VA Loans Vs. Conventional Loans

VA loans are home mortgages guaranteed by the federal government through the Department of Veterans Affairs. Both active-duty military and military veterans are eligible to use the VA loan program to finance the purchase of a home. VA loans have key advantages over conventional mortgage loans.

Significance

VA loans are one of the few sources for 100 percent financing of a home purchase. Veterans can buy a home using VA funding without making a down payment. A conventional mortgage requires a minimum 5 percent down payment in most circumstances. Bankrate.com reports that more than 90 percent of veterans using VA loans purchase a home with 100 percent financing.

Private Mortgage Insurance

Conventional mortgages require the payment of private mortgage insurance--PMI--if the home buyer makes less than a 20 percent down payment. PMI can add $80 or more per $100,000 of the loan amount to the monthly payment for a buyer using a conventional loan and 5 percent down payment. The VA prohibits lenders from charging mortgage insurance on VA loans.

Credit Qualifications

The VA will allow a loan applicant to have some credit problems and still qualify for a mortgage. The VA looks at individual applicants and is willing to take special circumstances into account when approving a mortgage for a veteran. Conventional mortgage lenders are tied to specific credit scores and have stricter underwriting standards when an applicant has had credit problems in the past.

Types

The VA offers guarantees on several types of mortgage loans. Fixed-rate loans are available with terms of 15 or 30 years. Adjustable-rate VA loans can have an initial interest-rate period of one, three or five years with annual rate adjustments after that. Conventional loans are available in similar types. The difference is that the VA dictates the terms of the loans to prevent abuses. This is especially important in ARM loans, where the VA sets the rates and limits of the rate adjustments.

Features

VA loans cannot have prepayment penalties, and they are all assumable loans. Both of these features can make it easier to sell a home financed with a VA loan, since most conventional mortgages are not assumable and have a paid-in-full clause if the home is sold. An assumable loan can be transferred to someone buying the home, allowing the new homeowner to take over the current mortgage on the home and not have to take out a new mortgage for the purchase. Prepayment penalties can be placed on conventional loans, charging the homeowner extra fees if he or she wants to refinance or sell the home in the early years of the loan.






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