Why Choose a VA Loan Over a Conventional Loan?

Not everyone qualifies, but those eligible for a VA loan can expect plenty of benefits. A VA loan differs from a conventional loan in several ways.

• Down Payment

Not having to put any money down is a real draw for those who are eligible for a VA loan. In most cases, there’s no required down payment. On the other hand, with a conventional loan you will likely have a down payment. The amount could vary, but it probably won’t be zero. 

• Private Mortgage Insurance 

With a VA loan, there’s no need for private mortgage insurance either. With a conventional loan you typically must have private mortgage insurance if your down payment is less than 20-percent. The insurance helps protect the lender if you default on the loan. The cost varies but is usually a small percentage of the loan amount.

• Credit Score

With a conventional loan, your credit score comes into play. The VA doesn’t have a minimum credit score that it requires. Instead, it varies by lender. Typically, lenders want a minimum credit score of 620. The average FICO score is typically higher with a conventional mortgage. 

• Interest Rate

If you do qualify for a VA loan, you’ll probably be extended a lower interest rate than you’d be eligible for with a conventional loan. Like the zero down payment incentive, a lower interest rate could be a big advantage for many homebuyers. It’s possible because the program is guaranteed by the government, so there’s less risk for lenders in case of default. That’s good news, of course, for borrows. 

• Prepay Penalties

Yet another reason to choose a VA loan has to do with what’s called prepay penalties. If you’re eligible for a VA loan and able to pay off the mortgage fully before the term is over, you won’t pay additional penalties. It’s to the advantage of traditional lenders for you NOT to pay off your loan early because they don’t want to miss out on interest payments. That’s why they’ll sometimes impose prepay penalties for those wishing to pay off the loan early. 

• Type of Property

Keep in mind, with a conventional loan, you can use the mortgage for your primary home, a second home, or even an investment property. With a VA loan, you must use it for your primary home.

• Extra Funding Fee

Another thing that sets a VA loan apart is its funding fee. A VA loan usually requires an extra upfront funding fee that’s used to help defray the cost of loans that go into default. Usually, it’s a small percentage of the loan amount. In most cases this fee is rolled into the loan.