A mortgage is a financial instrument that enables people to fully own a home over time. Usually, this time period is 15 or 30 years (though you can pay your mortgage off sooner by paying more than the monthly minimum). However, while the definition of a mortgage might be obvious to some, there are actually many different kinds of mortgages that are currently available.
All mortgages can fall into one of two specific categories: “conventional” mortgages and “non-conventional” mortgages. While both types of mortgages have the same basic goal—helping people become homeowners—the differences between these types of mortgages are important to keep in mind.
Whether you want to secure a conventional or non-conventional mortgage will have a major impact on the mortgage application process. In this article, we will discuss the primary differences between a conventional and non-conventional mortgage, as well as how these types of mortgages might affect your personal application process.
What is a Conventional Mortgage?
Generally speaking, the primary difference between conventional and non-conventional mortgages is that conventional mortgages are backed by a private lender (your mortgage provider), while non-conventional mortgages are backed by the federal government. Currently, the majority of mortgages in the United States are categorized as conventional mortgages.
Because conventional mortgages are backed by private (for-profit) organizations, applicants will usually need to meet a basic set of mortgage standards. The most common type of conventional mortgage is a conventional conforming mortgage, which means you will usually need to apply for a mortgage amount that is less than $647,200 (if you live in the 48 contiguous states) and you will need to meet some basic credit score standards—typically, 620 or higher. You’ll also usually be required to make a down payment of at least 3 percent before you can close (and pay for private mortgage insurance if your down payment is less than 20 percent), however, there are many exceptions to the rules mentioned above.
In addition to the very common conventional conforming mortgage, there are several other types of conventional mortgages available as well. For example, a non-conforming jumbo mortgage can be used to secure a home above $647,200, though you will typically be expected to make a proportionately larger down payment. Non-owner occupied mortgages are available for people, such as landlords, hoping to purchase a home that will not use as their primary residency. And alternative mortgage programs are available for people who have low credit scores or have a non-traditional credit profile.
Regardless, what all conventional mortgages have in common is that they are not issued by the government but are issued by private entities. Though the government might regulate these mortgages, the risk is held by the lenders who, therefore, get to set the standards for the mortgage application process.
Types of Non-Conventional Mortgages
A non-conventional mortgage is a mortgage that is not issued solely by a private entity but is instead issued (and regulated) by a specific department of the government. These mortgages are only available to individuals who qualify but often require a very low or non-existent down payment—when available, these are often the types of mortgages that people will apply for first.
There are currently many different departments of the government that offer non-conventional mortgages. Veterans Association (VA) mortgages are available to most current or former members of the military who are able to meet a basic set of applicant standards. Additionally, Federal Housing Authority (FHA) loans are available for people who are low-income, have a lower credit score, or are unable to make a large initial down payment—however, these loans have some restrictions and are not always easy to qualify for.
Additionally, the US Department of Agriculture (USDA) offers loans with no-low down payments available to those living in rural (or primarily agricultural) areas. The Department of Housing and Urban Development offers non-conventional mortgages low-value and low down payment loans via its 184 program—these loans do not require a minimum credit score, though your housing choices will be limited.
Should I Apply for a Conventional or Non-Conventional Mortgage?
Currently, the majority of mortgages (about 64 percent) are conventional mortgages. These are the types of mortgages that most people with decent credit scores and the ability to make a down payment can qualify for.
When available, a non-conventional mortgage may also be a beneficial option. These mortgages often have looser requirements, meaning that this might be the easiest way for you to own a home. However, these loans are only available to a select group of people—in most cases, you must be a veteran, live in a low-income household, or live in an agricultural area to apply.
Before committing to a specific mortgage (or lender), be sure to explore your options and learn about the many different types of mortgages that are currently available.
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