While many people deciding on a loan product rely exclusively on their lenders recommendation, you should understand the basic difference between an FHA loan and a Conventional Loan. The term Conventional Loan includes all loans under the current Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) lending limits. 

The main difference between an FHA loan and a Conventional loan is that the credit qualifying criteria for a borrower obtaining an FHA loan is not as strict as a conventional loan. The down payment or equity requirements are less too. Generally, Conventional loans have higher interest rates and require a larger down payment and often times carry a Pre-Payment penalty whereas FHA loans do not. 

FHA loans will allow a borrower who has had a few "credit problems" or those without a credit history to buy a home. An FHA Underwriter will require a reasonable explanation of all derogatory credit, but will approach a person's credit history with common sense credit underwriting.

FHA is one of the few home mortgage programs that allow a borrower to have their down payment gifted from a family member, a governmental agency, or non-profit organization. This allows home buyers without the necessary liquid funds to buy a home today.

One drawback to FHA loans is that the loan limits are typically less than the loan limits for conventional financing in most parts of the country. In addition, all FHA loans require a full income check to ensure the applicants ability to make timely payments.