The term Conventional Loan includes all loans under the current FNMA and FHLMC lending limits. Some of these may be called Conforming, A paper, sub prime, Alt A, A Minus, BC (bad credit) and other industry names.
The Federal Housing Administration provides a loan guarantee program in lieu of private mortgage insurance so qualified borrowers can get a mortgage loan with a low down payment.
Points of Differences
The main advantage of a FHA vs. Conventional Loan is that the credit qualifying criteria for a borrower are not as strict as conventional loan financing and the down payment or Equity requirements are less. . FHA loans will allow the borrower who has had a few "credit problems" or those without a credit history to buy a home.
Another advantage of a FHA vs. Conventional Loan is that FHA is one of the few home mortgage programs that allow a borrower to have their down payment gifted from a family member, a governmental agency, or non-profit organization. This allows homebuyers without the necessary money to buy a home today.
Up-front mortgage insurance
A FHA mortgage has up-front mortgage insurance (MI) of 1.5% of the loan amount and is added right to the loan. A conventional mortgage has no up-front mortgage insurance, but does have a monthly premium. This premium is determined by the loan to value.
The loan limits set for FHA loans are typically less than the loan limits for conventional financing in most parts of the country. If a borrower is looking for a mortgage that exceeds the FHA loan limits for the area, the borrower would have to put additional money down on the property or finance under a conventional mortgage, Subprime, Alt A or A Minus product.