FHA Compared to Conventional
- While the FHA does not actually make loans to borrowers, it does provide financial guarantees to lenders, so these lenders can give mortgages to borrowers who do not otherwise qualify for conventional loans. With this security, lenders can still make a profit on such loans. Borrowers are required to fulfill several additional requirements to meet FHA guidelines, but for many, these loans are easier to get than conventional types.
- Conventional loans are the standard loan types that lenders offer to borrowers who have credit within acceptable limits and can prove their ability to make payments. These loans range from prime mortgages with the lowest rates that banks offer to subprime mortgages on which lenders charge a higher interest rate. Conventional loans are backed only by the lender.
- Down payments differ between FHA loans and conventional types. With conventional loans, lenders typically require that borrowers pay a certain amount of the loan immediately, generally around 20 percent. FHA loans are unique in that they only require a small down payment by borrowers of at least 3 percent. This 3 percent can be paid as a gift by a family member or other individual.
- The borrowers who choose conventional loans can provide a reliable credit history that satisfies lenders as to their ability to make payments on the mortgage. Borrowers must also show a steady income and enough cash to pay for the loan if their income ceases for some reason. FHA loan borrowers, on the other hand, typically have strikes against their credit or do not have a credit history at all.
- Conventional loan lenders sometimes require borrowers to purchase mortgage insurance, which adds a small monthly fee to loan payments. Mortgage insurance covers the payments if the borrower is suddenly unable to make them. However, borrowers do not need to pay this insurance after they pay off a certain percentage of the loan, usually 20 percent. With FHA loans, however, borrowers must pay mortgage insurance as long as they have the loan.