What Is the Difference Between a Conventional & FHA Home Loan?

The FHA, or Federal Housing Administration, was founded in 1934 to help people purchase homes with small down payments. FHA loans are still an option and compete with conventional mortgages for borrowers' business.

Down Payments

FHA loans require a much smaller down payment, as low as 3 percent, than conventional mortgages, as high as 20 percent. In addition, FHA loans allow family members or nonprofits to pay the down payment for you.

Upfront Mortgage Insurance

As of spring 2010, the upfront mortgage insurance fee for an FHA loan is 2.25 percent, up from the previous premium of 1.75 percent. There is no upfront mortgage insurance fee for conventional mortgages.

Mortgage Insurance Premiums

Both FHA and conventional mortgages charge private mortgage insurance premiums at the rate of 0.5 percent per year. However, borrowers with FHA loans can stop paying these premiums when the borrower reaches 22 percent equity in the home. Those with conventional mortgages can stop paying when they reach 20 percent.

Interest Rates

According to FHA Today, FHA loans carry slightly higher interest rates than conventional mortgages.

Debt-to-Income Ratios

According to Bankrate, the monthly payment on an FHA loan can take up a larger percentage of a borrower's income than would be allowed under a conventional loan.

References

• FHA Today: FHA Mortgage 203B
• Bankrate: The Basics of Mortgage Insurance
• FHA Loan: FHA Mortgage Insurance

Resources

• Chicago Tribune: FHA Homeownership Rules to Change
• FHA Loans: FHA Loan Qualifying Summary
• Bankrate: How Much House Can You Buy?