VA loans versus conventional loans

If you're a current or former member of the military and shopping for a mortgage, you may have an ace up your sleeve: You may be eligible for a VA home loan provided through a private lender and backed by the U.S. Department of Veterans Affairs.

VA loans are loaded with advantages but, in certain circumstances, a conventional loan could be a better choice. Here's a look at the pros and cons of both types of loans.

Benefits of VA loan over conventional loan

The first thing that stands out about VA loans is in most circumstances, there's no down payment requirement. You also avoid paying for private mortgage insurance, or PMI, which most conventional loans require when you make a down payment of less than 20%.

Most borrowers using a VA loan pay a one-time funding feeOpen in New Window,‍ ‍ ^{See note 1} which ranges from 1.25% to 3.30% of the loan amount. A few different factors can impact the fee, such as your down payment amount, whether you served active duty in the military, or if you've used your VA loan eligibility before. You're exempt from the funding fee if you're receiving VA compensation for a service-connected disability, or if you're a Purple Heart recipient or the surviving spouse of a veteran who died in service or from a service-connected disability.

VA loans typically have easier credit qualifications than conventional loans. But for either type of loan you'll need to show that your mortgage payment will be a reasonable percentage of your total income.

Typically, VA loans tend to have lower interest rates — and if rates drop, refinancing with a VA Interest Rate Reduction Refinance Loan, or IRRRL, can be easier than with a conventional loan. In many cases a VA IRRRL may not require an appraisal or money out of pocket at closing. The VA doesn't require a credit check for an IRRRL but lenders will, at a minimum, look at your housing and payment history. Keep in mind, credit policies and requirements can vary among lenders and will depend on your unique financial situation.

When a VA loan may not be the right choice

There are some situations where a conventional loan may be a wiser choice — or even your only choice.

If you have enough money for a 20% down payment, you may come out ahead with a conventional loan. A down payment that big will exempt you from private mortgage insurance, or PMI, on a conventional loan. And you won't have to pay a funding fee like on a VA loan.

No down payment on a VA loan may sound appealing. Just remember — the more you borrow, the more money in interest you'll pay over time.

If you're purchasing a home far ahead of when you plan to move in, a VA loan may also be out of the question. VA occupancy rules generally require you move into the house within 60 days of your loan closing. Similarly, if you're on active duty and looking to purchase a home at your next duty station — but you don't have PCS orders in hand — you could also run into VA occupancy rules. Nothing's certain about your future residency without those orders.

VA loans also have stricter requirements on the condition of the house. If you're taking on a serious fixer-upper, you may have to go the conventional route.

Finally, here's a cautionary note about putting no money down. Having little to no equity in the home can cause challenges down the road if you move within a short time, especially if the home value decreases. No home equity may mean you'll be required to put cash into the sale of the home, so you may want to plan on being in it for at least three years or more if you plan to put no money down.