Are you getting ready to purchase a home, and need to decide on what type of mortgage to get? If so, you'll likely be deciding between a conventional and an FHA mortgage. While they are two similar products, the qualifications can be quite different when applying for a mortgage. Here is what you need to know about the differences.

Financial Backers

The main difference between an FHA loan and a conventional loan is who is providing the financial backing. An FHA loan is backed by the government and has more relaxed requirements, but can come with some major differences. A conventional mortgage is backed by a private lender, and tends to be more competitive since they are competing with other private lenders for your business.

Mortgage Insurance

Many mortgage providers require that you get mortgage insurance, which helps protect the lender if you were unable to pay for your mortgage. However, an FHA and conventional loan both handle mortgage insurance quite differently. 

An FHA loan will require you to pay mortgage insurance for the duration of the entire loan. If you end up sticking with the FHA loan for 30 years, you'll end up paying mortgage insurance every single year. The only way to stop paying mortgage insurance is to refinance the home and go with a conventional mortgage lender.

Conventional mortgages are backed by a private lender, and do not need to follow the same requirements that the government does. It is common for mortgage insurance to only be required if your down payment is less than 20% of the home's value. If you do have a small down payment, mortgage insurance can be waived once you have 20% equity in the home. There is no need to refinance if you are looking to get rid of mortgage insurance.

Credit Requirement

An FHA loan will have a bit of flexibility regarding the credit requirements, while a conventional loan tends to be more strict. You should be able to get an FHA loan if you have poor credit and a small down payment, which may result in paying a higher interest rate, but you will still be allowed to qualify for it. This can help many people become homeowners that normally wouldn't qualify.

Conventional loans have more strict requirements with borrowers needing a higher credit score. If you have previously filed for bankruptcy or foreclosed on a home in the past, You may have to wait quite a few years for those items to drop off your credit report to qualify for a conventional loan. There can also be a restriction on who is providing the money for the down payment, with a conventional loan having limits on how much money can be gifted.