YOU Magazine - April 2021 - Government vs. Conventional Mortgages
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Paul and Sarah Scheper     Paul and Sarah Scheper
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April 2021

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Government vs. Conventional Mortgages

Government vs. Conventional Mortgages

Government mortgages such as FHA, VA, and USDA are backed and insured by the U.S government, whereas conventional mortgages are insured by private lenders. Qualifications are more lenient for government-backed loans, and both types of mortgages can carry mortgage insurance which protects the lender in case the borrower defaults on the loan. Mortgage insurance is typically required for loans with less than 20% down. 

FHA Mortgages are government-backed loans through the Federal Housing Administration and approved lenders, banks, and credit unions can offer them. These loans help borrowers with little to no down payment, lower credit scores, and higher debt-to-income ratios. For example, a first-time homebuyer can obtain a mortgage with as little as 3.5% down. Mortgage insurance (MIP) is required on these loans. This insurance is paid through the life of the loan unless a minimum 10% down payment is made. In this case, the MIP can come off the loan after 11 years. 

VA Mortgages are also insured by the Federal Government through the Department of Veterans Affairs. These mortgages are only available to our U.S. military which includes those who are active duty for a required period of time, those who served in the armed forces for a required period of time, or a spouse of a veteran who has died in the line of duty. A COE (Certificate of Eligibility) is needed, as it provides proof you qualify for a VA loan. With a VA loan, you can finance up to 100% of the purchase price and not require a minimum credit score, although a private lender could set a minimum credit score. Additionally, VA loans don't charge mortgage insurance, however, an upfront funding fee may be required unless you meet certain requirements. 

USDA Mortgages are government-insured through the Rural Development Guaranteed Housing Loan Program. These mortgages help those with low to moderate income and are for purchasing a home in rural or suburban eligible area. There are several types of USDA loans and different qualification requirements that can vary between them. These mortgages carry mortgage insurance, however for USDA loans, there is no option to remove the insurance during the life of the loan.

Conventional Mortgages are originated and serviced by private lenders, banks, and credit unions. Guidelines are not as lenient as government-backed mortgages, rather they have more conservative approval guidelines such as larger down payments, higher credit score requirements, and lower debt-to-income ratios. Conventional mortgages will carry mortgage insurance when needed. For example, a borrower could require PMI (Private Mortgage Insurance) if they had little to no down payment. 

Bottom line: Talk with your loan officer. Utilize their knowledge to help put a plan together to weigh your options and guide you to the best fit based on your needs and qualifications.  

Source: Mortgage Market Guide

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