Real Estate Q & A

        Joy Shepard

        Keller Williams Realty

Joy Shepard


What is the difference between an FHA and Conventional loan?

We could go into more depth on the differences between the two loans, but let’s keep things simple. Basically FHA loans reduce the risk to banks. The US government guarantees their money is safe if the borrower defaults on their loan. There is a limit to the how high the loan can be, and each borrower can only have one FHA loan at a time. Typically the amount of down payment required is lower and the interest rates may be more competitive than a conventional loan.

Additionally, FHA may require certain repairs be made prior to closing which would be on the seller or additional inspections which would be on the buyer. Although unusual this does happen from time to time. You will have mortgage insurance unless you put 20% down. This insurance protects only the lender. It’s from $40 and up a month and you cannot get out of it unless you refinance once you have 20% equity. Down payment is 3 ½ percent.

The other most common residential loan is conventional. This type of loan is not backed by a guarantee from the government. If you are in need of a higher loan amount, conventional is your best bet. 

This loan requires a minimum of 5% down payment. As with an FHA loan, conventional loans require mortgage insurance for a loan of more than 80% of the value, but after 20% equity you can pay for an appraisal and request that your lender remove the insurance premium from your loan.

Both types of loans may have some incentives for 1st time buyers.

With either type of loan you may have the option of buying the interest rate down and you may qualify for a lower interest rate based on your credit score. These are definitely questions you’ll want to discuss with your lender.