The difference between an FHA Loan and a Conventional Loan.
The Lawhead Team knows there are many different types of loans one can apply for when buying a house. We would like to compare the two most common loans, Conventional loan and FHA loan, for our readers.
An FHA loan is a loan which is backed by the federal government and issued by participating lenders. With a conventional loan there is no such guarantee and the risk is assumed by the lending bank or other loan stakeholders.
A conventional loan lender will follow stricter Fannie Mae and Freddie Mac underwriting guidelines which require good credit, strong financial status and lower loan-to-value ratios. On the other hand, because of government intervention with an FHA loan, you must go through a more complicated approval process.
Conventional Loans vs. FHA loans –
- FHA loans only require a down payment of 3.5 percent which can be funded using borrowed or gift money while a conventional loan requires at least 10 percent down.
- To qualify for a conventional loan you must have a credit score of at least 620 however anything below a 740 will result in higher mortgage payments.
- Because a conventional loan requires a higher down payment, the borrower will be able to build equity faster. Because FHA loans require a comparatively lower down payment, borrowers are required to pay a mortgage insurance premium (MIP).
- FHA loans are suitable for applicants with bad or no credit. Conventional loans are suitable for those with sufficient cash and healthy financial conditions.
- FHA loan borrowers are required to pay a 1.5 percent upfront fee and a monthly 0.5 percent premium for the FHA mortgage insurance, which is designed to protect lenders from losses arising from mortgage defaults.