FHA Loan versus Conventional Loan: Are The Differences Major?


Loans can be frightful. They say it’s not the idea of borrowing a huge amount of money that scares people, rather it’s the duration of how long these loans usually last. While that’s a legitimate fear, this can be prevented. Research, a good amount of savings, a whole lot of well-thought-of calculated risk, and a dash of wisdom make for the perfect formula in approaching loans.

Given today’s unstable economy, home equity is powerful. The opportunity to rely on an investment you utilize every single day is not only smart but greatly advantageous as well.

But before you start house-shopping and googling a lender, it is only suitable for one to know the FHA loan definition, in all its truest, complex nature. This article will focus mainly on the many differences of conventional and FHA mortgage loans.

To begin, one of the clearest, most distinct differences between both loan programs is their compulsory credit scores. Loans under the Federal Housing Administration are perceived to be more compassionate in that their credit scores are lower than the ones conventional loans demand.

That said, the FHA is able to extend a loan to a borrower whose credit score is as little as 500, whereas conventional loans command for higher credit scores with 620 being the lowest lenders can accommodate. FICO ratings may range from 300 to 850, with 580 already being a safe bet for an FHA loan.

How much a borrower is required to expend for a down payment under an FHA loan may potentially be determined by what their FICO rating is. That established, FHA loans are able to help a vaster sea of people with more modest economic profiles, as opposed to the loans commercial lenders extend.

Moving forward, a huge difference between both loan programs is how much of a down payment borrowers are called to hand over. Conventional loans require their borrowers to shell out 5% to 20% for a deposit, whereas FHA loans may only ask for a minimum 3.5% down payment should your FICO score be 580. Those whose credit ratings are 579 down to the base can still receive FHA’s green light but will be obliged to deposit 10% instead of 3.5.

One should also know that FHA loans are insured by the federal government. Hence, looser requirements and standards. This is because a premium mortgage insurance is collected from the borrower on a regular basis all throughout the life of the loan. Conventional loans, comparatively, only require this up until a certain amount of the loan has been paid for.

This is also exactly why commercial lenders can only grant loans to a select market of people—a market comprised of individuals with promising and impressive FICO ratings. An FHA’s mortgage insurance is put in place to help protect a lender should the borrower default for whatever reason—something conventional lenders don’t worry about all the time as they’re not as exposed to this particular risk given their defined sea of borrowers.

To add, FHA loans may also be assumed. This feature might not be entirely present in conventional loans, as new borrowers are not able to assume real estate responsibilities. Borrowers who course their home ownership through the FHA also have the chance to pay for 100% of the closing costs, down payments, and other major house fees through gift funds—another feature not entirely possible for commercial loans.    

The obvious reason many first-time home buyers opt for this option is because of the opportunity to purchase a house a lot earlier.  While renting may have its benefits, you pouring money to a house you know will be yours is every bit of worth it.

Should you feel that an FHA loan is for you, the required documents are as follows:

    • Address to your place of residence (past two years)
    • Social Security numbers
    • Names and location of your employers (past two years)
    • Gross monthly salary at your current job(s)
    • Pertinent information for all checking and savings accounts
    • Pertinent information for all open loans
    • Complete information for other real estate you own
    • Approximate value of all personal property
    • Certificate of Eligibility and DD-214 (for veterans only)
    • Current check stubs and your W-2 forms (past two years)
  • Personal tax returns (past two years), current income statement and business balance sheet for self-employed individuals

(source: FHA.com)

It is important to note that each loan programs have their own sets of pros and cons, with each of them specifically designed for certain people. Although the FHA’s reach is much broader, not one is better than the other,

Good luck!