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FHA vs Conventional Loans

FHA Loans are loans that are backed by the government (Federal Housing Administration) whereas conventional loans are secured by government sponsored entities or GSEs such as Fannie Mae and Freddie Mac. It used to be that the main advantage of FHA home loans was that the credit qualifying criteria for a borrower was not as strict as conventional financing. However, FHA loans have become very popular again, specially since the loan limits have increased in many parts of the country.

With the new loan limits and its already existing benefits, an FHA loan might just be perfect for you. FHA allows the borrower who has had a few "credit problems" or those without a credit history to buy a home. FHA will require a reasonable explanation of these derogatory items, but will approach a person's credit history with common sense credit underwriting. Most notably, borrowers with extenuating circumstances surrounding bankruptcy that was discharged 2 years ago can work around the credit hurdles they created in their past. Conventional financing, on the other hand, relies heavily upon credit scoring. Credit scoring is a rating given by a credit bureau (such as Experian, Trans-Union, or Equifax) that ranks you upon your credit profile. For each inquiry, credit derogatory or public record that shows up in your credit report, your score is lowered (even if such items are in error).

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