What's the Difference Between FHA and Conventional Loans?

May 31, 2017 — 6:00 AM EDT

Consumers qualify for various types of mortgages based on their financial profiles. People with established credit who are on a solid financial footing usually qualify for conventional mortgages. Those who are just starting out in life with than a little more debt than normal and a modest credit rating typically qualify for mortgages insured by the Federal Housing Administration(FHA).

Conventional Mortgages

Conventional mortgages present the most risk for lenders since they are not insured by the federal government. For this reason, lenders extend such mortgages to applicants who have the strongest financial profiles. Conventional down payment requirements range from 3 to 20% depending on the mortgage product. Consumers typically have stellar credit reports with no significant blemishes and credit scores of at least 680 to qualify for conventional mortgages. Conventional loan interest rates vary depending on the amount of the down payment, the consumer’s choice of mortgage product and current market conditions. People who have conventional mortgages, and make less than a 20% down payment, pay mortgage insurance until their loan-to-value reaches 80%.

FHA Mortgages

The main difference between FHA and conventional loan requirements is that the federal government insures mortgages with looser qualifying standards to make it possible for first-timers to achieve the American dream—to buy a home. FHA mortgage applicants don’t need to have stellar credit and can gain loan approval with credit scores as low as 580, as long as they bring a 3.5% down payment to the closing table. Most lenders require FHA mortgage applicants to have credit scores between 620 and 640 for approval. FHA mortgage holders pay mortgage insurance for the life of the loan.