One clear difference 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 provides insurance for the loan, meaning that if you default on the loan, your lender’s loss is covered by the government. For FHA loans, mortgage insurance is a requirement. Lenders that underwrite conventional loans also use private mortgage insurance companies to insure their loans against loss. With a conventional loan, mortgage insurance is not a requirement. But according to the Federal Deposit Insurance Corp., most lenders require mortgage insurance if your down payment is less than 20 percent of the overall cost of the home.
The down payment is one area in which FHA loans provide consumers an advantage. FHA’s primary goal is to help first-time home buyers get into a home. It’s one of the reasons FHA requires mortgage insurance with its loans. The insurance requirement allows FHA lenders to accept down payments of as little as 3.5 percent of the total cost of the home. Conventional mortgage loans typically require a larger down payment.
FHA instituted a minimum credit score recently. Borrowers must have a score of 580 to qualify for FHA’s low down payment program, instituted by the Department of Housing and Urban Development in 2010. That doesn’t mean you can’t get a loan from FHA if your score is 579 or less. It means that you’ll probably need to put more up front in the form of a down payment. Conventional lenders put more stock in the credit score, and Bank Rate reports that most lenders are looking for a score of at least 620 in order to lend, and a score of 740 to avoid an increase in lending fees.
FHA backs six types of mortgages: fixed-rate, adjustable-rate, energy-efficient, graduated-payment, condominium and growing-equity. Graduated-payment and growing-equity mortgages feature payments that grow over time. They're for borrowers who can prove their income will go up over time. Conventional lenders are not limited to these half-dozen loans. Conventional lenders may use loans that rely on traditional fixed rates, or loans that rely on any combination of fixed and adjustable rates, balloon payments or subprime interest rates.
Because FHA loans are backed by the federal government, those loans must conform to the standards set forth by FHA. Conventional loans typically use standards for lending set forth by Fannie Mae and Freddie Mac, the country’s two largest underwriters. Fannie Mae and Freddie Mac’s definition of a “conforming loan” is one that is written for $417,000 or less. That limit is larger in states where the standard of living is higher, such as Hawaii. Any loan written above the conforming limit is considered a “nonconforming loan.” Interest rates for nonconforming loans are generally higher because they are associated with more risk.
source : http://homeguides.sfgate.com/difference-between-traditional-fha-mortgage-2661.html