What Is the Difference Between Conforming & FHA Mortgages?

The four-unit conforming loan limit in high cost areas is $1,202,925.

The four-unit conforming loan limit in high cost areas is $1,202,925.

Choosing the right home loan is critical to your overall financial health. Conforming loans and FHA mortgages have significant differences as types of home loan financing. Deciding which way to go for your borrowing needs depends on your current situation and your eligibility for conventional lending.

Conforming Basics

A conforming loan is a conventional mortgage. This means that you can get a mortgage through a regular lender if you have the required 20 percent down payment. Conforming loans are those that meet standard loan limits established by Fannie Mae. Loan limits are set for one- to four-unit residential properties. The 2012 general limit for a single family home in most of the United States is $417,000. In high cost areas, the limit is $625,500. You can get a jumbo loan that exceeds conforming limits, but your lender cannot resell your mortgage in the secondary market.

Pros and Cons

Conforming loans are historically common. Conventional lenders that work with borrowers with good credit and the necessary down payment funds usually offer them. Typical home buyers purchase homes that fall within the conforming loan limits. Lenders prefer to stay within conforming loan limits to have the ability to resell your mortgage to another lender when necessary. Thus, you usually get better interest rates than you do with a jumbo loan with higher limits. The down payment requirement and credit score requirements are limiting for some borrowers.

FHA Basics

The Federal Housing Administration has offered government-backed mortgage loans under the U.S. Department of Housing and Urban Development since 1934. Originally intended for first-time buyers with poor credit, FHA loans have become more common in the early 21st century to borrowers who do not have down payment funds for conventional loans. You can usually get FHA loans through regular mortgage lenders as long as you meet the borrowing requirements. FHA loans also have maximum borrowing limits based on the area in which you live. You can search limits in your area through the HUD website.

Pros and Cons

The strengths of FHA financing include much less restrictive eligibility requirements. The down payment requirement is only 3.5 percent of the loan, according to Bankrate.com. FHA loans also work for borrowers with lower credit scores. The main drawback of FHA loans is that you need to carry FHA mortgage insurance. This is your lender's protection against your higher risk of default. The insurance covers the loan payments if you fail to repay and default on the loan. The insurance usually adds a small upfront fee and monthly premiums onto your mortgage payments.


About the Author

Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.

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