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The Difference Between Conventional and Non-Conventional Mortgages
Simply put, a conventional mortgage is not backed by the government while non-conventional mortgages are backed by the government. Examples of non-conventional mortgages include the FHA, VA, USDA and HUD Section 184 programs. Almost all other loans are conventional mortgages. Non-conventional mortgages usually require borrowers to pay extra upfront and/or ongoing fees in addition to their monthly payment but usually charge lower mortgage rates because they are insured by the federal government. Borrowers typically prefer conventional mortgages to avoid the extra fees involved with most non-conventional mortgages. The tables below summarize numerous conventional and non-conventional mortgage programs including key loan features.
As outlined below, there are different types of conventional mortgages and some conventional mortgages charge higher mortgage rates or fees depending on the loan amount and type, loan-to-value (LTV) ratio and borrower credit profile.
Conforming mortgage: In the 48 contiguous states, Washington D.C. and Puerto Rico, this is a mortgage with a loan amount of $726,200 or less. In Alaska, Guam, Hawaii and the U.S. Virgin Islands this is a mortgage with a loan amount of $1,089,300 or less. Conventional conforming mortgages typically require an LTV ratio of 97% or less, which means you are making a down payment of at least 3%, and a borrower credit score of at least 620, although certain conventional loan programs allow lower credit scores or non-traditional credit profiles. You are usually required to pay private mortgage insurance (PMI), which is an ongoing monthly fee in addition to your mortgage payment, on a conventional loans with an LTV ratio of greater than 80%.
Lenders also typically require the borrower to demonstrate the ability to afford the monthly payment and repay the mortgage according to Qualified Mortgage guidelines. These guidelines also require that the length of the mortgage is not longer than 30 years and the loan must amortize, which means you payoff your loan balance in full with your final payment. Mortgages with conforming loan amounts are typically eligible for all conventional mortgage programs offered by traditional lenders such as banks, mortgage banks, mortgage brokers and credit unions.
Conforming jumbo mortgage: This is a mortgage with a loan amount that exceeds $726,200 (or $1,089,300 in Alaska, Guam, Hawaii or the U.S. Virgin Islands) but less than the conforming loan limit set by the government for counties with higher housing costs. Conventional conforming jumbo mortgages typically require an LTV ratio of 90% or less and a borrower credit score of at least 680. Lenders typically require the borrower to demonstrate the ability to repay the loan according to Qualified Mortgage guidelines. The mortgage rates for conventional conforming jumbo mortgages are typically slightly higher than the rates on conventional conforming mortgages. Mortgages with conforming jumbo loan amounts may not be eligible for some conventional nor or low down payment mortgage programs, depending on the loan limits for your county.
Non-conforming jumbo mortgage: Typically referred to as a jumbo mortgage, this is a mortgage with a loan amount that exceeds the conforming mortgage limit in your county. Non-conforming jumbo mortgages have historically required lower LTV ratios depending on the loan amount and mortgage program, although many lenders have increased their maximum LTV ratio for jumbo loans to 90% and also relaxed their credit score requirements. Mortgages with jumbo loan amounts are typically not eligible for conventional low down payment programs.
Non-owner occupied mortgage: This is a mortgage for a property in which you do not live, such as a rental or investment property. The interest rate for a non-owner occupied mortgage is typically .250% - .750% higher than the interest rate for a loan on an owner occupied property. Additionally, lenders typically require lower loan-to-value ratio ratios of 75% - 85% for non-owner occupied mortgages, which means you are required to make a larger down payment or have more equity in your home when you refinance.
Alternative mortgage programs: These are programs for borrowers who are unable to obtain a mortgage from a traditional lender. Most applicants who use alternative mortgage programs have lower credit scores (below 500), are self-employed or want to provide limited income or asset documentation when they apply for the loan. These programs can include much higher upfront fees and mortgage rates as much as 3.0% - 6.0% higher than the current market rates. Most programs also typically require a lower LTV of 75% or less, which means your down payment is higher than other conventional loan programs. Alternative mortgage programs are usually provided by private money lenders, also known as hard money lenders, and are not required to follow Qualified Mortgage guidelines.
The table below compares mortgage rates and fees for conventional loans. We recommend that you contact multiple lenders in the table to shop for your mortgage. Comparing loan proposals is the best way to find the lender and mortgage that are right for you.
FHA, VA, USDA and HUD Section 184 mortgages are the primary types of non-conventional home loans. These programs are designed to help individuals with low and moderate incomes or individuals with limited funds purchase a home by requiring a low or no down payment. The downside to these non-conventional mortgage programs is that they require the borrower to pay additional fees such as upfront and ongoing mortgage insurance premium (MIP), funding and guarantee fees.
VA Home Loan Program: Allows borrowers to purchase a home with no down payment. VA mortgage rates tend to be lower than conventional rates but applicants may be required to pay a one-time, upfront VA Funding Fee depending on their military disability rating. Although technically the VA Home Loan Program does not have a minimum credit score requirement, most VA lenders require that borrowers have a credit score of at least 620 .
FHA Mortgage Program: Allows borrowers to purchase a home with a down payment of 3.5% of the purchase price of the property. FHA mortgage rates tend to be lower than conventional interest rates but borrowers are required to pay a one-time, upfront FHA Mortgage Insurance Premium (MIP) plus an ongoing monthly fee in addition to their mortgage payment. The FHA Mortgage Program permits a credit score of 500 if you make a down payment of at least 500 and a score of 580 if your down payment is between 3.5% and 10.0%.
USDA Mortgage Program: Designed to help individuals with low-to-moderate incomes obtain mortgages and buy homes located in rural areas or small communities with no down payment. The program allows qualified borrowers to obtain USDA-backed mortgages at favorable interest rates to finance 100% of the purchase price (plus certain fees and expenses) of eligible properties located in USDA-designated rural areas. The borrower is required to pay upfront and ongoing USDA mortgage insurance fees, which are also known as guarantee fees.
HUD Section 184 Program: Enables eligible Native Americans to buy a home with a down payment as low as 2.25% for loans above $50,000 or 1.25% for loans below $50,000. The Section 184 Program also offers more affordable mortgage rates but requires participants to pay upfront and ongoing mortgage insurance fees, depending on your loan-to-value (LTV) ratio. Section 184 mortgages do not require a minimum credit score.
Non-conventional mortgage programs are provided by approved lenders including banks, credit unions and mortgage brokers. In many cases lenders offer both conventional and non-conventional mortgages. Use the FREEandCLEAR Lender Directory to search for twenty-five mortgage programs including conventional and non-conventional options.
Sources
“Conventional loans.” CFPB. Consumer Financial Protection Bureau, 2018. Web.
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