Are you looking to buy property? It’s highly probable that you’re trying to make up your mind on what kind of loan to get. Many home buyers do a mental FHA vs conventional loan debate. If you’re facing a similar dilemma, you need to figure out how these two are different from each other in order to determine which one is the better option for you.
The main difference between these two kinds of home loans is that conventional loans aren’t insured by the government while FHA loans are.
Now, some people mistakenly believe that the FHA loan originates from the government, but this is not the case. Just like conventional mortgage products, FHA loans also originate from the private sector, but get insured by the government through the Federal Housing Administration.
The insurance is for the lender, not the borrower. If you look up mortgage etymology, you’ll see that it originates from archaic French and literally means death pledge because the deal dies either when the debt is paid or when payment fails. Protection for the lender is certainly necessary, and during the property crisis of 2008 when the housing market took a serious tumble, government insurance was certainly a fitting solution.
Does this mean that conventional loans aren’t insured? They could very well be, but their coverage would come from an insurance company also in the private sector and not from the government, hence the term private mortgage insurance.
What are the other differences? With a conventional loan, you’ll have to meet the lender’s requirements for approval, clearing their underwriting process as well. With an FHA loan, you have to meet both the lender’s criteria for approval and those of the government as well.
You’d assume that it’s harder to get approved for an FHA loan considering that you have to meet two sets of criteria, but the reality is that it’s easier to qualify for an FHA-insured home loan in specific situations. Lenders are also comforted by the government insurance so they tend to relax their requirements, making FHA loans more appealing to those with less than stellar credit scores.
Another area where these two types of loan differ is in down payments. FHA loans typically require a lower down payment, which makes them more popular among first-time property buyers.
Keep in mind that there is no mortgage product that is perfect for everybody. You need to study your options and weigh their pros and cons. Through your due diligence, the best financing course for you to take will reveal itself.