What is the major difference between conventional and unconventional loans?

The distinction between conventional and unconventional loans primarily lies in the backing and guarantees associated with them. Unconventional loans, such as those offered by government agencies like the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the U.S. Department of Agriculture (USDA), come with specific guarantees or insurance from the government. This support allows lenders to offer these loans with lower down payment requirements and more flexible credit score criteria, making homeownership accessible to a broader range of borrowers.

In contrast, conventional loans are not backed by any government entity and are typically offered by private lenders. While they may require private mortgage insurance if the down payment is less than 20%, they do not have the same government guarantees that characterize unconventional loans.

Understanding this difference helps borrowers navigate their options and choose the type of loan that best suits their financial situation and homeownership goals.