Private Mortgage Insurance
Traditionally, paying less than 20% down with a conventional loan will result in private mortgage insurance (PMI). Your credit score may also be a contributing factor as well. A low down payment or credit score are red flags for loan default, so your lender may require PMI so that they can protect themselves from the potential loss.
The PMI may be a one-time closing charge, a regular fee or premium added to your monthly payment, or a combination of the two. The exact amount will vary between lenders.
VA loans, however, don’t require any mortgage insurance. That’s partially due to the lack of a minimum down payment requirement. Instead, the VA relies on the VA funding fee.
Property Eligibility
If you want to buy a primary residence, then either a VA loan or a conventional loan will work. However, purchasing a second home or investment property using a VA loan is not allowed. You may still be able to earn rental income by making your primary residence a multi-unit property.
While conventional loans allow you to buy investment properties or secondary homes, it may be slightly harder to purchase other types of property after you purchase a second home because the qualifications may shift. For example, a lender may require additional reserve assets depending on how many conventional loans you’re currently borrowing on.
Borrower Eligibility
Conventional loans don’t have special requirements to determine borrower eligibility. You and the property have to qualify, but this depends on standard factors, such as income level or credit score.
Borrower eligibility works differently for VA loans. The process of showing your eligibility hinges on a document called a Certificate of Eligibility (COE). To obtain a COE, you must have at least one of the following qualifications:
- Meet the minimum military service requirements for an active-duty or veteran borrower
- Be a surviving spouse of a service member who died in the line of duty
- Have a qualifying discharge
Borrower Fees
Both conventional and VA loans require an origination fee. Lenders charge this fee to cover the cost of processing the loan. It generally costs 0.5% –1% of the loan’s total amount, and you pay it as part of your closing costs. Lenders who don’t charge an origination fee tend to make it up elsewhere.
While both loans share origination fees, VA loans have a cap on the amount. They also do not allow certain fees, such as prepayment penalties or settlement charges.
VA Funding Fee
VA loans also require a VA funding fee, which is a singular, upfront cost that usually sits between 1.25% – 3.3% of the loan’s amount. The actual percentage can depend on whether you previously used your VA loan benefit and your down payment.
The funding fee is designed to cover potential costs in case the borrower defaults. While it’s a one-time charge, the fee often gets rolled into the total loan amount. That adds to your monthly payment and the amount of interest you pay over the loan’s life.
Veterans receiving VA disability compensation do not have to pay this fee.
Additional Requirements To Consider
While the above comparisons are vital to know, they’re not the only differences between these two loan types.
For example, VA loans don’t possess loan limits, but conventional loans do. These limits are set by each county, with most counties setting their limit at $726,200 for a single-family property in 2023.
They also differ in their mortgage rates. Typically, when you compare rates for the average 30-year VA loan and a 30-year conventional loan, VA loans usually have lower interest rates. The percentage difference tends to sit between 0.25% – 0.42%.
The VA also caps closing costs, which – along with competitive interest rates – can make VA loans financially favorable.
