VA Loans vs. Conventional Mortgages

January 3, 2019

A U.S. Department of Veterans Affairs (VA) home loan helps military veterans and service members make their homeownership dreams come true. Backed by the U.S. government, VA loans assist most military personnel to acquire a home without expenses like private mortgage insurance (PMI) and often without a down payment.

Comparatively, conventional mortgages offer no government guarantees, and they generally require a minimum down payment of five percent of a house’s purchase price, according to Veterans United. Conventional mortgage credit benchmarks also vary based on the lender, loan type, and other factors. A borrower with a conventional mortgage loan pays PMI if they do not have a downpayment of 20 percent of the purchase price.

Uniformed Personel with Real Estate Paperwork

Uniformed Personel with Real Estate Paperwork. Source: Getty

How Do VA Loans Work?

VA loans are viable home financing options for millions of military veterans and service members across the United States. They are available to veterans who have served on active duty and have been discharged after a minimum of 90 service days during wartime or 181 continuous days during peacetime. Veterans with a dishonorable discharge are ineligible for a VA home loan.

There is a two-year service requirement for VA loans for veterans who began their service after September 7, 1980, or served as an officer and started their service after October 16, 1981. Moreover, there is a six-year mandate for National Guard reservists relative to VA loans. The surviving spouses of deceased veterans may also be eligible for VA loans.

Not all military veterans and service members qualify for VA loans. Borrowers must meet both VA loan service requirements and a lender’s credit and income mandates to obtain a VA loan.

With a VA loan, a borrower can receive a maximum loan amount of $453,100. Additionally, the VA guarantees up to 25 percent of a home loan amount up to $113,275. This guarantee generally substitutes for the down payment on a home and protects the lender if a borrower is unable to repay the loan. VA-guaranteed loans frequently ensure borrowers can receive favorable financing.

VA guaranteed loans are available from banks, mortgage companies, and other private lenders. Reserved for the purpose of buying a primary residence, VA loans can’t be used to acquire a vacation or rental property.

Benefits of VA Loans

Military veterans and service members often consider VA loans if they plan to make home purchases, and perhaps it is easy to understand why. VA loans offer many benefits, and these benefits include:

Patriotic Neighborhood

Patriotic Neighborhood. Source: Getty
  • No down payment: Unlike a conventional or U.S. Federal Housing Administration (FHA) home loan, a VA loan requires no down payment. Alternatively, a borrower may submit a down payment on a home and use a VA loan to reduce his or her home buying costs further.

  • Limited closing costs: Military personnel may be able to reduce their closing costs or avoid these expenses altogether thanks in part to VA loans. The home seller can pay a veteran’s closing costs up to 4 percent of the purchase price. In some cases, a home buyer may request a home seller cover some or all home closing costs to finalize a house sale.

  • Low interest rate: The interest rate for VA loans often tends to be lower than the rates for other home financing options. For instance, the average interest rate for a VA loan was 4.24 percent as of February 2018, ValuePenguin reports. The average interest rate on a 30-year fixed-rate conventional mortgage at this time was 4.48 percent.

There are many benefits to a VA loan, but keep in mind that one requirement is an appraisal to guarantee the condition of the home you buy. This appraisal must be completed and approved before you can finalize a home purchase with a VA loan.

How Do Conventional Mortgages Work?

A conventional home mortgage is not guaranteed or insured by the VA, FHA, or any other government agency. There are several types of conventional loans, and these include:

  • Conforming loans: These loans are backed by Fannie Mae and Freddie Mac, both of which are government-sponsored entities (GSEs). Conforming home loan limits are established by the Federal Housing Finance Agency (FHFA).

  • Nonconforming loans: GSEs do not back nonconforming loans. They may also require a borrower to have a lower debt-to-income (DTI) ratio than conforming options, and a lender may request additional documentation from a borrower before approving a request for a nonconforming loan.

  • Jumbo loans: Jumbo loans exceed the conforming loan limits set by the FHFA. In 2018, FHFA limits for standard loans were $453,100 for single-family residences in most areas of the United States and $679,650 for single-family homes in most high-cost regions.

  • Portfolio loans: A lender originates portfolio loans, and the lender holds the investments until paid in full.

  • Subprime loans: Subprime loans are designed to provide home financing to borrowers with low credit scores, and these loans tend to have higher interest rates than other types of conventional loans.

Conventional mortgages represent some of the most popular home financing options. They are available to borrowers nationwide and often enable these individuals to obtain the financing they need to buy a house quickly.

Benefits of Conventional Mortgages

There are many benefits associated with conventional mortgages, including:

    Painted residential townhouses

    Painted residential townhouses. Source: Getty
  • No monthly PMI: If a homebuyer makes a down payment of 20 percent or more, he or she will not pay monthly mortgage insurance.

  • Flexible loan terms: There is no shortage of conventional loan options available. Borrowers can choose from conventional loans with a repayment period of eight to 30 years. Plus, both fixed- and adjustable-rate conventional loan options are available.

  • Ability to use for any residence: A borrower can use a conventional loan for a home even if this house is not his or her primary residence. A conventional loan may be an excellent option for those who want to buy a vacation home or investment property.

Conventional home loans frequently benefit nonmilitary homebuyers, but borrowers usually need a good to excellent credit score to get a lower interest rate. Conventional mortgage interest rates are often higher than those associated with VA and FHA loans. Income guidelines for conventional home loans vary by lender. Finally, borrowers may be required to submit a down payment of 5 percent or more based on the purchase price to obtain home financing.

Bottom Line:

VA home loans often prove to be superior options over conventional mortgages. That said, shop conventional loan rates and VA loans even if you qualify for the latter. With VA loans, military veterans and service members can enjoy low interest rates, no down payment requirements, and other perks they won’t find with conventional options. Best of all, VA loans are available from lenders across the United States.