Conventional Mortgage Loans and Government Assistance Mortgage Loans

The United States government has several agencies designed to provide assistance in securing mortgage loans.  Those agencies don’t provide the loans themselves, but rather provide lenders with loan insurance, and thereby make those people who qualify for government assistance a much lesser risk.  Government assistance mortgage loans, which are also referred to as simply government loans, can therefore be obtained at more favorable terms.  Government loans make up about 20% of all residential mortgages.  The other 80% of mortgage loans are called conventional loans.

The following government agencies, each catering to a specific segment of the population, are responsible for government loans:

• Federal Housing Administration (FHA) – Helps low and moderate income people obtain mortgages by insuring lenders against losses due to loan default.
• Department of Veteran Affairs (VA) – Provides loan guarantees to eligible active duty military personnel and veterans.
• Farmers Home Administration (FmHA) – Provides loan guarantees to people who live in rural areas.  No need to farm!

Since these government agencies don’t actually lend money, in order to get a government loan, you’ll have to find a separate lending institution that deals with the agency relevant to your case.

Due to the guarantees they provide, government loans are given at better terms than conventional mortgage loans.  These improved terms include low down payments, long repayment periods, low interest rates, and no penalties for early payments. 

Government loans do have drawbacks, however.  They are given only to specific segments of the population, have low loan amount limits, and involve more paperwork and waiting periods due to the additional involvement of government agencies.

The processing time for a conventional loan can be much shorter.  This factor can be very significant in seller’s markets, in which homes get multiple offers.  Those waiting to be approved for government loans typically get homes snatched by conventional borrowers while still waiting.