What Makes An FHA Loan Different From A Conventional Loan?

The fundamental distinction between conventional and FHA loans is that the government does not guarantee conventional loans. FHA loans are backed by government money, giving lenders additional protection. Because the risk to lenders is reduced, FHA loans are more straightforward to qualify for. A comparable lender protection may be required for conventional loans. However, this coverage is obtained as private mortgage insurance.

Borrowers should know that FHA mortgage loans are only available to owners who intend to live in the home. You cannot use an FHA loan to finance a home if you do not plan to live there. These loans are not meant for investment homes or commercial properties where the home’s residential aspect takes second place to the property’s non-residential purposes. Conventional loans may provide more flexibility in this regard.

FHA loan standards allow for financing a multi-unit property (up to four units) as long as the borrower intends to live in one or more of the units. In this case, renting the others is acceptable if the occupancy restrictions are met.

Conventional Loans vs. FHA Loans

Borrowers may finance home purchases using FHA and conventional loans, but they are not the same. Here’s a list of the important distinctions to remember while looking for a mortgage for your future home.

Credit Ratings

FHA loans are often simpler to qualify for, requiring just a credit score of 580 to be eligible for a 3.5% down payment. If your credit score is 500 to 579, you may qualify for a 10% down payment FHA loan.

A credit score of 620 or better is generally required for conventional loans.

The lender will determine the credit score required for each kind of loan. Even though the FHA specifies minimal scores, lenders may seek a higher minimum. You’ll be given a lower interest rate on conventional and FHA loans with a higher credit score.


FHA loans are more costly than conventional loans.

Conventional loans may have somewhat higher interest rates than FHA loans. However, the inclusion of permanent MIP on FHA loans may compensate for their slightly lower rates. “If you receive a conventional home loan with a down payment of less than 20%, you may have to pay Private Mortgage Insurance (PMI) on your loan, but that will go away automatically after your loan to value ratio drops to 78%,” Channel explains.

An FHA mortgage loan may be less costly in the near term, depending on the amount of your down payment, but if you no longer have to pay PMI on your conventional loan, it may be the less expensive alternative.

Last Words,

Before the current housing boom, submitting a winning bid on a new home required just a mortgage preapproval letter and a fair offer.

That is different now when there are more purchasers than available properties. Because of the heated competition and bidding wars prevalent among home purchasers, the sort of home loan you choose is more critical than ever.

While conventional loans are always popular, FHA loans are more straightforward to qualify for if your credit is less than excellent. However, in today’s market, you may need help to get the home of your dreams with an FHA loan.