If you are planning to take out a home mortgage loan, you need to know the difference between different types of loans, particularly the difference between an FHA and a conventional loan. An FHA loan is issued by a private lender but this is guaranteed by the Federal Housing Administration (FHA). No such federal backing is there in case of a conventional loan. There are a lot of differences between these two types in terms of qualification criteria, down payment requirements, insurance, loan limits etc. Get to know the main difference between these two mortgage offers.
Eligibility requirements
There are a lot of differences between these two mortgage types in terms of eligibility requirements. For qualification to an FHA loan, the minimum credit score required is around 620. If your credit score is below that, you will find it difficult to make the cut. On the other hand, to become eligible for a conventional deal, you should have a much higher credit score. Again, to get qualified for an FHA deal after bankruptcy, you will have to wait at least one year. The waiting period to get qualified for a conventional deal after bankruptcy is around 2 to 4 years.
Down payment
There are huge differences between these two types, in terms of down payment requirement. To obtain an FHA loan, you have to make a down payment of 3% of the appraised value of the house. For conventional mortgages, the down payment amount may vary from 5% to 15% of the appraised value of the house. This variation depends upon the type of the home that you are purchasing. In case of an FHA loan, even the gifted money can be used for making down payment, whereas in case of a conventional mortgage home deal, gifted money is not accepted for making down payment.
Restrictions on loan amount
In terms of the limits, there are differences between these two types of offers. As such, conventional lenders don’t put any restrictions on the amount that they lend. FHA lenders however put restrictions on the amount they lend depending upon the area. In the areas where the real estate prices are very high, FHA lenders lend a bigger amount.
Mortgage insurance requirements
If you make a down payment which is less than 20% of the purchase price of the house, then you have to pay the mortgage insurance premium. This actually protects the lenders from defaulting borrowers. In case of both these types, you have to pay the insurance premium. In case of a conventional loan, you don’t have to pay this insurance premium upfront but you have to pay it on a monthly basis. In case of an FHA offer, you have to however pay this insurance premium upfront as well as on a monthly basis.
These are the main differences between an FHA and a conventional loan. If you have clear understanding between these two offers, it will help you chose the type which best suits your requirements.