Conventional Loan Vs Government Loans
Home buyers have dozens of mortgage loan options today.
In general, though, mortgages can be divided into two broad categories government-backed loans and conventional loans.
The rule of thumb is that if you have good credit and a large down payment , a conventional loan is often best. If you have lower credit and/or a smaller down payment, a government-loan can help.
But those are not universal rules. The best type of mortgage for you will depend on your budget, your credit, and your home buying goals.
To help guide you in the right direction, heres a broad overview of conventional vs. government loans, and who theyre best for:
If youre not sure which type of loan is best for you, read up on your options or chat with a loan officer about what you might qualify for.
Conventional Loan Down Payment
Contrary to popular belief, a 20% down payment is not a requirement to obtain a conventional loan. However, if you cant come up with a 20% down payment, youll have to pay private mortgage insurance , which is a lenders protection in case you default on your loan.
A smaller down payment equals more risk, so you mitigate that risk for the lender when you pay for mortgage insurance. PMI payments are built directly into your monthly mortgage payments.
Minimum Down Payment For A Conventional Loan
Its a common myth that you need a 20% down payment for a conventional loan. You can actually get one with as little as 3% down.
All told, there are six major conventional loan options that can range from 3% to 20% down.
Conventional loan down payment requirements:
From the 10% down piggyback loan to 3% down HomeReady and Conventional 97 loans, low-down-payment options not only exist but are extremely popular with todays conventional loan borrowers.
So, how do you qualify for a conventional loan? Simply by meeting requirements set out by Fannie Mae and Freddie Mac.
Once you do that, you can join the club of conventional loan homeowners who make up the majority of the market.
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Who Qualifies For A Conventional Mortgage
For the most part, the eligibility requirements for a conventional mortgage break down into three categories: credit score, debt-to-income ratio, and down payment.
If you can’t meet all three qualifications, you’ll want to check if you qualify for a government-backed mortgage or wait to buy a home. With more time, can improve your credit score, pay off some debt, or save more for a down payment.
Why Choose A Conventional Loan
Most homebuyers choose conventional mortgages because they offer the best interest rates and loan terms â usually resulting in a lower monthly payment. Since most people choose a fixed-rate loan over an adjustable-rate mortgage, they donât have to worry about rising mortgage rates, making it easier to budget.
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Minimum Down Payment Of 3% Or 20% With No Pmi
Many people assume you have to put down 20% for a conventional loan. Fannie Mae and Freddie Mac, however, only require 3% down.
Good to know:
A piggyback loan also known as an 80/10/10 loan can get you out of this requirement. With a piggyback loan, you put 10% down, but the other 90% of the homes purchase price is split into two mortgage loans: a main mortgage of 80% and a second piggyback mortgage of 10%. The combination of your down payment and the secondary mortgage allows you to avoid PMI.
Not everyone will get approved for a loan with a down payment as low as 3%. For example, Fannie Maes 97% LTV Standard mortgage also known as a Conventional 97 loan allows 3% down but requires at least one borrower to be a first-time buyer, and Freddie Macs Home Possible program requires a credit score of at least 660.
Here are some popular low-down-payment conventional mortgage programs to consider:
| Loan type | ||
|---|---|---|
| For very-low-, low-, and moderate-income borrowers | ||
| Piggyback loan | 10% | Allows borrowers to take out a second mortgage at the same time as the first mortgage to cover 10% of the purchase price and avoid PMI |
Apply For Your Mortgage
Once youve decided on which lender best suits your needs, you can apply for your mortgage. At this point, your house hunt can begin! The application process can take some timesometimes more than a monthand involves heavy documentation so its smart to start this early, preferably before youve started house hunting in earnest.
Conventional home loans can feel confusing and stressful, especially because there is so much money at stake. However, by learning the ins and outs of mortgages prior to applying, you can give yourself a leg up in the game, and the resources you need to find the financial product thats right for you.
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Applying For A Conventional Loan
When you apply for a mortgage, your lender will discuss what type of home loan is best for you. You will probably need to submit proof of income and assets if you decide to apply for a conventional loan. The lender will decide whether to approve you based on this information. They’ll also use this documentation to determine your interest rate.
Conventional Vs Government Loans
| Lender or insurer is a government entity | |
| Usually require higher down payments | Down payment requirements are low to accommodate certain homebuyers |
| Buyers with low credit may not qualify or may have higher interest rates | Available to borrowers with low credit |
The main difference between a conventional loan and other mortgage types is that a conventional loan isn’t made by or insured by a government entity. They’re also sometimes referred to as non-GSE loans.
Government loans include Fair Housing Administration and Veterans Association loans. The government insures FHA loans and backs VA loans. Down-payment requirements are much more buyer-friendly. The minimum down payment for an FHA loan is 3.5%. The minimum down payment can be zero for VA loans to qualifying veterans. The U.S. Department of Agriculture offers USDA loans if you want to buy a rural property and are eligible.
Conventional loans are harder to qualify for than government loans, as private lenders generally require a lower debt-to-income ratio than government lenders. People with poor credit or DTIs above 43% may not qualify for conventional loans.
Conventional loans aren’t particularly generous or creative regarding credit score flaws, loan-to-value ratios, or down payments. There’s generally not a lot of wiggle room here when it comes to qualifying.
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Selecting The Right Mortgage Option For You
Even though conventional mortgages tend to be the most typical option, they are by no means the only one. Mortgages come in a variety of different forms. Choosing the right one is important to ensure a successful home-buying process.
There are fixed-rate mortgages, variable-rate mortgages, convertible mortgages, bridge mortgages. hybrid mortgages, closed mortgages, among many others. Although understanding each of these mortgage term types fully may take a significant amount of research, its more than worth it to ensure you approach the mortgage application process with strong background knowledge to best inform your choices.
Ultimately, a conventional mortgage is a lower risk transaction for lenders since the additional equity in the property serves as a buffer from potential losses in the event of a loan default. Single family conventional home loans are typically cheaper, in that the cost of added insurance is avoided.
In the case of multifamily property loans, often conventional mortgages are more expensive as a result of the additional risk component, and high amount of capital required for non-insured deals. CMHC insured multifamily loans are also available through CMIs commercial mortgage division.
Take the time to consider your situation, crunch the numbers and work directly with a mortgage professional. This will allow you to proceed through the mortgage process with confidence and move into your dream home.
Is A Conventional Home Loan Right For You
In many cases, itâs the best option for rates and terms – but only if you qualify. The bottom line is that conventional loans are really only available to borrowers with good credit and some available cash for down payment. If you are fortunate to be an attractive borrower, then you might have the ability to obtain a loan at a lower cost and have it processed faster than with a government insured loan.
However, before you decide to apply for a conventional loan, make sure to speak with at least a few mortgage professionals. Remember, each lender offers different rates, terms and fees, so itâs best to receive a Loan Estimate prior to committing to one institution. This additional research will help you secure the best mortgage terms possible for your future home loan.
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Why You Can Trust Bankrate
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our mortgage reporters and editors focus on the points consumers care about most the latest rates, the best lenders, navigating the homebuying process, refinancing your mortgage and more so you can feel confident when you make decisions as a homebuyer and a homeowner.
What Are Interest Rates For A Conventional Loan
Interest rates on conventional home loans are dynamic, changing daily to reflect evolving economic and market conditions. At the same time, rates for individual loans also depend heavily on the terms of the loan itself, including the size of the loan, its length and whether itâs a fixed-rate or adjustable-rate mortgage.
If you are considering taking out a conventional loan to put towards purchasing a house and want a clearer idea of what current interest rates look like, check out Pennymacâs free mortgage calculators. Mortgage calculators provide estimates for monthly mortgage payments, including interest, taxes and other factors.
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Fha Loans And Mortgage Insurance
To offset a lower required credit score, FHA loans include mortgage insurance as part of the borrowers responsibility.
FHA loans require two types of mortgage insurance payments:
- An upfront mortgage insurance premium of 1.75% of the loan amount, either paid when you close on the loan or rolled into the loan amount.
- A monthly MIP as part of your regular mortgage payments.
If your down payment was less than 10%, youll continue to pay monthly mortgage insurance for the life of the loan.
If your down payment was 10% or more, youll only have to pay mortgage insurance for the first 11 years of the loan before it’s removed.
Can A Second Mortgage Eliminate Pmi
A loan option that is rising in popularity is the piggyback mortgage, also called the 80-10-10 or 80-5-15 mortgage.
This loan structure uses a conventional loan as the first mortgage , a simultaneous second mortgage , and a 10% homebuyer down payment. The combination of both loans can help you avoid PMI, because the lender considers the second loan as part of your down payment. A piggyback loan can make homeownership accessible for those who may not yet have saved a down payment.
For an in-depth look at these loans, see our piggyback loan blog post.
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Conventional Loan Is Not Synonymous With Conforming Loan
Be careful not to confuse conventional with conforming, as the two terms can actually be very different, despite being lumped together constantly by lenders and reporters.
Lets talk about the difference between conventional and conforming for a moment to really let it sink in.
Ill start by saying all conforming mortgages are conventional, but not all conventional home loans are conforming. Confused yet? Bear with me here.
To answer the first part of that statement, consider that conforming loans are those backed by Fannie Mae and Freddie Mac, which arent the government, as noted above.
As for the second statement, there are non-government mortgages that exceed the loan limits allowed by conforming mortgages, making them conventional loans that are non-conforming.
Case in point, the jumbo loan, which is conventional but not conforming due to loan amount.
How Is A Conventional Loan Different From A Government
Government-insured mortgage loans have special features that can make them a good fit for certain homebuyers. Here’s a quick summary of each option and who might consider it:
- FHA loans: An FHA loan is open to applicants with credit scores as low as 500 if you have a 10% down payment, or 580 if you have a 3.5% down payment.
- VA loans: A VA loan doesn’t require a down payment or mortgage insurance, but is designed only for select members of the military community, their spouses and other beneficiaries.
- USDA loans: USDA loans have no down payment requirement and can help low- to moderate-income homebuyers who want to purchase a home in an eligible rural area.
Note that while these loans are insured by various government agencies, it’s private lenders that offer them to borrowersthe same lenders that also offer conventional loans.
If you’re trying to decide between a conventional loan and a government-insured loan, the right one for you depends on your financial situation. While government-backed loans offer perks if you don’t have great credit or a sizable down payment, qualifying for one is not always easy. Additionally, you may save more money with a conventional loan if you have good credit or can put more money down. Compare the different options and their benefits and drawbacks to find the right loan program for you.
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Alternatives To Conventional Loans
If you have a credit score below 660, you might need to find a conventional loan alternative with more forgiving standards though as we noted above, borrowers with a score of 620 might qualify for certain conventional mortgage programs.
If youre having trouble qualifying for a conventional loan and youve talked to lenders who offer programs such as HomeReady or Home Possible, you might want to try one of the following non-conventional loans.
| Loan type | ||
|---|---|---|
| Borrower must be an active-duty military member, veteran, reservist, or surviving unremarried spouse | ||
| USDA | None | Borrowers income must not exceed area median must be buying a home in a USDA-eligible area |
| Note: Lenders might require a higher credit score than the programs required minimums. |
No matter what type of mortgage youre looking for, you should shop around to find the best interest rate and the lowest closing costs. If youre looking for a conventional loan, Credible can help you get personalized prequalified rates from our partners in less than three minutes check out the table below to get started.
Loan Limits And Jumbo Loans
Conventional, conforming loans have limits, meaning a maximum loan amount you can take out to qualify for that type of loan.
The conforming loan limit differs from county to county, Sanchez shares.
Any time you go over that conforming loan limit by even a dollar, youre now considered a jumbo loan, which is a type of non-conforming loan.
In most counties, the conforming loan limit is $510,400, though it can be higher in expensive cities, such as San Francisco.
Jumbo loans are generally considered a bit riskier for lenders, so theyll typically have stricter qualifications such as higher minimum credit scores, larger down payment requirements, and more significant asset reserves, plus a lower maximum DTI.
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Sourcing Your Down Payment
A conventional loan borrower has the option to put anywhere from 3% to 20% down or more.
Plus, a down payment gift can cover the entire amount in some cases. Check with your loan officer for gift and donor documentation requirements.
Unless its a gift, the applicant will need to verify a valid source of the down payment such as a savings or checking account.
Applicants can liquidate investment accounts and even use a 401k loan for the down payment.
Typically, home buyers will need to supply a 60-day history for any account from which down payment funds are taken.
Conventional Loans And Mortgage Insurance
Private mortgage insurance is a type of mortgage insurance unique to conventional loans. Like mortgage insurance premiums do for FHA loans, PMI protects the lender if the borrower defaults on the loan.
Youll have to pay PMI as part of your mortgage payment if your down payment was less than 20% of the homes value.
Unlike mortgage insurance for FHA loans, PMI offers different payment options. Borrower-paid PMI, or BPMI, does not require an upfront cost. Depending on the lender or mortgage investor, you can request to have it canceled once youve reached 20% equity in your home. In most cases, its automatically removed once you reach 22% equity.
Lender-paid PMI, or LPMI, is paid for you by your lender. The lender will raise your mortgage interest rate to incorporate the insurance payment they make on your behalf. This option may result in lower payments, but its typically not cheaper over the life of the loan. LPMI cant be canceled because its built into your interest rate.
A third option is single-pay mortgage insurance. Under this scenario, a client pays for all or part of their mortgage insurance policy up front in order to have lower monthly mortgage insurance fees or none at all, regardless of their down payment.
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