Conventional vs. Government-Backed Loans
by Frank Verni
A conventional loan is a loan that is not insured by the government; the lender takes on the risk of losing money in the event that the borrower defaults on the mortgage.
Conventional loans come in a variety of sizes and terms, and may feature either fixed or adjustable interest rates. Conventional loans may be either conforming or non-conforming.
A government-backed loan is insured, either completely or partially, by the U.S. government. The government does not lend money to the borrower; instead, it promises to repay some or all of the money to the lender in the event that the borrower defaults. This reduces the risk for the lender when making a loan.
Government-backed loans can be a good option for borrowers who would not be able to qualify for a conventional loan. Compared to conventional loans, government-backed loans have lower down payment and credit score requirements.
Though government-backed loans can provide flexibility for home buyers, they may carry a higher interest rate than comparable conventional loans, and require the borrower to pay mortgage insurance
Like conventional loans, government-back loans may be issued with a variety of terms and interest rates.
Examples of Government-Backed Loans
FHA Loans: FHA loans are very popular among first-time home buyers, but are available to anyone who qualifies. They offer competitive rates, less-stringent credit requirements, and low down payments.
VA Loans: VA loans are available to eligible veterans and their spouses. They offer low down payments and favorable interest rates.