When it comes to getting a mortgage, you have two main loan types to choose from: A government-backed loan or a conventional one.
Though both can help you buy a home, the two are vastly different in requirements, costs, borrowing amounts, and more. And choosing the right one? That’s critical to both purchasing your dream home and affording it.
Are you preparing to buy a house? Here’s how government and conventional mortgages differ:
The main difference
A government loan is one that’s guaranteed by a U.S. government agency — meaning the government will step in and repay the lender (at least partially) if the borrower defaults on the loan. This backing makes it easier for lenders to dole out money — particularly to high-risk borrowers — and it also lets them offer more favorable terms and interest rates as well.
Examples of government loans include FHA, USDA, and VA mortgages, which are designed for veterans, military members, and their spouses.
Conventional loans, on the other hand, are issued by private mortgage lenders. They don’t come with the backing of the U.S. government, and lenders generally have a bit more say-so in who they approve and what types of loans they dole out.
Both types of loans have their place on the homebuying spectrum. The right option really depends on your credit score, the kind of home you’re buying, how much you have saved up, and a few other factors. Let’s look at a few other major differences now:
You can typically expect government loans to have more lax eligibility requirements than conventional ones. FHA loans, for example, only require a 500 credit score, while conventional ones require well into the upper 600s. VA and USDA loans have no minimum score whatsoever.
Government-backed loans almost always come with mortgage insurance, which protects the lender if you default on your loan. FHA loans require both an upfront (at closing) mortgage insurance premium and an annual one, while VA and USDA loans require funding fees and guarantee fees, respectively.
On conventional loans, insurance isn’t always required. If you can make a 20% down payment (sometimes less, depending on your financials and the lender you choose), you may be able to avoid mortgage insurance altogether. For reference, Freddie Mac estimates that private mortgage insurance costs an additional $30 to $70 per month, on average.
Government loans are only intended for primary residences — meaning the home you intend to live in full-time. So if you’re hoping to buy a vacation house, second home, or investment property? They’re not an option.
With conventional loans, you can buy any property type. Want to vacation at a house, but Airbnb it while you’re away? A conventional loan typically allows it. You can also buy full-on rental properties, investment homes, and even multifamily properties if that’s what you’re eyeing.
Down payments vary across all loan products — government or not. On some government loans, you need no down payment at all. That’s only on VA and USDA loans, though, which come with strict stipulations (you must be military or buy in a rural area).
On other government loans (FHA), you need anywhere from 3.5% to 10% down. With these, your down payment directly ties to your credit score, so if you have a low credit score, you’ll need to make a higher down payment to account for the risk.
With conventional loans, you can make a down payment as low as 3% — though higher payments will mean a reduced interest rate and more affordable loan on the whole.
Government and conventional loans also vary in loan thresholds. With FHA loans, the loan limit in most U.S. counties is a mere $356,362. On conventional loans, it goes up to $548,250 — or $1 million in some higher-cost housing markets.
Choose the right loan for you
Picking the right loan option is critical to ensuring you can both purchase your dream house and afford it for the long haul. Need help picking the right mortgage option for your situation? Get in touch with a Premier Nationwide Lending office in your area today.
Premier Nationwide Lending is an Equal Housing Opportunity lender. Sponsored by NTFN, Inc. 700 State Highway 121 Bypass, Suite 100, Lewisville, TX 75067 NTFN NMLS 75333.