Buying a home is a significant financial decision, and choosing the right mortgage type for your situation is a crucial part of that process. The two primary categories of mortgages are conventional mortgages and government-backed mortgages. Conventional mortgages are backed by private lenders, while government-backed mortgages are insured by the federal government.
In this article, we’ll delve into the benefits of a conventional mortgage and how it compares to government-backed mortgages like FHA, VA, and USDA loans.
Understanding Conventional Mortgages
A conventional mortgage is a home loan offered by a bank, credit union, or online lender, and it’s not insured by the federal government. Conventional mortgages come in two types: conforming and non-conforming loans. Conforming loans follow the guidelines set by Fannie Mae and Freddie Mac, while non-conforming loans, like jumbo loans, don’t.
Understanding Government-Backed Mortgages
Government-backed mortgages are insured by the federal government. If a borrower defaults on a government-backed loan, the government pays the lender a portion of the loan amount. The three types of government-backed mortgages are:
- Federal Housing Administration (FHA) loans
- Veterans Affairs (VA) loans
- United States Department of Agriculture (USDA) loans
Now, let’s explore some of the benefits of conventional mortgages compared to government-backed mortgages.
Benefit #1: Lower Mortgage Insurance Costs
Conventional mortgages often have lower mortgage insurance costs than FHA loans. If your down payment is less than 20%, both loan types require mortgage insurance. However, FHA loans require an upfront mortgage insurance premium and a monthly premium. Conventional loans only require private mortgage insurance (PMI), which can be dropped once your loan-to-value ratio reaches 80%. Bankrate provides a comprehensive guide on understanding PMI.
Benefit #2: Flexibility in Property Types
Conventional mortgages can be used to buy a wider variety of property types, including vacation homes and investment properties. Government-backed loans often come with restrictions on the type of property you can purchase. The U.S Department of Housing and Urban Development (HUD) outlines these restrictions in detail for FHA loans.
Benefit #3: No Upfront Funding Fees
VA loans require an upfront funding fee unless the borrower is exempt due to a service-related disability. This fee can range from 1.4% to 3.6% of the loan amount. Conventional loans do not require this upfront fee, potentially saving borrowers a significant amount of money at closing.
Benefit #4: Loan Size
Conventional loans allow for larger loan amounts, especially in high-cost areas. For borrowers looking to purchase a more expensive home, a conventional loan might be the best fit. Fannie Mae provides a look at current conforming loan limits.
Benefit #5: Lower Overall Cost for High-Credit Borrowers
For borrowers with high credit scores, conventional loans can often be more cost-effective overall, offering lower interest rates and lower PMI rates than government-backed loans.
Choosing the right mortgage type for your situation is a crucial step in the home-buying process. Both conventional and government-backed loans have their advantages, and the best choice will depend on your individual circumstances and goals. To discuss which mortgage type might be the best fit for you, contact us at Fairway Fast Mortgage, or you can start your loan application today.