Difference Between FHA and Conventional Loans

The 2024 FHA Loan Handbook

The main difference between FHA and conventional loans is the government insurance backing. Federal Housing Administration (FHA) home loans are insured by the government, while conventional mortgages are not.

Additionally, borrowers tend to have an easier time qualifying for FHA-insured mortgage loans, compared to conventional. The closing process can take a bit longer as well.

Did you know? The Federal Housing Administration falls under the Department of Housing and Urban Development (HUD), one of the 15 cabinet departments of the U.S. federal government.

Main Difference Between FHA and Conventional Loans

Reader question: “I keep hearing about ‘conventional’ mortgage loans and how they are harder to obtain, when compared to the FHA program. What are the main differences between FHA and conventional home loans? And why would one be harder to get than the other?”

Let’s start by looking at the main difference between these two financing options, and move on from there:

  • A conventional mortgage product is originated in the private sector, and is not insured by the government.
  • An FHA loan is also originated in the private sector, but it gets insured by the government through the Federal Housing Administration.

That’s the primary difference between the two. Conventional loans are not insured or guaranteed by the federal government, while the FHA program does receive federal backing.

Note: The insurance mentioned above protects the lender, not the borrower. If the homeowner fails to repay the loan for whatever reason, the lender will be compensated for losses via the Federal Housing Administration.

A conventional mortgage loan can also be insured. But in this case, the coverage comes from a third-party insurance company operating within the private sector. It does not come from the government. That’s why it’s called private mortgage insurance, or PMI.

We’ve covered the main difference between FHA and conventional home loans. It has to do with the government-provided insurance. Here is some additional information you might find helpful.

Qualifying for the Program

Regardless of whether you apply for a conventional or an FHA-insured loan, you will apply through a mortgage lender that operates in the private sector. That’s where the money comes from. So you will have to meet the lender’s minimum guidelines for approval, and you’ll have to clear their underwriting process.

The difference with the FHA program is that you have to meet two sets of qualification criteria. You have to meet the lender’s criteria, as well as the government’s. The program is managed by the Department of Housing and Urban Development, or HUD, which is part of the federal government. And they have their own specific requirements and guidelines for borrowers.

You might think it would be harder to get an FHA loan (compared to conventional financing) because of this “two-tiered” qualification system. But the opposite is often true. Generally speaking, it’s easier for borrowers to qualify for an FHA-insured home loan.

By insuring the mortgage, the government is basically guaranteeing that the lender will be repaid — even if the borrower defaults on the loan down the road. That’s why lenders are generally more relaxed with their guidelines when making government-insured loans. This is another major difference between conventional and FHA mortgage financing.

Since the lender has a higher degree of protection against default, they’re usually willing to take on a higher degree of risk. For example, the lender might welcome a borrower whose credit score is too low for conventional financing. In short, they might not be as strict with certain qualification criteria.

So the government does not actually lend money directly to consumers. At least, not through the FHA program. Instead, they insure certain loans that are originated by lenders operating in the private sector. This accounts for the official name of the program — it’s officially called the “HUD 203(b) Mortgage Insurance” program, because the government insures the loan. That’s the main difference between FHA and conventional financing.

Down Payments: Another Key Distinction

FHA loans also require less of a down payment, when compared to some of the conventional mortgage products available these days. Borrowers can put down as little as 3.5% of the purchase price or the appraised value of the home, when using the FHA program. This is what makes the program so popular among first-time buyers with limited cash.

A few years ago, many mortgage lenders began to offer conventional loans with down payments as low as 3%. But some still require at least 5% down for conventional financing, especially if the borrower is considered to be high-risk for some reason. So FHA is usually the best option for home buyers who are trying to minimize their upfront, out-of-pocket expense.

Just keep in mind there are no perfect mortgage products. They all have certain pros and cons associated with them. So the best thing you can do, as a home buyer, is to learn about these pros and cons. Once you do that, the best financing option will emerge.

Now that you understand the primary differences between FHA and conventional mortgage loans, you can research the pros and cons associated with each option.