A good credit score is a must when thinking about taking a loan. It allows a lender to recognize the risk involved in lending money an individual.
Key Takeaways
- FHA loans are backed by the Federal Housing Administration and are designed to help first-time homebuyers and those with lower credit scores qualify for a mortgage.
- The government does not insure conventional loans, and they are typically offered by private lenders to borrowers with good credit scores and financial stability.
- While FHA loans offer more flexibility regarding credit requirements and down payments, conventional loans may have lower interest rates and fewer restrictions.
FHA vs Conventional Loans
The difference between FHA and Conventional Loans is that FHA is a government-backed loan which you can take even if you do not have a good credit score. On the other hand, conventional loans are backed by private lenders. Conventional Loans require a borrower to have a good credit score.
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FHA loans are ensured by the Federal Housing Administration. This kind of loan is backed by a government agency and has very few restrictive qualifications for the borrower.
Conventional Loans are loans for those people who have a good credit score. They are backed by private lenders and no government agency is involved in the process.
Comparison Table
| Parameters of Comparison | FHA | Conventional Loans |
|---|---|---|
| Credit score | An individual can borrow money even if their credit score is less. | An individual can only borrow money if they have a high credit score. |
| Insurance | FHA loans are insured by the government. | Conventional loans are insured by private lenders. |
| Requirements | FHA loans require a borrower to have a credit score of 580. | Convention loans require a borrower to have a credit score of 620 or higher. |
| Down Payment | A borrower can get this loan even if the down payment is as low as 3.5%. | A borrower has to pay down 20% or use the option of private mortgage. |
| Competition | FHA loans are competitive because they are backed by the government and thus not very risky. | Conventional loans are less competitive as they are backed by private loan lenders and may be risky. |
| Qualification | FHA loans have fewer restrictive qualifications. | Conventional loans have more restrictive qualifications. |
What is FHA?
FHA is a home loan that the Federal Housing Administration insures. It has few restrictive qualifications, allowing people to borrow money even with a low credit score.
Money can be also be borrowed by an FHA loan with a credit score of 500. The higher your credit score a person has, the lower the down payment.
Every loan has a limit according to the home you want to purchase. The limit depends on which location you choose to set up your home.
It is necessary to pay a mortgage insurance premium while taking an FHA loan. This amount is either paid for as long as you take the loan, or for 11 years of you pay 10% down payment.
What is Conventional Loans?
Conventional loans are home loans that are insured by private lenders. To avail such type of a loan, the credit score of a person should be at least 620.
The down payment for a conventional loan is 20%. However, when an individual is unable to pay a 20% down payment, they have an option to pay private mortgage insurance.
The repayment terms of conventional loans are quite flexible. However, if a small down payment is made, the risk for the lender increases.
The types of conventional loans include conforming conventional loans, Jumbo conventional loans, Portfolio Loans, Subprime conventional loans, Amortized Conventional Loans and Adjustable conventional loans.
Main Differences Between FHA and Conventional Loans
- FHA loans are competitive while conventional loans are not.
- FHA loans are not as flexible as the latter and have higher interest rates.
- https://www.jstor.org/stable/1060046
- https://onlinelibrary.wiley.com/doi/abs/10.1111/1540-6229.00803
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
