What Is A Government vs A Conventional Mortgage?

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A conventional mortgage is a loan that is not insured or guaranteed by the federal government

  • You can get a conventional mortgage from a bank, a credit union, or a mortgage broker
  • A down payment as small as 5% is allowed
  • Primary residence, rental properties, or second homes
  • Mortgage Insurance (MI) is required if the down payment is less than 20% of the purchase price
  • Generally good to great credit is required
  • These loans are mostly backed by Fannie Mae or Freddie Mac

A government-backed mortgage is a loan that is insured or guaranteed by the federal government

  • weak to poor credit is allowed
  • small to zero down payments are allowed
  • Generally only can be used to finance primary residences
  • Mortgage Insurance is often required for the life of the loan
    • The MI can be more expensive than conventional loan MI
    • the MI may be called something different (like the Funding Fee with a VA loan, but it’s still MI)
  • FHA loans
    • anyone can apply
    • MI cannot be canceled
    • down payment can be as little as 3.5%
  • VA loans
    • only veterans with an honorable discharge can apply
    • zero down payment allowed
  • USDA loans
    • zero down payment allowed
    • rural areas only – you can look up your area here to see if it qualifies as rural
    • there are income limits so if you make a lot of money you won’t be able to use this program
  • You can get a government-backed mortgage from the same lenders who offer conventional mortgages

The main difference between a conventional and a government-backed mortgage is the risk involved for the lender and the borrower

  • With a conventional mortgage, the lender assumes more risk if the borrower defaults on the loan, and the borrower may have to pay a higher interest rate or make a larger down payment
  • With a government-backed mortgage, the government assumes some or all of the risk if the borrower defaults on the loan, and the borrower may benefit from lower interest rates, smaller down payments, or more flexible eligibility criteria.

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