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VA loans vs. Conventional loans

What are the benefits of VA loans compared to Conventional loans?

When you want to buy or refinance a home, VA loans are frequently a better choice than Conventional loans. That's because VA loans have competitive interest rates, lower down payments, lower minimum credit scores, and lower mortgage insurance costs compared to Conventional loans.

You need to be a Veteran, active-duty military personnel, or a surviving spouse to qualify for a VA loan. You are generally restricted to buying only primary homes with VA loans. And there are times when a Conventional loan can make more financial sense than a VA loan. Check out our comparison table:

  VA Loans Conventional Loans
Interest Rates Competitive Competitive
Minimum Credit Scores Often Lower Often Higher
Minimum Down Payments Often not required Required
Funding Fee Yes No
Monthly Mortgage Insurance No No with Equity 20% or More
Property Type Restrictions Primary Homes Only No Restrictions
Closing Costs Yes Yes
Streamline Refinancing Yes No

What are the benefits of VA loans versus Conventional loans?

You can often get a competitive interest rate with a lower credit score by choosing a VA loan rather than a Conventional loan. It’s also often possible to buy a house without a down payment. There are no monthly mortgage insurance payments. And VA streamline refinancing helps you lower your interest rate with less paperwork and a faster closing.

What are the benefits of Conventional loans versus VA loans?

VA loans are restricted to Veterans, active-duty military personnel, and surviving spouses who meet the eligibility requirements. Conventional loans do not have these eligibility requirements.

You can only buy or refinance your primary residence with a VA loan. With a Conventional loan, you can finance primary homes, vacation homes, rental properties, and investment properties. You are also generally limited to having one VA loan at a time while you can have more than one Conventional loan at a time.

VA loans include an upfront, one-time funding fee which is due at closing or can be financed into your mortgage amount. The VA funding fee is a type of mortgage insurance. The fee helps protect the VA loan program when borrowers default. Some disabled veterans and surviving spouses are exempt from paying this fee.

Conventional loans don’t have any upfront costs like the funding fee. However, Conventional loans often require monthly payments for private mortgage insurance (PMI). The total cost of these PMI payments over the life of your loan can be higher than the cost of your funding fee.

VA funding fee costs versus Conventional loan mortgage insurance costs

Let’s look at examples of the cost of the VA funding fee versus the cost of private mortgage insurance. Assume that you are buying a house with a 10% down payment and a $300,000 mortgage.

In this example, you will pay a funding fee of 1.25% of the loan amount or $3,750 if you buy the home with a VA loan.

Freddie Mac estimates that you might pay between $30 and $70 per month in PMI for each $100,000 you borrow with a Conventional loan. In this example, that means you might pay between $90 and $210 per month, or between $1,080 and $2,520 per year, for private mortgage insurance. Look at this table:

  VA Funding Fee PMI (Low Estimate) PMI (High Estimate)
Upfront Cost $3,750 $0 $0
1st Year Cost $0 $1,080 $2,520
2nd Year Cost $0 $1,080 $2,520
3rd Year Cost $0 $1,080 $2,520
Total 3-Year Cost $3,750 $3,240 $7,560

A Conventional loan might save you some money on mortgage insurance costs if you can cancel your PMI after a few years or it might cost you more. In this example, choosing to pay the funding fee rather than PMI may make more financial sense.

Now, assume you are buying a house with a 20% down payment and a $300,000 mortgage. Because you are making a 20% down payment, you will not have to pay for private mortgage insurance. In this example, choosing a Conventional loan to avoid paying the funding fee may make more sense.

  VA Funding Fee PMI (Low Estimate) PMI (High Estimate)
Upfront Cost $3,750 $0 $0
1st Year Cost $0 $0 $0
2nd Year Cost $0 $0 $0
3rd Year Cost $0 $0 $0
Total 3-Year Cost $3,750 $0 $0

You’ll also want to consider the costs of the funding fee versus private mortgage insurance when you refinance your home. However, when you refinance your home using a VA streamline refinance, your funding fee is only 0.5% of the loan amount or $1,500 when you refinance a $300,000 mortgage.

Look at all the costs before you make your decision

Be sure to consider the interest rate, monthly interest payments, closing costs, and other terms and conditions before you choose between a VA and Conventional loan. Mortgage insurance costs are an important consideration, but they are not the only ones. Also, keep in mind you will have to meet our credit, income, and financial standards to get approved for VA and Conventional loans.

Freedom Mortgage is not a financial advisor. The ideas outlined above are for informational purposes only, are not intended as investment or financial advice, and should not be construed as such. Consult a financial advisor before making important personal financial decisions.

Last reviewed and updated May 2024 by Freedom Mortgage.

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