ranges from 0.5% to 3.6% of the loan amount, depending on factors like loan type, whether it is a first-time or subsequent use, and the size of any down payment. The fee can be paid upfront at closing or financed into the loan amount. Certain individuals, such as veterans receiving compensation for service-connected disabilities or Purple Heart recipients, are exempt from paying the funding fee.

To verify eligibility, borrowers must obtain a Certificate of Eligibility (COE) from the VA. This document confirms military service requirements and details available VA loan entitlement. While the VA does not set a minimum credit score, most lenders typically require a FICO score of 620 or higher, though some may accept lower scores around 580. For 2025, the standard VA loan limit for most U.S. counties is $806,500, with higher limits up to $1,209,750 in high-cost areas. However, veterans with full entitlement are not subject to these loan limits, meaning they can borrow as much as a lender is willing to provide without a down payment.

Distinctive Features of Conventional Loans

Conventional loans are mortgages provided by private lenders, such as banks, credit unions, and mortgage companies, without government backing. These loans typically adhere to guidelines set by Fannie Mae and Freddie Mac.

Lenders typically look for a minimum credit score of at least 620, though higher scores, often 740 or above, can lead to more favorable interest rates and terms. Borrowers’ debt-to-income (DTI) ratio is also a key factor, with most lenders preferring it to be at or below 43-45%, though some may accept up to 50% depending on other qualifying factors.

Conventional loans generally require a down payment, which can range from as little as 3% for some programs. If a borrower makes a down payment of less than 20% of the home’s purchase price, private mortgage insurance (PMI) is typically required. This insurance is usually paid monthly and is added to the mortgage payment. PMI can typically be canceled once the borrower reaches 20% equity in their home.

Conforming loan limits, established by the Federal Housing Finance Agency (FHFA), dictate the maximum loan amount for conventional mortgages. For 2025, the baseline limit for a single-family home in most of the United States is $806,500, extending up to $1,209,750 in high-cost areas. Loans exceeding these limits are known as jumbo loans and generally have stricter qualification criteria.

Comparing Key Loan Elements

Down payment requirements differ significantly. VA loans typically do not require a down payment for eligible borrowers with full entitlement. Conventional loans generally require a down payment, often starting at 3%, with 20% being the threshold to avoid private mortgage insurance.

Mortgage insurance also varies. VA loans do not require private mortgage insurance (PMI), instead having a one-time funding fee. For conventional loans, PMI is required when the down payment is less than 20%, adding to the monthly housing cost until sufficient equity is built.

Credit score requirements also vary. While the VA does not impose a minimum, individual VA lenders often set their own minimums, typically around 620. Conventional loans generally require a minimum credit score of at least 620, with higher scores often securing more competitive interest rates.

Interest rates for VA loans are often lower than those for conventional loans. This favorable rate is attributed to the government backing, which reduces risk for lenders. Actual rates depend on market conditions and borrower profiles.

Property requirements also differ. VA loans mandate that properties meet specific Minimum Property Requirements (MPRs) to ensure they are safe, sanitary, and structurally sound. A VA appraisal focuses on these MPRs, and any identified issues must be addressed before loan approval. Conventional appraisals assess market value and general condition but do not have the same stringent property standards.

Navigating the Loan Process

The journey to homeownership typically begins with obtaining a pre-approval. This step involves a lender reviewing a borrower’s financial profile to determine how much they are conditionally approved to borrow. Pre-approval requires submitting various financial documents, including proof of income, assets, and debts, and allows the lender to perform a credit check. This initial assessment provides a realistic budget and strengthens a home offer.

Once pre-approved, the formal loan application process requires a comprehensive set of documents to verify financial standing. For both VA and conventional loans, this generally includes recent pay stubs (typically for the last 30 days), W-2 statements for the past two years, and bank statements covering the last two months. Self-employed individuals will also need to provide two years of federal tax returns. A valid government-issued photo ID is universally required for borrower identification.

For VA loans specifically, the Certificate of Eligibility (COE) is needed. While a COE is essential for loan closing, it is not always required to start the pre-approval process; lenders can often help obtain it. Beyond the COE, VA loan applicants typically provide military service records like a DD-214 or a statement of service for active-duty personnel.

Following the application, the loan enters the underwriting phase. During underwriting, a mortgage underwriter examines the borrower’s credit history, income, assets, and the property details to assess the risk involved in the loan. This stage may involve requests for additional documentation or clarification on financial transactions.

The final step in the loan process is closing. This is the event where all legal documents are signed, and the ownership of the property is formally transferred. Borrowers will sign various documents, including the promissory note and the mortgage or deed of trust. At closing, any remaining down payment, closing costs, and prepaid expenses, such as property taxes and homeowner’s insurance, are typically paid. The closing generally occurs at a title company, lender’s office, or attorney’s office.