Choosing the type of loan that makes the most financial sense for you can be daunting for first time homebuyers and repeat purchasers alike.
There’s some really important advantages to VA Loans that might help you get into home ownership, but there are strings attached that could make it harder to win an offer. Here is an intro to these two mortgage types and their advantages and disadvantages.
What are VA loans?
A VA loan is a mortgage loan backed by the U.S. Department of Veterans Affairs (VA). Its primary purpose is to help veterans, active-duty service members, and eligible spouses secure home financing with favorable terms. VA loans offer benefits like zero down payment, competitive interest rates, and no private mortgage insurance (PMI), making them a strong choice for eligible borrowers.
What are conventional loans?
Conventional Loans (also called conforming loans) are backed by private mortgage lenders, with higher barriers to qualify such as credit score and down payment. Conventional loans have much fewer restrictions when it comes to the loan amount, type of property to be purchased, and intended use of the property. They are ideal for borrowers with good credit who can afford a larger down payment and want to avoid the restrictions of government-backed loans. They are far and wide the most frequently used loan type.
We sometimes see sellers or their agents may (wrongly) give preferential treatment to buyers with conventional loans over VA loans. This is often because VA loans can come with more restrictions that sellers might not want to deal with, or a slightly longer closing timeline. It’s important to talk to your lender about all your options so you can make the strongest possible offer
| VA Loan | Conventional Loan | |
| Loan Term | 15 and 30-year | 15 and 30-year |
| Minimum Down Payment | 0% | 3% |
| Minimum Credit Score | Usually 580 | 620 |
| Debt-to-income requirements | 43%, generally | 43% to 50%, generally |
| Co-borrower allowed | Yes, even if they don’t reside in the home | Yes, only if they reside in the home |
| Residency type | Primary residence only | Primary, secondary, or investment property |
| Mortgage fees | VA loans do not require any mortgage insurance. Instead, they have a one-time VA funding fee, typically 2.15% of the loan amount for first-time users (ranging from 0.5% to 3.3%). | Private mortgage insurance (PMI), where costs range from 0.22% to 2.25% of the loan amount and are higher for larger loans if you put less than 20% down. You can cancel PMI once they’ve paid off 20% of the home’s value |
| Special conditions | VA loans have stricter appraisal and inspection standards, and often taken longer to close. | NA |
Which is the better loan option?
The most accurate (though somewhat frustrating) answer is: it depends. Typically, the option to put 0% down with a VA loan for those who are eligible is hard to pass up, but buyers will want to consider the market and the properties they’re targeting with their loan team and real estate agent.
But, thankfully, your Loan Officer will be able to talk through the pros and cons of each loan and their relative costs in your specific situation so that you get the best option.
When you apply for a loan, you might not know which loan type you want, and that’s OK. At Tomo Mortgage, we offer both VA and conventional loans, and we work with first time homebuyers all the time to work out the tradeoffs and advantages.
Usually, the right answer is the one that will save you the most money.
If you’re ready to start your journey to homeownership, get pre approved with Tomo Mortgage today.