VA loan vs. conventional loan: What's the best choice for you?

Shopping for a home can be intimidating. When it comes to available mortgages, there are many options to choose from, and it can be difficult to select the right one for your specific financial circumstances or lifestyle. Here is a simple breakdown and comparison of VA-backed loans and conventional home loans.

What’s a VA loan?

The Department of Veterans Affairs (VA) home loans program was established in June 1944 to help World War II veterans purchase homes in the aftermath of the war. This program granted the VA the power to guarantee home, business, or farm loans issued to veterans by private lenders.

Not everyone can qualify for a VA loan — they are only available to service members, veterans, and eligible spouses. Backed by the VA, the federal program has guaranteed more than 25 million loans since 1944.

The VA guarantees a portion of the loan by assuming debt obligation, which allows lenders to offer better terms to veterans who may not have great credit scores or the ability to make down payments.

There are certain periods of eligibility military service members must meet to qualify for a VA loan, which can then be used to purchase a new property or refinance. Choosing a VA specialty lender is also helpful for borrowers because these lenders are typically more knowledgeable about all of the benefits available to military personnel.

Advantages of VA loans

  • There is no down payment necessary unless required by the lender.
  • There is no need to pay mortgage insurance.
  • There is a one-time VA funding fee that can be part of the loan.
  • The property is inspected to ensure it meets the minimum property requirements.
  • The VA can provide assistance if the borrower is unable to make payments and the loan becomes delinquent.
  • The VA loan limit in Texas is $548,250, but anyone who has previously used a loan program may have full entitlement.
  • The remaining entitlement applies if you have an active VA loan or still reside in the home you’ve paid off.

What’s a conventional loan?

A conventional loan is any type of loan that isn’t guaranteed by a government agency. Many conventional loans must follow specific government-established loan limits, and borrowers must meet certain income and credit score requirements. Those with conventional mortgages often have access to lower interest rates and more flexible terms, although borrowers with lower credit scores may have to pay higher interest rates.

Unlike VA loans, conventional loans can be used to purchase second homes or investment properties. They typically require down payments of at least 3% if the borrower is willing to pay for private mortgage insurance, but most borrowers put down anywhere from 5% to 20% percent. Texas residents can borrow up to $548,250 for a single-family home.

Types of conventional loans

  • Fixed-rate conventional loans: The fixed interest rate remains the same for the entire length of the mortgage.
  • Conforming conventional loans: This applies to any mortgage that is less than or equal to the dollar amount limit set by the Federal Housing Finance Agency (FHFA), an organization that regulates the government-sponsored enterprises Fannie Mae and Freddie Mac.
  • Adjustable-rate conventional loans: Also known as ARMs, or adjustable-rate mortgages, these loans have interest rates that fluctuate during loan length, often changing annually after the initial fixed-rate period that may be three, five, seven, or 10 years.
  • Nonconforming conventional loans: These loans exceed the limits set by the FHFA, so they use different underwriting standards set by Fannie Mae and Freddie Mac.
  • Low down payment conventional loans: Also known as 80/20 loans, these types of loans once required 20% down payments, but now have more flexible terms that require down payments of as little as 3% to 5%.

Which loan is right for you?

The process of purchasing a new home isn’t easy, and deciding which type of loan or mortgage best fits your needs, income, and lifestyle can be a stressful process. VA loans are great options for military members seeking homes as their primary place of residence, while conventional loans are recommended for non-military homebuyers with higher credit scores.