There are two types loans you will come across when shopping for a mortgage which include government insured mortgages and conventional mortgages. USDA loans, VA loans, and FHA loans are all examples of government insured loans guaranteed by the US government. Conventional loans are not insured by the government, but are insured through private companies.
If you are debating whether to choose a government insured mortgage or a conventional mortgage, consider a few things first. If you have good credit and can afford to cover at least 20% of the down payment, then a conventional home loan may be the best option. If you are looking to pay less money down, but don’t mind making a larger monthly payment that includes mortgage insurance, a government backed loan may be a wiser option for you.
Conventional loans have a higher risk for the lender, for they lack government insurance. Because of this, there are stricter guidelines to meet regarding credit and income for the borrower. Keep in mind that traditional or conventional mortgage requirements vary drastically from lender to lender. The down payment as well as income qualifications can be very different, so it is very important to compare lenders to find the best options for you.
Conventional mortgages are perfect for home buyers who have great credit history and a significant amount of money to dedicate towards the down payment. conventional mortgages can be used to purchase a primary residence, investment property, or secondary residence. Conversely, government insured loans may only be used for primary residences. Traditional mortgage loans can come with a fixed or adjustable rates, and can have terms from 1 to 40 years.
For certain home buyers, a conventional mortgage can offer more savings than a government guaranteed mortgage, particularly FHA’s. In recent years, FHA loan costs have been rising and include mortgage insurance that remain for the entire life of the loan. Borrowers who can afford conventional mortgages are encouraged to choose this option over government backed loan programs.
Conventional loans only require PMI (private mortgage insurance) on loans with less than 20% down payment. Once the balance of the loan falls and the payments reach a certain amount, PMI can be discontinued. For FHA insured loans, PMI is required for the entire life of the loan. Down payments for conventional loans can also be as low as 5% for buyers who qualify, though typically lenders require 10-20% down. Conventional mortgages usually close much faster than government insured mortgages.
Conventional loans usually offer a lower interest rate than the government insured loans such as FHA, VA, and USDA loans. This lower interest rate is due the stricter guidelines and requirements needed for obtaining a conventional loan. One must have a steady income, good credit, and a sizeable down payment for a conventional mortgage.
Since conventional loans are not guaranteed, they carry a higher risk for lenders. Because of this, income and credit requirements for conventional loans are tighter than loans backed by the US government. Although conventional loans are privately insured and have stricter requirements for borrowers, they do offer several advantages to homeowners.
Conventional mortgages are harder to qualify for than government insured mortgages.
In general, guidelines for conventional home loans include: