Q:

What is the difference between lhome and home, and is it causing my SSH key authentication to fail?

I have RHEL running on a system with my account having the root privilege. 
My home directory is in /lhome/myusername.
If I try to add any user their home directory is created in /home/newuser.
What is the difference between lhome and home?
Also I was trying to setup a ssh connection using cygwin from my windows 7 PC. Even though I followed all the steps in this tutorial, ssh still asks for my password.
Does this have anything to do with my home directory being in lhome?

A:

/lhome is not a standard directory. This is a local setup. Ask your system administrator.
RHEL uses SELinux. It's possible that the non-default location of /lhome has somehow caused an incorrect setup of the SELinux security contexts which is causing the SSH server not to be able to read the keys in ~/.ssh/authorized_keys. There will be entries in the system logs (/var/log/messages) if this happens. See Red Hat Bug 499343.
To allow the SSH keys to be read, run the following command:
restorecon -R -v ~/.ssh

