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Difference Between FHA and Conventional loans

loanFHA vs Conventional loans

It is of paramount importance, for anyone intending to acquire a loan product, to thoroughly familiarize themselves with the difference between conventional loans and FHA loans. Many put a lot of reliance solely on the lender’s opinion.
The FHA is the federal government agency that runs various financial programs, aimed at encouraging home ownership. Typically, FHA loans are mortgages that are secured with the assistance of the federal government agency. Banks are guaranteed repayment in case the borrower fails to honor the loan. All one needs to do, is make a small down payment, and they will be able to buy a home.

Conventional loans are ones offered by banks without any guarantees of repayment through a government agency. These loans will typically come with private mortgage insurance (PMI), which will insure the lending bank against nonpayment by the borrower, for loans of more than 80% of the value of the property. This means that, for a loan of 95% of the property, the private mortgage insurance will cover them for 15%.

Both FHA and conventional loans have the same rates, but FHA is more popular because of the lower risk it carries to the bank. Typically, conventional loans are for 80% of the property value, but a top-up loan of 10%, 15% OR 17% can be obtained by the borrower. This will make the combined value of the loan equal to FHA’s 3% down. However, a single loan is offered by some conventional lenders, rather than two loans. Like PMI for conventional loans, FHA-backed loans also have a mortgage insurance premium (MIP) which, instead of being paid as a closing cost, could be added to the loan. FHA loans require the borrower to contribute at least 3.5% of his own money to closing.

One of the main advantages of FHA over conventional loans, is that the criteria for qualifying for the loan is fairly simpler, and also has fewer requirements for equity. Generally speaking, borrowers with a few glitches in their credit history, as well as those without a credit history, will be allowed to qualify for FHA loans. Conventional loans depend heavily on credit scores, whereby, if a score is below the minimum standard, you will be denied qualification, or at best, be placed in a sub prime of higher rate.

Summary:
Conventional loans are offered by banks unguaranteed, while FHA loans are guaranteed by the government.
Conventional loans have a stricter qualification process than FHA loans.
FHA loans may be obtained without the borrower having a credit history, while conventional loans depend heavily on credit scores.
FHA loans are more popular for borrowers than conventional loans, because of their reduced risk to banks.


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