VA Loans vs. Conventional Loans

Deciding between a VA loan or a conventional loan may seem easy. No money down and no mortgage insurance — a VA mortgage wins hands down, right?

But when you consider things like the VA funding fee and perhaps putting enough money down on a conventional mortgage to forgo mortgage insurance, the choice may be more complex.

Backed by the U.S. Department of Veterans Affairs, VA loans are only for veteran and current military members and some surviving spouses. Conventional loans, which are not backed by the federal government, are for anyone who can meet a lender's financial requirements.

Here are the factors to consider when deciding between a VA mortgage and a conventional loan.

VA loans vs. conventional loans

Loan requirements	VA loans	Conventional loans
Property type	Primary home.	Primary or second home, investment properties.
Minimum down payment	Zero in most instances.	Usually at least 3%. Some lenders offer special zero-down loans.
Mortgage insurance	No mortgage insurance. One-time VA funding fee of 1.25% to 3.3% of loan amount for purchase mortgages.	Private mortgage insurance usually required if down payment is less than 20%.
Minimum credit score	No minimum set by VA, but a 580-620 FICO score is a common lender requirement.	A 620 FICO score is typical.
Maximum debt-to-income ratio	Lenders will give more scrutiny if DTI is over 41%.	Ideally under 36%, but higher ratios can be accepted.

Property type

The type of property you’re buying can be a key factor in the VA-versus-conventional decision.

VA loans

A VA loan can be used to purchase a primary residence, and the property must meet minimum standards set by the VA.

Conventional loans

A conventional loan gives you more options. You can use it to buy a primary home, a second home or an investment property.

The takeaway: Choose a conventional loan if you want to buy a vacation or rental property.

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Minimum down payment

VA loans

VA loans usually require no down payment. However, a lender may require money down if the purchase price of a property is higher than its current market value. That can happen in competitive housing markets with bidding wars.

Conventional loans

Conventional loans usually require a down payment. The amount varies by lender but can be as low as 3%. Some lenders offer niche no-down-payment loans.

The takeaway: VA loans usually have the lowest down payment requirement.

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Mortgage insurance

VA loans

VA loans don't require mortgage insurance, but they do have a funding fee, a one-time, upfront charge ranging from 1.25% to 3.3% of the loan amount for purchase mortgages. The fee percentage depends on your down payment amount and whether you've ever had a VA loan.

The funding fee is 0.5% for an Interest Rate Reduction Refinance Loan, or IRRRL, and 2.15% for a first VA cash-out refinance and 3.3% for a subsequent VA cash-out refinance loan.

You can pay the fee in cash at closing or finance it as part of the mortgage.

Service members who have been awarded a Purple Heart, veterans receiving compensation for a service-connected disability and surviving spouses receiving Dependency and Indemnity Compensation are exempt from the funding fee.

» MORE: What are VA loan closing costs?

Conventional loans

Conventional loans usually require private mortgage insurance if you put down less than 20%.

The amount you pay varies by lender, but depending on your credit score and the size of your down payment, average annual PMI fees range from 0.46% to 1.5% of the loan amount, according to the Urban Institute's Housing Finance Policy Center. Typically, the annual PMI cost is divided into 12 portions and added to your monthly mortgage payments. You can use a PMI calculator to estimate the cost.

You can get rid of PMI after you've built some equity. Your mortgage servicer must cancel the PMI after the mortgage balance reaches 78% of the home's value or you hit the midway point of the loan term. You can ask the servicer to cancel it sooner once your balance is 80% of the home's value when you purchased it.

The takeaway: A conventional loan might be the best choice if you can put down 20% or more. You avoid the VA funding fee with a conventional loan and can skip PMI with a large down payment. But compare costs with a VA loan before deciding.

» MORE: Find the best VA lender for you

Credit score requirements

You will qualify for better rates with a higher credit score, regardless of loan type.

VA loans

The VA sets no credit score requirement, but lenders have their own standards. Common FICO score requirements range from 580 to 620. The average FICO score of borrowers with VA purchase loans that closed in the last 30 days was 725, according to mortgage data provider ICE Mortgage Technology.

Conventional loans

Requirements vary by lender, but a common minimum credit score is 620. The average FICO score of borrowers with conventional purchase loans that closed in the last 30 days was 753, according to ICE Mortgage Technology.

The takeaway: You might have an easier time qualifying for a VA loan than a conventional loan if your score is under 620. Another option would be an FHA loan, insured by the Federal Housing Administration. The minimum credit score is 500 for an FHA loan with a 10% down payment and 580 for an FHA loan with a 3.5% down payment.

» MORE: FHA vs. VA loan

Maximum debt-to-income ratio

The debt-to-income ratio, or DTI, is the percentage of your gross monthly income that goes toward monthly debt payments, including housing costs. Regardless of loan type, you'll qualify for better mortgage rates with a lower DTI.

VA loans

The VA has no maximum debt-to-income ratio, but it requires lenders to give loan applications more scrutiny when the DTI is greater than 41%. The average DTI of borrowers with VA purchase loans that closed in the last 30 days was 44%, according to ICE Mortgage Technology.

Conventional loans

For conventional loans, lenders like to see a debt-to-income ratio of under 36%, but many accept higher ratios. The average DTI of borrowers with conventional purchase loans that closed in the last 30 days was 37%, according to ICE Mortgage Technology.

The takeaway: If average DTIs of borrowers are any indication, then you'll probably have a better shot qualifying for a VA loan with a DTI over 36% than with a conventional loan. Paying down debt will lower your DTI and increase the chances of qualifying for a mortgage at better rates.

The final decision

A VA loan may be your best bet if you don't have a big down payment or have a higher DTI. You'll pay the one-time VA funding fee but won't bear the annual cost of private mortgage insurance.

A conventional loan may cost less than a VA loan if you can put down 20% and skip mortgage insurance. A conventional loan is also the way to go if you want to buy a second home or investment property.

The only way to make an informed choice is to compare mortgage rates and fees for both types of loans, given your financial details. Visit with a loan officer who handles VA and conventional loans to crunch the numbers and discuss options.