Mortgages come in all shapes and sizes, and while government-backed loans offer unique benefits to homebuyers, conventional loans are still by far the most common type of home loan. FHA loans are backed by the Federal Housing Administration and are offered by FHA-approved lenders, while conventional loans are not insured or guaranteed by the government. The main difference between conventional loans and FHA loans is that conventional loans are not insured by the government. FHA loans are guaranteed with government funds that provide additional protection to lenders.
Mortgage insurance is required with FHA loans; you can avoid it on a conventional loan with a down payment of at least 20%. Conventional loans have a minimum credit score of 620 or higher, and higher scores result in significantly better interest rates. When evaluating a loan application, lenders generally do not approve a conventional loan for a buyer who has a higher debt-to-income ratio (DTI). For some, a conventional loan is not an option due to lack of income, down payment requirements, or credit problems, making government-insured loans favorable options in these scenarios. If you deposit at least 20% down payment on your conventional loan, you won't have to pay private mortgage insurance. In the world of mortgages, there is a dividing line between conventional loans and loans that are insured by the government (also known as those that are backed by the government).
Conventional loans are divided into compliant and non-compliant loans, depending on whether or not they meet the guidelines established by the National Federal Mortgage Association (Fannie Mae) and the Federal Mortgage Corporation (Freddie Mac). Therefore, government-insured loans make homeownership accessible to more populations that would not otherwise be approved for a conventional loan. When trying to decide between a conventional loan and a government insured loan, it's important to consider how those differences could affect your ability to qualify for a home loan and save money on mortgage payments in the future. You can save more money with a conventional loan if you have good credit or can deposit more money.
