The Difference Between FHA and Conventional Home Loans

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There are a lot of different questions regarding the conventional mortgage loans from those who want to buy a house. They often question why conventional loans are so much harder to get than the FHA Home Loans. Another frequently asked question is regarding the major differences between the FHA Home Loans and the conventional home loans.

Following is the main difference between conventional and FHA Home Loans.

  1. A conventional home mortgage is originated through the private sector and is not government insured.
  2. The FHA Home Loan is also originated through the private However, it is a government insured mortgage provided by the Federal Housing Administration. This government insurance acts as a protective shield for the lender.

A conventional home loan may also be insured. However, in this case, the entire coverage comes from a third party insurance corporation in the private sector. This does not come directly from the government itself. This is why it is called a private mortgage insurance, or as it is commonly known, PMI. This is the major difference between FHA home loans and the conventional home loans.

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Following is some extra, detailed information you may find very helpful about FHA and Conventional Home Loans.

Irrespective of whether you have already applied for a conventional or an FHA home loan, you are advised to apply through a mortgage lender who works in the private sector. This is where all the money is generated from. So you are going to have to meet all the lender’s minimum recommendations for approval, and then you will have to clear the underwriting process as well.

The difference which sets the FHA home loan program apart (and it is definitely a very big difference) is that clients will have to meet two different sets of qualification criteria. The clients will have to meet all the lender’s criteria, along with the government’s criteria as well. The program is well managed by the government’s Department of Housing and Urban Development, or as it is commonly known HUD, and is an active part of the federal government.

Clients may believe that it would be very difficult to get an FHA home loan (when compared with the conventional financing) all due to this rigorous “two-tiered” qualification system. However, the opposite still rings true. Generally speaking, it is comparatively easier for home buyers to qualify for an FHA home loan.

By covering the mortgage, the government will basically effectively guaranteeing that the lender is going to get completely repaid, even if the mortgagor defaults on this home loan. This is why moneylenders are usually more relaxed with the guidelines when they make government-insured mortgages. This is one additional major difference between conventional home loans and FHA home loans.

Because the money lender has a higher level of protection against default, they are usually eager to take on an even higher level of risk (for example a borrower with very few credit dings in the past). In short, they may not be as harsh with certain qualification principles.

Thus, as we proved in the discussion mentioned above, the US government does not essentially lend the money directly to customers. At least, not through the FHA program. Instead, the government ensures various loans created by the money lenders functioning in the private sector. This completely accounts for the authorized name of the program, and it is officially known as the “HUD 203(b) Mortgage Insurance” program, as the government covers the loan. This is the major difference between FHA home loans and conventional home loans. Ready to get prequalified with a conventional or FHA home loan? Call us at (855) 866-8339 and get started today!

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