What Is the Difference Between a Traditional & an FHA Mortgage?

You’re most likely going to take a mortgage to purchase a house. There are two approaches. One would be to get what’s considered a traditional, or conventional, loan, which you get from a bank or mortgage company. Another is to get a loan. Both kinds of loans set out to achieve exactly the same thing, but there are clear differences in the way they help homebuyers.

Mortgage Insurance

1 clear distinction between a conventional loan and an FHA loan is mortgage insurance, which lenders use to help protect themselves from loss. In the case of an FHA loan, the U.S. government offers insurance for the loan, meaning that if you default on the loan, your lender’s loss is insured by the government. For FHA loans, mortgage insurance is a necessity. Lenders that underwrite conventional loans also utilize private mortgage insurance companies to cover their loans against loss. With a conventional mortgage, mortgage insurance isn’t a necessity. However, in accordance with the Federal Deposit Insurance Corp., many lenders require mortgage insurance if your down payment is less than 20 percent of the general price of the house.

Down Payment

The deposit is 1 place in which FHA loans offer consumers an benefit. FHA’s primary aim is to assist first-time home buyers get into a house. It’s one reason FHA needs mortgage insurance using its loans. The insurance requirement permits FHA creditors to accept down payments of no more than 3.5 percent of the entire price of the house. Traditional mortgage loans typically require a larger deposit.

Credit Score

FHA instituted a minimum credit rating lately. Borrowers must have a score of 580 to qualify for FHA’s low down payment plan, instituted by the Department of Housing and Urban Development at 2010. That does not mean that you can’t secure a loan from FHA if your score is 579 or less. It means you’ll probably need to put up more front in the form of a deposit. Traditional lenders place more stock in the credit rating, and Bank Rate reports that many creditors are looking for a score of 620 in order to lend, and a score of 740 to avoid an increase in lending fees.

Types of Mortgages

FHA backs six kinds of mortgages: fixed-rate, adjustable-rate, energy-efficient, graduated-payment, condo and growing-equity. Graduated-payment and growing-equity mortgages comprise payments which increase over time. They are for debtors who can prove their income will go up over time. Traditional lenders are not limited to these half-dozen loans. Traditional lenders can make use of loans which rely on traditional fixed rates, or loans which rely on any mixture of fixed and flexible rates, balloon payments or subprime interest rates.


Since FHA loans are backed by the national government, those loans must conform to the standards set forth by FHA. Traditional loans typically utilize standards for lending put forth by Fannie Mae and Freddie Mac, the nation’s two largest underwriters. Fannie Mae and Freddie Mac’s definition of a”conforming loan” is one which is composed for $417,000 or less. That limitation is larger in nations where the quality of living is significantly higher, such as Hawaii. Any loan written above the conforming limit is regarded as a”nonconforming loan.” Interest rates for nonconforming loans are usually higher because they’re associated with more risk.

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