Conventional Loans or Government-Backed Loans?
There are many important decisions to make during the mortgage process, but one of the more notable choices involves knowing the difference between using a conventional or government-backed loan. So what exactly do these terms mean, and how do they impact the specific type of loan you choose?
Well, it is important to start off by noting that the main difference between conventional and government-backed loans is the way in which the loan is insured.
The term conventional doesn’t just mean the “normal” or “average” loan; it means that the loan is conventionally insured to meet guidelines set forth by Fannie Mae and Freddie Mac, the two largest investors of conventional loans1. Therefore, a conventional type of loan is originated in the private sector and not insured by a government entity. A conventionally insured loan is called…Conventional Loan (they state it right in the name!).
The Conventional Loan possesses particular criteria and requirements such as a good credit rating, a debt-to-income (DTI) ratio not exceeding a specific percentage, a down payment (with the percentage depending on your FICO score), and stable income.
As you can probably infer, the government-backed mortgage loan is guaranteed or insured by a government agency. The three main types of government-backed loans are:
The Veterans Affairs (VA) Loan - This mortgage loan is guaranteed by the U.S. Department of Veterans Affairs for veterans or active duty service members who wish to purchase homes without the requirement of a down payment.
The Federal Housing Administration (FHA) Loan Program - This mortgage program is insured by the U.S. Department of Housing and Urban Development (HUD) and is designed to assist homebuyers with low down payments and affordable closing costs.
The U.S. Department of Agriculture (USDA) Loan - This loan provides homeownership opportunities to buyers looking for a home in rural areas who meet certain income requirements and is insured by the U.S. Department of Agriculture.
Keep in mind that different government agencies have a different set of eligibility criteria and requirements. For example, VA Loans require the borrower to be a veteran or active duty member (in some capacity), and FHA Loans are designed for people with lower credit scores and higher DTIs.
In the end, one type of loan does not hold higher status than the other. Your choice between a conventional or government-backed loan depends entirely on what best suits your needs. So make sure you check out the loans we offer or contact the loan office closest to you to find out which one works for you!