When you apply for a mortgage, you can choose to apply for a government-backed loan, such as an FHA loan, or VA loan, or a conventional loan. Government-backed loans are insured through the government, whereas conventional loans are insured through private companies.
As conventional loans are not backed by the government, they represent a higher risk to lenders. This means credit and income requirements are generally more stringent, although these loans do offer several advantages to qualifying buyers.
Conventional mortgages are ideal for home buyers who have excellent credit and a substantial down payment. Conventional loans may be used to purchase a primary home, a second home or an investment home. This is unlike government-backed mortgages, which may generally be used exclusively for a primary residence. Conventional home loans are also available in 10, 1, 20, 25, 30 and 40-year terms, as well as fixed-rate and adjustable-rate mortgages (ARMs).
Conventional mortgages are traditionally harder to obtain than a government-backed mortgage. Conventional mortgage lenders generally want to see:
For some borrowers, a conventional mortgage offers greater savings over a government-backed mortgage, particularly an FHA loan. In recent years, FHA loans have experienced rising costs and mortgage insurance, that now remain for the life of the loan. Borrowers who can qualify for and afford a conventional mortgage are often encouraged to use this option over a government-backed loan.
If you are deciding between a government-backed mortgage or a conventional mortgage, consider your priorities. If you have excellent credit and can afford a down payment of at least 20%, a conventional mortgage may be the best option. If you would prefer a smaller up-front down payment, but a larger monthly payment with mortgage insurance, a government-backed mortgage may better serve your needs.
Keep in mind that conventional mortgage requirements vary greatly by lender. The down payment required, as well as other qualifications, may change dramatically, so it is important to compare lenders to find the most favorable conventional mortgage for your situation.