Difference Between FHA and Conventional Loans

FHA vs Conventional Loans

FHA and Conventional loans are two kinds of loans available to a home buyer in United States. With increasing property prices, it is becoming harder to buy a home these days. To compound the misery of the people, interest rates are also on the upswing. To avail a mortgage from a bank, a person needs to arrange a down payment, which is in the vicinity of 10% of the total value of the property. The process of obtaining a home loan is tiresome, and a vast majority of people rely on the expertise of a bank and they readily accept to the loan type and conditions being offered by a bank rather than making a search themselves. There are two different types of loans available to a home buyer, and these are FHA loans and conventional loans. Both types of loans have their pros and cons, and depending upon your requirements and eligibility, you have to decide which type of loan is better suited to your needs.

FHA Loans

Federal Housing Administration or FHA, as it is called falls under the authority of Department of Housing and Urban Development. FHA loans are insurance backed by the US government, and banks approving them are assured that in case of default, their money is safe as it is guaranteed by federal government. FHA loans were very popular in the sixties and seventies but fell out of favour when the property prices surged ahead, surpassing the credit limit set by FHA. This why FHA makes suitable changes in credit limit periodically.

FHA does not make loans or guarantee them. It only insures them to assuage the fears of lenders in case of a default from the borrower. FHA loans are a way to encourage first home buyers as there is very little down payment required in case of FHA loans and the interest rates are also more competitive than conventional loans. However, any person who has availed an FHA loan cannot get another FHA loan while the earlier loan is running.

Conventional Loans

In the category of conventional loans come all commercial and residential loans being offered by banks and other financial institutions to home loan borrowers. These loans are the best options for a person if he has a good credit history and enough money to make a down payment. The better the credit score, more power is in the hands of the borrower to negotiate with the lender for a lower rate of interest. Conventional loans are all loans that are not backed by any government guarantee. These loans remain in the borrower’s investment portfolio till the time they are fully repaid. There are tax benefits to home owners who have availed conventional loans from banks. If the repayment history of the borrower is good, the lender may disburse more money to him for purchase of furniture or for renovation of the property.

Difference between FHA and Conventional Loans

While both FHA loans and conventional loans are simply means of availing money for the purpose of buying a home, there are differences between the two that must be taken into account to see which is better before applying for a home loan. Of course every one cannot apply for an FHA loan as there are criteria to be met. Let us take a look between the differences.