When you set out to purchase a home, there are a lot of different things to do and consider. You not only have to research the location and type of home you want, but also think about how you’re going to pay for it. For most people, that involves getting a mortgage to pay for a portion of the home.
In the USA alone, there is nearly 10 trillion dollars of total mortgage debt, which shows just how prevalent mortgages are. However, not all mortgages alike. Sure, each mortgage will have a different rate, a different term and a different length, but those aren’t the only differentiating factors.
In fact, one of the biggest choices that you will have to make is the type or category of home loan that you will get. In general, there are two types to choose from, either a government home loan or a conventional home loan. This article will take a look at both types and the differences between them.
Government Home Loans
First, let’s dive into government home loans. These loans are mortgages that are backed by the government. When you obtain either an FHA or VA loan, the lender has insurance which works so that if you are unable to pay back the loan, the government will step and cover the loss. These are designed to let a wider range of people become homeowners, as a government insured loan is typically easier to qualify for and down payment amounts are lower.
There are many different kind of government home loans, these include:
You might be asking yourself “What is a USDA home loan”? Well, these loans are backed by the U.S Department of Agriculture and are aimed at helping buyers purchase homes in rural developments across the country.
An FHA loan is one that is backed and insured by the Federal Housing Administration. The guidelines are very flexible with these kind of loans, and thus most people (including first time homebuyers) can often qualify. These have a low credit score requirement and are accessible to most people, but require the borrower to have mortgage insurance.
A VA home loan is specifically for an individuals who have served or are actively serving in the armed forces in some capacity. Sometimes spouses can also qualify, too. These require no down payments and also don’t need the borrower to have mortgage insurance. However, the borrower may be subject to some extra fees, such as a VA funding fee.
All of these government home loans generally have low or no down payment options, require mortgage insurance and often have lower interest rates when compared to conventional home loans.
Conventional Home Loans
Next, we will look at conventional home loans. These loans are essentially any other loan that isn’t backed by the government in any way. As a result, the lender takes all of the risk, and thus, the down payments are generally higher and the qualifications are a bit more strict. Unless you have a down payment of over 20%, mortgage private insurance might be necessary.
These often have less expensive mortgage insurance amounts than government loans, and can often be simpler and quicker to close. However, the choice of which is the best will depend on your unique situation. In conclusion, we hope that this article has helped you be able to differentiate the different types of mortgages, and decipher which one is the best option for you.