What Is the Difference Between a VA Loan and a Conventional Loan?

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All conventional loans require the borrower to have one key qualification: a good credit history. A veteran often lacks a credit history because he or she has spent years in the military, where no loans are required or taken. As a result, the veteran may have a low credit score even though he or she has never failed to repay a debt. The VA developed the VA loan program to help overcome this problem. This program is one of the benefits of joining the U.S. military.

VA loans are not issued directly to veterans like conventional loans are. Instead, the veteran receives a guarantee from the VA; the limit of this guarantee depends on factors such as the individual's length of service and rank. The individual must first seek a conventional, private loan. Then, the VA loan guarantee can be used to secure the loan, assuring the lender the VA will purchase the loan if default occurs. As the result of the guarantee, the loan is easier to source and much less expensive for the individual.

Without a guarantee, some individuals would find great challenge in sourcing a large loan. Conventional lenders want to see not only good credit but a long credit history before issuing financing. This is particularly true in the case of mortgage lenders, where the loan size can be very large. The loans also can make it possible to buy a home with a lower than average down payment.

The veteran starts by determining his limit by applying independently for a certificate of guarantee. Veterans must be either active duty or have received an honorable discharge in order to qualify. Once the guarantee has been approved, the veteran can then seek a conventional loan. Many lenders are VA qualified, meaning they are familiar with the process of VA guarantees and can streamline the application for such a loan. If a private lender accepts the borrower's guarantee, the loan is issued similarly to a conventional loan.

Aside from being in good standing with the Department of Veterans Affairs, the veteran must be deemed creditworthy. For this purpose, the VA understands the unique factors that may cause a veteran to have a short history. However, the VA will not approve a guarantee if the veteran has a low score due to poor behavior on debt. For example, unpaid student loans or taxes may immediately disqualify the veteran from acceptance into the VA guarantee program.