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What is the Difference between FHA and Conventional Mortgage Loan?

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What is the Difference between FHA and Conventional Mortgage Loan?

The basic differences between the two are as follows:

  1. A conventional mortgage program takes place in the private sector and is not insured by the federal government.
  2. An FHA loan also takes place in the private sector, but it is insured by the federal government via Federal Housing Administration. The insurance protects the lender against the borrower if he fails to repay.

You can also insure a conventional mortgage loan. But in this situation, the coverage occurs from third party insurance in the private sector. It doesn’t occur from the government. Hence, it is referred to as a private mortgage insurance or PMI. This is the primary distinction between FHA and conventional home mortgage loans. Read on for the in-depth distinction between the two.

In-depth distinction

No matter if you apply for a conventional or an FHA loan, you have to apply via a mortgage lender who works in a private sector. This is where your money will originate. You will have to be eligible for meeting the lender’s minimum guidelines in order to get approved and for that you have to further meet two sets of qualification criteria. You have to meet both lender’s and the government’s criteria.

The program is handled by the HUD or the Department of Housing and Urban Development which is a part of federal government. It might seem that it is hard to apply for an FHA loan, but it’s actually quite the opposite. By insuring the mortgage, it makes it a protection for the lender against the defaulter by reimbursing the insurance money and the losses occurred. Hence, the lenders are now more relaxed with the pre-determined guidelines when applying for loans insured by the government.

So, this takes us to the point where the government doesn’t really lend the funds directly to the individuals. Not through the FHA program as well. Rather than this, they insure many loans started by the lenders working in the private sector. This asks for the official name of the program which is called the HUD 203(b) Mortgage Insurance program. This is because the loan is insured by the government. This is the principal distinction between FHA and conventional mortgage program.

Down Payments

FHA loans also need less down payment when it comes to comparison with the conventional mortgages. Individuals have to pay as low as 3.5 percent of the purchase price. This is why this program is much more popular than the conventional counterpart. In 2017, many lenders provide loans with down payments as low as 3 percent. When it comes to conventional, lenders need at least 5 percent of down payment. If you are looking for FHA loan, visit this site.