What’s the difference between FHA and conventional loans?

Deciphering loan lingo can present a challenge when you’re starting the loan application process. Between the products and requirements, it’s almost as if the lending industry has its own language.

Should you go for a 203k, 203b, jumbo or ARM? (Those are all real things.)

A good place to start is with the big picture: a conventional loan compared to an FHA loan.

The big difference

Conventional mortgages are private-sector loans that are not backed by the government. If the borrower fails to repay the loan, the lender is on the hook.

An FHA loan is insured through the Federal Housing Administration. The government protects the lender—not the borrower—in the event of default.

A conventional mortgage loan can be insured, but such insurance comes from a third party and is paid for by the borrower. It’s called private mortgage insurance (PMI).

What does that mean for borrowers?

The qualification requirements for FHA loans differ from those of conventional loans. FHA borrowers must meet a lender’s criteria and the government’s. Contrary to what you might think, qualifying for an FHA loan is usually easier than qualifying for a conventional. The process takes longer—more paperwork—but the government backing means lenders are willing to assume more risk.

Part of this increased risk means lower down payments for FHA loans. If you’re getting a conventional loan, you’ll need to come up with a 10-20% down payment. Some FHA loans allow borrowers to contribute as little as 3.5%.

FHA loans have more restrictions on what types of properties they can be used for. And some lenders further restrict the types of property eligible for FHA loans.

This comparison of FHA and conventional loans doesn’t hit all the pros and cons. The best source for information specific to your situation is your lender.