What Are The Difference Between FHA And Conventional Loans?

Understand the differences between FHA and conventional loans.

Buying a home can be a complicated process with considerable unfamiliar terminology. Understanding the ins and outs of mortgage loans and what it all means is daunting. There are various types of mortgages and the differences are important for the buyer to understand.

The Difference Between FHA and Conventional Loans

One of the major differences is that FHA doesn’t loan money at all. The FHA (Federal Housing Administration) is the largest insurer of loans and guarantees 100% of the loans it backs. This provides ultimate protection to the lender if a borrower defaults on the loan. FHA is part of Housing and Urban Development (HUD). HUD is the federal governmental department that is in charge of major housing programs and establishes guidelines for what loans they will insure.
FHA , like conventional loans, offers programs for purchase, cash out refinance and rate and term refinance mortgages, and fixed rate, adjustable rate and buy down mortgages. The loan requirements are, however, somewhat different than that of conventional loans. The differences can be very meaningful for the first time buyer or those with less stellar credit.

The Benefits of FHA

FHA focuses on employment history, income to monthly payment ratio and any previous mortgage payment history rather than on credit scores. It will guarantee loans for those with no credit making it easier for first time buyers to secure their first home. FHA will even consider those with poor credit, if a reasonable explanation for the bad record can be given. The down payment can be as low as 3.5% with an FHA approved loan. Closing costs are also less than with conventional loans.

The Benefits of a Conventional Loan

Conventional loans are quicker to process. If mortgage insurance is required it is less expensive than with FHA.

What Are The Difference Between FHA And Conventional Loans?

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