When you want to get a mortgage, you’ve got an overwhelming number of options. It helps to start by looking in the right spot. And that means first identifying the type of loan you want to get. 

You have quite a few categories here. If you want to buy a really expensive house, you might need a jumbo loan. If you’re looking to buy in a rural area, you might consider a mortgage backed by the U.S. Department of Agriculture (a USDA loan). If you’re having trouble affording a house, a mortgage backed by the Federal Housing Administration (an FHA loan) might be right for you. 

Today, we’re going to focus on two of your big options in the overall mortgage category: VA loans and conventional loans. Our goal is to help you better understand these kinds of mortgages and when one might be right for you. 

The big difference-maker: Government backing

To understand the difference with VA loans vs. conventional loans, you have to understand government backing. 

Basically, some government agencies essentially offer insurance to mortgage lenders. If a lender extends a loan that meets that government agency’s criteria, they get some security. If the borrower doesn’t repay the loan, the government agency pays out to help the lender recoup some of its losses. The USDA backs USDA loans, and FHA loans get backed by — you guessed it — the FHA. 

In the case of a VA loan, the agency backing the mortgage is the U.S. Department of Veterans Affairs (the VA). The VA typically backs up to 25% of the loan. Lenders love the added security that offers. In fact, they love it so much that they pass some benefit onto you. The VA’s guarantee is why VA loans can come with a 0% down payment and typically have lower interest rates. 

Conventional loans, by contrast, don’t have any government backing. But most aren’t totally rudderless. The majority of conventional loans are also conforming loans, which means they adhere to lending standards by Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs). 

That means lenders set a cap on how much you can borrow. That ceiling depends on the Federal Housing Finance Agency’s limit for your area. If you want to exceed that, you’ll get a jumbo loan. That’s still a conventional loan, just not a conforming one. 

Conventional lenders won’t allow your loan-to-value (LTV) ratio to go quite as high. That means you need to put at least 3% down. 

Conventional loans are also subject to private mortgage insurance (PMI) if you put less than 20%. Lenders add this cost to your monthly payment to help lower their risk. The good news is that you can remove PMI once your equity reaches 20%, so it’s not forever (unlike with a lot of FHA loans). 

Comparing key features: VA loans vs. conventional loans

The loans available with the VA’s backing come with some slightly different features than loans that don’t have a government agency standing behind them. Here, we outlined the key things you should know as a borrower when you’re trying to weigh VA loans vs. conventional loans:

Deciding between a VA loan and a conventional loan

For the bulk of borrowers who are eligible, a VA loan offers more financial upside than a conventional loan. The 0% down payment makes it possible to buy sooner. And you should be able to get a competitive interest rate. 

There are a few cases, though, when a conventional loan better fits your needs.

A lot comes down to the down payment. With a conventional loan, you avoid private mortgage insurance if you put 20% down. With a VA loan, there’s no avoiding the funding fee except in the case of disabilities sustained during service. So going the conventional route might help you save money overall. 

That’s particularly true if you’re in a good financial position. The mortgage interest rates on VA loans tend to be lower than conventional rates. But if you’ve got great credit, solid and steady income, and a low debt-to-income ratio, lenders will likely offer you the lowest rate they can regardless of the type of loan you choose. 

There’s one more reason why a conventional loan might be the right call: if you don’t plan to live in the property. The VA only backs loans for primary residences. If you want to buy a vacation or investment property, you’ll need to look elsewhere.

TL;DR? A conventional loan might be best if you:

• Can put 20% down and are in great financial standing
• Want to use the mortgage to buy something other than your primary residence

Other than that, with their lower interest rates, VA loans are usually the best call. Want to really use them to your financial advantage? Compare offers from different VA lenders. That makes it possible to see which one can offer you the lowest interest rate and fewest fees. 

We can help you get started. We have rate tables showing what leading VA lenders have on offer. Input your information in the bar at the top so you see what kind of VA loan rates are available to you.