What distinguishes a conventional loan from an FHA loan?

The distinguishing feature of a conventional loan is that it is not insured or guaranteed by the government, whereas an FHA loan is specifically designed to be backed by the Federal Housing Administration. This means that if a borrower defaults on an FHA loan, the government covers a portion of the lender's losses, which encourages lenders to offer loans to a wider range of borrowers, including those with lower credit scores or smaller down payments.

Conventional loans, on the other hand, rely on the creditworthiness of the borrower and do not have the backing of the government. This results in different underwriting criteria and often means that borrowers may need a higher credit score or a larger down payment to qualify for a conventional loan compared to an FHA loan.

Understanding this distinction is important for borrowers, as it impacts their eligibility, the types of loans they can qualify for, interest rates, and insurance requirements. For example, because FHA loans are backed by the government, they allow for lower down payments and are more accessible to first-time homebuyers who may not have a significant amount saved for a conventional down payment.