What Is the Difference Between a VA Loan and a Conventional Loan?

Securing a home mortgage is a significant financial undertaking, with VA loans and conventional loans being two prevalent options. Understanding their distinct characteristics and requirements is crucial for prospective homebuyers. This comparison clarifies the differences between these common mortgage types, enabling informed decisions.

Understanding VA Loans

A VA loan is a mortgage product designed for eligible service members, veterans, and surviving spouses, backed by the U.S. Department of Veterans Affairs. Its purpose is to help those who have served the nation achieve homeownership. Private lenders fund these loans, with the VA’s guarantee reducing lender risk and leading to favorable terms for borrowers.

Eligibility typically requires specific service criteria, such as 90 consecutive days of active service during wartime or 181 days during peacetime, or six years in the National Guard or Reserves. Spouses of service members who died in the line of duty or from a service-connected disability may also qualify. A Certificate of Eligibility (COE) confirms a borrower’s service meets VA requirements.

Key features of VA loans include the absence of a down payment requirement for most eligible borrowers, allowing for 100% financing. Unlike other loan types, VA loans do not require private mortgage insurance (PMI). However, a one-time VA funding fee is typically applied to help offset program costs, though certain veterans are exempt.

Understanding Conventional Loans

A conventional loan is a mortgage not insured or guaranteed by a government agency. These loans are widely available from private lenders and are generally suitable for borrowers with strong credit profiles and stable financial histories.

Eligibility involves meeting specific criteria set by the lender and often by government-sponsored enterprises like Fannie Mae and Freddie Mac. Borrowers typically need a minimum credit score, and lenders evaluate debt-to-income (DTI) ratios.

A common feature of conventional loans is the expectation of a down payment. 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 protects the lender in case the borrower defaults on the loan.

Key Differences in Loan Characteristics

The core characteristics of VA and conventional loans significantly impact a homebuyer’s financial obligations and eligibility.

Down Payment and Mortgage Insurance

VA loans typically allow for no down payment, enabling 100% financing for eligible borrowers. They do not require private mortgage insurance (PMI). However, a one-time VA funding fee is usually applied, ranging from 0.5% to 3.3% of the loan amount, depending on factors like loan type, prior VA loan use, and down payment size. This fee can be paid upfront or financed into the loan. Conventional loans generally require a down payment, ranging from 3% to 20% or more, with 20% often being the benchmark to avoid additional costs. If the down payment is less than 20%, PMI is typically required, adding to the monthly mortgage payment until sufficient equity is built. PMI can usually be canceled once the borrower reaches 20% equity in the home.

Credit Score and Debt-to-Income (DTI)

While the VA does not set a minimum credit score, individual lenders offering VA loans typically require a score around 620. Conventional loans generally have stricter credit score criteria, with lenders often seeking a minimum of 620. Borrowers with scores of 720 or higher usually qualify for the most competitive rates. VA loans often have more flexible DTI guidelines, with some lenders allowing higher ratios than conventional loans, as the VA considers residual income and other compensating factors. Conventional loans typically prefer a DTI ratio below 45%, though some programs may allow up to 50% under specific conditions.

Loan Limits

VA loans do not impose a maximum loan amount for those with full entitlement, allowing eligible borrowers to finance higher-value homes without a down payment. Conventional loans are subject to conforming loan limits set annually by the Federal Housing Finance Agency (FHFA). In most areas, this limit is $806,500 for a one-unit property in 2025, with higher limits in designated high-cost areas. Loans exceeding these limits are considered “jumbo” loans and come with stricter requirements.

Appraisal and Property Requirements

VA loans require a specific VA appraisal, which includes an assessment of Minimum Property Requirements (MPRs). These ensure the home is safe, sanitary, and structurally sound, covering aspects like functional utilities, sound roofing, and proper drainage. Conventional loans typically require a standard appraisal to determine the property’s market value. Lender-specific requirements may not be as stringent regarding property condition as the VA’s MPRs.

Interest Rates and Closing Costs

VA loans often offer competitive interest rates due to the government guarantee. Conventional loan rates depend on the borrower’s creditworthiness and market conditions. Closing costs are incurred with both loan types. VA loans have limits on certain fees that can be charged to the borrower, and the funding fee can be rolled into the loan. Conventional loan closing costs typically include lender fees, title insurance, and appraisal fees.

The Application and Approval Process

The application and approval process for VA and conventional loans shares common steps, but each has unique requirements. Both begin with a pre-approval phase, where a lender evaluates a borrower’s financial standing. For a VA loan, obtaining a Certificate of Eligibility (COE) verifies service eligibility. Conventional loan pre-approval involves a comprehensive review of credit history, income, and assets.

Documentation for both includes proof of income (e.g., pay stubs, W-2 forms) and asset verification (e.g., bank statements). The COE is an additional document for VA loans. Underwriting assesses financial risk; VA loan underwriting can be more flexible regarding debt-to-income ratios than conventional loans.

A key difference is the appraisal. VA loans require a VA-specific appraisal that determines market value and ensures the home meets Minimum Property Requirements (MPRs) for safety, sanitation, and structural soundness. If a property does not meet MPRs, repairs may be necessary. Conventional loans require a standard appraisal focused primarily on market value, with less emphasis on strict property condition standards. Closing procedures for both involve signing documents and paying closing costs.

Refinancing Your Loan

Refinancing options are available for both VA and conventional loans. For VA loan holders, the Interest Rate Reduction Refinance Loan (IRRRL) allows veterans to refinance an existing VA loan to a lower interest rate or convert an adjustable-rate mortgage to a fixed rate. This streamlined process often requires less documentation and has a reduced funding fee of 0.5%.

Another VA refinancing option is the VA Cash-Out Refinance. This allows eligible borrowers to replace their existing VA or non-VA mortgage with a new VA loan for a higher amount, taking cash out from their home equity. While the VA allows cash-out refinancing up to 100% of the home’s value, many lenders cap it at 90%. This option involves a more thorough underwriting process, including credit, income, and appraisal requirements.

Conventional loan holders have several standard refinancing options. A common choice is a rate-and-term refinance, which involves obtaining a new loan to secure a lower interest rate or change the loan term. Another option is a conventional cash-out refinance, where borrowers access home equity by taking out a new, larger loan and receiving the difference in cash. Conventional cash-out refinances typically have loan-to-value (LTV) limits, requiring borrowers to maintain a certain percentage of equity after the refinance. Eligibility for both conventional refinance types depends on factors like credit score, debt-to-income ratio, and home equity.