Definitions

• To make the right choice between a conventional mortgage and an FHA insured mortgage, you must understand the differences between them. A conventional mortgage is a mortgage that is serviced and administered through a traditional lending institution such as a bank or credit union. Mortgage brokers can be used for conventional mortgages to help find a lender, but the parameters of a conventional mortgage are roughly the same. Conventional mortgages use credit scores, income versus expenses and property value to determine the mortgage rates. In addition, conventional mortgages require down payments in the amount of 20 percent of the home's value, which is due at closing. An FHA insured mortgage differs from a conventional mortgage as it is insured by the FHA (Federal Housing Administration), which means that federal funding helps offset some of the costs and fees associated with the mortgage. FHA mortgages generally do not require as high a credit score as conventional mortgages and FHA mortgages require less money upfront for both closing costs and down payments.
  
  

Credit Score

• Conventional mortgages typically require that, as of July 2010, a borrower must have a minimum credit score of at least 620. FHA mortgages allow borrowers to have a credit score as low as 580 to qualify. Those with a score below 580 do not get to use the lowest down payment program through the FHA, but they still qualify for a reduced down payment when compared to a conventional mortgage.
  
  

Down Payment

• Conventional mortgages typically require a down payment in the amount of 20 percent of the home's total selling price. This can quickly add up to a large upfront amount, which could years of saving.
  
  FHA mortgages can offer down payments as low as 3.5 percent provided the borrower has a credit score of at least 580. If you have a credit score below 580, you can still obtain a reduced down payment as an FHA mortgage for lower credit score borrowers is set at 10 percent.
  
  The worst case scenario between a conventional and an FHA mortgage is 10 percent in terms of the down payment. That can equate to a big cost savings if you have been struggling to save for the costs associated with buying a home. For example, on a $200,000 house, a conventional mortgage would require a down payment of $40,000 whereas an FHA mortgage would have a down payment of $7,000 for those with a good credit score or $20,000 for those with a weaker score.
  
  The difference between the down payment alone could help you pay for the additional costs and fees associated with mortgages and home buying.
  
  

Mortgage Insurance

• Conventional mortgages require mortgage insurance when a mortgage is secured with less than a 20 percent down payment. One of the primary benefits of an FHA mortgage is a reduced down payment, which means that mortgage insurance is a requirement. FHA mortgages, as of July 2010, require that mortgage insurance be paid upfront. Currently, upfront mortgage insurance in the amount of 2.25 percent of the loan amount is required and due at mortgage closing.
  
  

Loan Limits

• Conventional mortgages do not set limits regarding the price and value of a home. Provided a borrower qualifies for the mortgage, she may purchase a property for any amount. FHA mortgages have limits that are based on geographical region. As of 2009, the highest priced home available through the FHA mortgage program was $729,750. Though the maximum loan amounts are fair, they may not be high enough for buyers under certain circumstances or in specific, high home value areas such as California or New York City.