By Bill Lyons | Published on July 21, 2020
TABLE OF CONTENTS

    VA loans are special home loans available only to veterans and active duty service members. They’re popular among those in the military because they boast lower interest rates than conventional mortgages often offer, and sometimes come with the perk of no down payment and more flexible credit requirements. However, before you rush to get a VA loan, it’s often smart to first walk through the pros and cons of this method of funding, and compare the benefits to those you might expect from a conventional mortgage.

    Whatever you ultimately decide is right for you and your family, your decision will be much easier once you’ve gathered all the relevant information. Below is a list of topics we’ll discuss in this post.

    Let’s start by taking a look at the benefits most people think of when they compare VA loans to conventional mortgages, then we’ll dive into a point-by-point comparison between the two. 

    Benefits of a VA Loan vs Conventional Loan: Overview

    VA Loans

    VA loans are special home loans available only to military veterans and active duty servicemembers, as well as their surviving spouses in some cases. These loans are particularly attractive to many veterans and servicemembers because they offer certain perks:

    • No down payment required
    • Lower interest rates than traditional mortgage options
    • Backed by the Department of Veterans Affairs 
    • No need for private mortgage insurance 
    • Flexible loan requirements
    • Limited closing costs in most cases

    Along with numerous other incentives. Because VA home loans are backed by the Department of Veteran Affairs, lenders are more comfortable lending to borrowers with varying credit profiles and lending histories. More information about the government program securing VA loans is available through VA.gov.

    Conventional Loans

    A conventional mortgage is a loan that is offered through a bank, credit union, or lending agency. They’re often offered in 15- or 30-year repayment installments with fixed interest rates. Conventional loans are attractive because they can be used on any number of properties, and they can have low interest rates for those with higher credit scores. For many borrowers, they are also convenient, as their own bank or credit union may offer conventional mortgage loans. 

    In order to gain the best insight into which might be right for your situation, it’s helpful to look at how the two compare on a few different features. 

     

    VA Loans vs Conventional Loans: Side by Side Comparison

     

    Property Types

    • VA loans: One condition that some borrowers may find restricting is that VA loans can typically only be used to purchase a home that will be used as a primary residence (note that this can be an existing home or new construction). However, VA loans can still be used to purchase a house, condo, duplex, or townhome, so long as that home will serve as your primary residence. 
    • Conventional loans: A traditional mortgage can be used to purchase any number of homes, provided that your funds, debt-to-income ratio, and credit score are sufficient to secure you multiple loans. If you’re looking to accrue property as an asset, conventional loans may be preferable in this respect. These loans can also be used on any type of property that you may wish to purchase, like houses, condos, duplexes and townhomes. 

    Credit Score Minimums

    • VA loans: VA loans do not require any minimum credit score to apply. Depending on the lending agency, a credit check may still be part of your application process. However, there is no requirement from the VA that you meet any minimum. This is particularly useful for veterans and service members who may not have a strong credit history. At Griffin Funding, we require a FICO score of 580 (along with certain income requirements) in order to qualify for a VA loan. 
    • Conventional loans: A conventional loan offered by a bank typically includes a credit check as part of the application process. In fact, many lenders actually have minimum credit requirements, usually a FICO score of around 620. In addition to stringent credit score criteria, banks, credit unions, and lending agencies may also have a number of other requirements, such as a satisfactory debt-to-income ratio, and a previous history of borrowing money (like a car payment, for instance). For some, these requirements can be prohibitive, making VA loans more easily secured options. 

    Down Payment

    • VA loans: One of the biggest draws of a VA loan is that it requires no down payment. While other loans may require you to put money down as a way to lower the risk level for the lender, VA loans are able to sidestep this requirement because they are secured by the Department of Veteran Affairs. So, if a borrower defaults on their loans—meaning they’re unable to keep up with payments—then the VA will step in and protect the lender from any significant financial losses. At Griffin Funding, we offer VA loans with no down payment up to a certain amount. The amount that you can secure without a down payment is in part dependent on the level of entitlements you have remaining. 
    • Conventional loan: Conventional loans are usually only available to those who can make a sizable down payment. The traditional recommendation is 20%, though some lenders may be willing to allow lower down payments if applicants also purchase mortgage insurance (more on that below). In that case, you may be able to put down as little as 3%. The benefit to making a down payment is mostly to the bank—it lowers their risk in case you default. But there is some benefit to the borrower in that it may somewhat reduce the duration of your loan, so you could be paid off faster. 

     

    Loan Fees

     

    • VA loan: VA loans come with certain requirements imposed by the VA, but they are issued through banks and mortgage lenders which may also have their own requirements, fees, and special conditions. The VA imposes its own set of lending fees which are available in a chart on the VA website. The fees you’ll pay range from 1.4% to 3.6% depending on the size of the down payment you are able to make, and whether it is your first time using your VA entitlement. Bear in mind that your lending institution may also impose its own closing costs as well. 
    • Conventional loan: Conventional loans’ specific terms can vary depending on the agency, bank, or credit union you use to obtain the loan. This means that some may have higher closing costs and loan fees, and others may not. Aspects of your borrower profile, like your credit score and debt-to-income ratio, may also have an effect on the size of your lending fee, as may the size of the downpayment you make. Ultimately, VA loan vs conventional loan closing costs depend in part on the lender.

     

    Mortgage Insurance

     

    • VA loan: As mentioned briefly above, VA loans do not require that you purchase mortgage insurance. That’s because of the VA guarantee behind the loan; if the borrower defaults, the Department of Veteran Affairs will protect the lender from damages. This is one of the biggest benefits of VA loans, and one of the features that can make them much less expensive than a conventional loan. Even without a downpayment, you won’t be required to purchase mortgage insurance. 
    • Conventional loans: When purchasing a conventional loan, you may or may not be required to also purchase mortgage insurance along with the loan. This depends on the specific lender’s terms and requirements. However, often, you may have to purchase mortgage insurance if you are unwilling or unable to make a 20% down payment. 

     

    Mortgage Rates

     

    • VA loans: One significant perk is that, when comparing VA loan vs conventional loan interest rates, the VA loan is usually noticeably lower. Rates can vary from week to week, and often depend on the condition of the economy and other factors. However, VA loan rates are usually lower than conventional mortgages. They are also preferable for those with lower credit scores, as in those cases conventional loans can have higher rates. 
    • Conventional loan: Conventional loan rates are highly dependent on your credit score, debt-to-income ratio, down payment size, and other factors that are carefully looked over by the lender. If you have a great borrowing track record, high income, and can put down a significant downpayment, you’ll likely have a low interest rate—though this varies depending on factors like the overall economy. 

     

    VA Refinance vs Conventional Refinance

     

    Some loan applicants might not realize that, in addition to purchasing or building a new home with a VA loan, you can also refinance an existing mortgage. You can use a conventional loan for this purpose too, so it’s important to see how the two stack up as you consider how you want to refinance your home. 

    • VA loans: you can use a VA loan to refinance much in the same way that you might use it to purchase a new house. You can take advantage of a VA loan’s lower interest rate to pay off and consolidate burdensome debt, as well as increase the period you have to repay your loan, and even negotiate lower monthly payments. The benefit of doing this with a VA loan is that you can take advantage of the lower rates, lower credit minimums, and potentially lower fees. 
    • Conventional loans: Conventional mortgages can also be used to refinance a home, consolidate debt, or decrease monthly payments—or even increase them, if you’re hoping to pay off your loan in a shorter period of time. In order to qualify for an advantageous conventional loan refinance, it’s best to have a high credit score (usually, upwards of 700), a comfortable debt-to-income ratio, and potentially a healthy downpayment. It’s also smart to be mindful of closing costs and fees.

    Working with Griffin Funding

    Griffin Funding offers both conventional loans and VA loans, so no matter what you decide is best, we’re happy to work with you — and we are always proud to help our men and women in uniform find the perfect financial product for their goals. Our competitive interest rates make home loans accessible to many, and we are proud to say that we can complete the entire loan approval process within 30 days or less. Whether you’re interested in a conventional mortgage, VA loan, jumbo loan, or even asset-based loans, we have you covered. 

    When it comes to comparing VA loans vs conventional loans, there are many factors to consider. In many cases, however, a VA loan may prove the lowest cost option for veterans and active service members—you can find out more about VA loan eligibility on our website. If you’re not sure what’s best for you and your family, you can speak with a Griffin Funding professional to find out more about which financial product might be the wisest for your particular situation. 

    Bill Lyons

    Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 22 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 10 years in business.