As you prepare to buy and finance your next property for long term appreciation plus additional monthly cash flow, there are two primary options for you to consider. Mortgage lenders and banks primarily offer two types of mortgages for residential real estate up to four units—conventional andconventional vs government financing government guaranteed. What are the differences between the two and when should you select either one?

A conventional mortgage is by far the most popular loan product used to finance investment real estate and is the bread and butter of most mortgage companies. Requiring at least 20 percent down, these mortgages are underwritten to loan guidelines established by Fannie Mae and Freddie Mac.

A government guaranteed, or government-backed, mortgage is a loan using guidelines set by FHA or VA. The Federal Housing Administration and the Veteran’s Administration. Both programs provide a government guarantee that compensates the lender should the loan go into default. The FHA program provides full compensation and the VA offers a guarantee of 25 percent of the loan amount. Both compensation programs are primarily financed with a form of mortgage insurance. Conventional mortgages carry no government guarantee. Should a conventional loan go into default, the bank forecloses on the property with no government compensation.

However, government-guaranteed loans are only available to purchase a primary residence, not for investment properties.  So how can you use a government backed loan? You can when buying a 1-2 or 2-4 unit property and living in one of the units. Additionally, your mortgage rate will be based upon owner occupancy compared to a rental property loan used for conventional financing.

This application of VA and FHA loans is not as common as conventional mortgages but in the right circumstance and property type, the financing offers more competitive rates, lower closing costs and very little down payment.