The Difference Between Conventional Loans and FHA Loans

Conventional and FHA loans are fundamental sources of financing for many home buyers. Both these products play an integral role in the housing market.

Broadly speaking, FHA loans are suitable for poor credit or first-time mortgage applicants, while conventional loans are perfect for people with a solid credit history.

But, in order to get the best deal on your mortgage loan, you need to understand the main features of FHA and conventional loans.

Loan origination and insurance

FHA loans are insured by the Federal Housing Administration. But, the government doesn’t secure conventional loans. This is the main distinguishing factor between FHA and conventional loans.

FHA-loan insurance protects mortgage lenders against losses arising from default. Borrowers are required to pay the insurance for the life of the loan. Meanwhile, conventional mortgage loans can also insured through a private insurance company.

Private mortgage lenders issue FHA and conventional loans. In order to apply for an FHA loan, you will need to approach an FHA-approved lender.

Down payment

Another key difference between FHA and conventional loans is in down payment. An FHA loan requires a lower down payment amount (3.5 percent minimum) as compared to a conventional loan. Therefore, an FHA loan is a good loan option for people with limited funds.

On the other hand, the minimum down payment on a conventional loan is 5 percent. If you’re able to put down 20 percent (or more) down payment on a conventional loan, you will not have to pay the mortgage insurance.

Credit score

As conventional loans are not insured by the government, they have a higher credit score requirement.

In order to qualify for a conventional loan, you need a credit score of at least 620. But, credit score requirements may vary among conventional mortgage lenders.

For FHA, a minimum credit score of 580 can help you qualify for the loan. If you have a credit score less than 580, you can still qualify for the loan. But, you will most likely have to pay a higher down payment.

Loan amount and interest rates

When it comes to interest rates, FHA loans interest rates are generally lower than conventional loan interest rates. However, conventional loans amounts are typically greater than FHA loans.

Conventional lenders take into account some factors, such as down payment, current market conditions, borrower’s choice of mortgage product, etc. to determine the interest rate.

Find and compare quotes on FHA and conventional mortgage loans here. As a registered mortgage brokerage company, we can help you to secure the right mortgage loan at an affordable price from reputable FHA and conventional lenders.