Is a VA Loan Considered a Conventional Loan?
Unsure about home loan types? Learn the fundamental differences separating VA loans from conventional mortgages and what it means for you.
Homebuyers encounter various loan options. Understanding the distinctions between conventional and VA loans is important for purchasing a home.
Characteristics of Conventional Loans
Conventional loans are mortgage financing not insured or guaranteed by any government agency. Private lenders, such as banks and credit unions, offer these loans. Borrowers generally need to meet specific financial benchmarks, including a minimum credit score, commonly around 620. Lenders also evaluate a borrower’s debt-to-income (DTI) ratio, which is the percentage of gross monthly income toward debt payments. A DTI ratio of 43% to 50% is a common range.
A down payment is usually required for conventional loans, varying from 3% to 20% or more. When the down payment is less than 20%, borrowers typically pay Private Mortgage Insurance (PMI). PMI protects the lender and can often be canceled once a borrower achieves 20% equity. Many conventional loans are “conforming,” adhering to loan limits set by the Federal Housing Finance Agency (FHFA).
Characteristics of VA Loans
VA loans are a distinct type of mortgage financing guaranteed by the U.S. Department of Veterans Affairs (VA). This government guarantee provides security to private lenders, enabling them to offer favorable loan terms. Eligibility is specific to military service, generally including active-duty service members, veterans, reservists, National Guard members, and certain eligible surviving spouses. The duration and character of service determine eligibility.
A Certificate of Eligibility (COE) confirms an individual meets the VA’s service requirements. While necessary, a COE is often obtainable directly by the lender. VA loans offer key features, including no down payment for eligible borrowers. Unlike many other loan types, VA loans do not require Private Mortgage Insurance (PMI). Instead, VA loans include a one-time VA funding fee, which helps sustain the program. This fee can be paid upfront or financed, and exemptions are available for certain veterans, such as those receiving VA disability compensation.
Comparing Conventional and VA Loans
VA loans are not conventional loans; they are a distinct category of government-backed mortgages. The primary distinguishing factor is government backing: VA loans are guaranteed by the U.S. Department of Veterans Affairs, while conventional loans are not. This guarantee reduces risk for private lenders, allowing for flexible terms. Conventional loans rely on borrower qualifications and Private Mortgage Insurance to mitigate lender risk.
Down payment requirements differ. VA loans often allow eligible borrowers to purchase a home with no down payment. Conventional loans typically require a down payment, ranging from 3% to 20% or more. Mortgage insurance also differs. Conventional loans usually necessitate PMI when the down payment is less than 20%. VA loans do not have a PMI requirement, instead utilizing a one-time VA funding fee.
Eligibility criteria also differentiate the loans. Conventional loans are available to any qualified borrower meeting lender credit and income standards. VA loans are specifically for individuals with qualifying military service or their eligible surviving spouses. VA loans are generally intended for a primary residence, while conventional loans offer greater flexibility for primary residences, vacation homes, or investment properties.
Key Eligibility and Processing Factors
The underwriting process for both conventional and VA loans involves assessing a borrower’s financial standing. For conventional loans, lenders scrutinize credit scores, generally looking for a minimum of 620, and debt-to-income ratios typically below 45% to 50%. Stable employment history and verified assets are also important. Automated underwriting systems are often used to streamline evaluation.
For VA loans, the Certificate of Eligibility (COE) confirms military service eligibility. While the VA guarantees a portion of the loan, private lenders still apply their own credit and income requirements, known as “overlays.” A VA appraisal is required, which includes an evaluation to ensure the property meets the VA’s Minimum Property Requirements (MPRs). These MPRs ensure the home is safe, sanitary, and structurally sound.
Both conventional and VA loans are originated, underwritten, and serviced by private lenders. VA loans operate under specific guidelines established by the Department of Veterans Affairs. This framework allows private lenders to offer the benefits associated with VA loans to eligible service members and veterans.