Which Loan Is Right For Me?: Conventional vs Government-Insured Loans (2024)

FAQs

Which Loan Is Right For Me?: Conventional vs Government-Insured Loans? ›

Since a federal agency doesn't fund or sponsor conventional mortgages, they carry fewer fees and are usually cheaper than government-guaranteed loans. However, conventional mortgages have stricter borrower requirements, such as higher minimum credit scores and lower debt-to-income ratios.

The Primary Difference

Examples of government loans, such as FHA, USDA, and V.A. mortgages, are specifically tailored for veterans, military members, and their spouses, providing them with unique benefits. Conversely, conventional loans are issued by private mortgage lenders without the backing of the U.S. government.

Conventional loans are any loan that isn't insured by the government. This means if the borrower defaults on their loan, the lender is at risk of losing money. Conventional loans are generally more difficult to qualify for than government-insured loans.

FHA loans generally accept modest credit scores: Borrowers with lower credit scores or credit challenges are frequently approved. Conventional loans generally favor higher credit scores: Borrowers tend to need moderate to high credit scores to receive opportune loan terms and rates.

A conventional loan is often better if you have good or excellent credit because your mortgage rate and private mortgage insurance (PMI) costs will decrease. But an FHA loan can be perfect if your credit score is in the high 500s or low 600s. For lower-credit borrowers, FHA is often the cheaper option.

Government-insured loans are backed by either the Federal Housing Authority, which provides a loan option called FHA, the U.S. Department of Veterans Affairs, which has an option called the VA loan, or the U.S. Department of Agriculture, which provides a mortgage option called the USDA loan.

The main disadvantage of a conventional loan is the requirement for a down payment, which can be quite large depending on the loan amount and the borrower's financial situation. Additionally, borrowers need to show that they have assets that can be used to pay off the loan as well as reserves in case of a hardship.

The Advantages of a Conventional Mortgage

Homeowners with good credit and money for a larger down payment could avoid paying upfront mortgage insurance or monthly mortgage insurance like an FHA loan. There are several reasons why a conventional mortgage loan could be the best option for your next home purchase.

Conventional Loan Minimum Credit Score

In most cases, you'll need a credit score of at least 620 to qualify for a conventional loan. When you apply, your lender will check your credit history to determine if you have qualifying credit. If you don't, you might not get approved for the loan.

Down Payment Requirements for a Conventional Loan

While a 20% down payment is often recommended, it's not always required. A lender will look at the big picture when evaluating your mortgage application. Depending on your specific situation, you can put down as little as 3% when taking out a conventional mortgage.

Why do realtors prefer conventional over FHA? ›

A major benefit of a conventional loan is that the buyer often has higher credit ratings and more capital available for a down payment than with an FHA loan. On the other hand, FHA loans may be attractive to some sellers since they only require a small downpayment and have traditionally lower closing costs.

In general, it's easier to qualify for an FHA loan than for a conventional loan, which is a mortgage that isn't insured or guaranteed by the federal government. Here are some key differences between FHA and conventional loans: Credit score and history: FHA loans allow for lower credit scores than conventional loans.

Benefits Of FHA Loans. An FHA loan can grant many borrowers the opportunity to become homeowners – especially those who have a somewhat low credit score and a reasonably high amount of debt. Known to be more forgiving and less restrictive than some other loan types, FHA loans present numerous benefits.

Homebuyers often like Conventional loans because of their flexible down payment options, which can be as low as 3%, easier inspection requirements, and the opportunity to get rid of mortgage insurance.

Key Takeaways

Conventional mortgages close in an average of 48 days, though that timeframe can vary. More complex mortgages, such as Federal Housing Administration (FHA) loans, can sometimes take longer.

"From a consumer standpoint, the 30-year fixed-rate mortgage is typically the most popular because it offers borrowers lower monthly payments while providing long-term stability and predictability.

Government loans - money you borrow from the federal government and that you repay with interest.

The interest rate is fixed and is often lower than private loans—and much lower than some credit card interest rates. View the current interest rates on federal student loans. The interest rate is fixed and may be lower than private loans—and much lower than some credit card interest rates.

With a government-backed loan, mortgage insurance is often included, and rate and term options may be more limited. Most government-backed loans also require that the home you purchase with the loan be your primary residence. A conventional loan allows you to avoid many of these restrictions.