FHA vs Conventional Loan: Complete Comparison for Homebuyers

FHA vs Conventional Loan: Which Mortgage Is Right for You?

You're ready to buy a home, and now you're staring at two mortgage options that every first-time buyer encounters: FHA loans and conventional loans. Your lender might have a recommendation, your real estate agent probably has an opinion, and the internet is full of conflicting advice. Let's cut through the noise.

FHA loans are backed by the Federal Housing Administration and designed to make homeownership accessible with lower credit scores and smaller down payments. Conventional loans aren't government-backed, which means stricter requirements but potentially lower costs if you qualify.

The "better" choice depends entirely on your financial profile — your credit score, your savings, and how long you plan to keep the loan. Let me show you exactly how these loans compare and which one saves you more money.

Quick Comparison Table

Feature	FHA Loan	Conventional Loan
Minimum Down Payment	3.5%	3% (some programs)
Minimum Credit Score	500 (10% down) / 580 (3.5% down)	620+ (most lenders: 680+)
Mortgage Insurance	MIP: 1.75% upfront + 0.55%/yr (life of loan)	PMI: 0.2–1.5%/yr (removable at 80% LTV)
DTI Ratio Max	43–50%	36–45%
Loan Limits (2026)	$498,257 (std) / $1,149,825 (high-cost)	$806,500 (conforming) / higher for jumbo
Property Requirements	Strict (must meet HUD standards)	Standard appraisal
Seller Concessions	Up to 6% of purchase price	3–9% (varies by down payment)
Assumable	Yes	No
Best For	Lower credit, first-time buyers	Good credit, 5%+ down payment

Down Payment: The Entry Ticket

FHA Down Payment

FHA loans require just 3.5% down with a credit score of 580 or higher. On a $350,000 home, that's $12,250. If your credit score is between 500 and 579, you'll need 10% down ($35,000).

The 3.5% down payment can come from savings, a gift from family, a down payment assistance program, or even certain employer programs. FHA is very flexible about the source of your down payment.

Conventional Down Payment

Conventional loans have a minimum of 3% down through programs like Fannie Mae's HomeReady or Freddie Mac's Home Possible (income limits apply). Standard conventional loans require 5% down.

But here's the thing: the ideal conventional down payment is 20%. That eliminates PMI entirely, saving you $100–$400+ per month on a typical loan. On a $350,000 home, 20% down is $70,000 — not exactly pocket change.

At 3–5% down, conventional and FHA are very close on down payment. The real differences show up in mortgage insurance and credit requirements.

Credit Score Requirements: The Biggest Differentiator

FHA Credit Requirements

FHA loans are designed for borrowers with less-than-perfect credit:

• 580+ credit score: Qualify for 3.5% down payment
• 500–579 credit score: Qualify with 10% down payment
• Below 500: Not eligible for FHA

FHA is also more forgiving of negative credit events. You can get an FHA loan:

• 2 years after a bankruptcy discharge
• 3 years after a foreclosure
• 1 year after a Chapter 13 bankruptcy (with court approval)

Conventional Credit Requirements

Conventional loans technically start at a 620 credit score, but most lenders want 680+. And here's the kicker: your credit score dramatically affects your interest rate on a conventional loan.

• 760+ score: Best available rates
• 700–759: Slightly higher rates (+0.125–0.25%)
• 680–699: Noticeably higher rates (+0.5%)
• 660–679: Significantly higher rates (+0.75–1.0%)
• 620–659: Highest conventional rates — may be worse than FHA

FHA rates are less sensitive to credit score. A borrower with a 620 credit score gets a much better deal on an FHA loan than a conventional loan. A borrower with a 760 score gets a much better deal on a conventional loan.

For current rate comparisons, see our mortgage rates guide.

Mortgage Insurance: FHA's Biggest Drawback

This is where the FHA vs conventional decision often gets made, and it's the most misunderstood aspect of the comparison.

FHA Mortgage Insurance Premium (MIP)

FHA loans require two types of mortgage insurance:

1. Upfront MIP: 1.75% of the loan amount, paid at closing (usually rolled into the loan). On a $340,000 loan, that's $5,950 added to your balance.

2. Annual MIP: 0.55% of the loan balance per year, paid monthly. On a $340,000 loan, that's about $156/month.

Here's the painful part: FHA MIP is permanent. If you put less than 10% down (which most FHA borrowers do), you pay MIP for the entire life of the loan. The only way to eliminate it is to refinance into a conventional loan once you have 20% equity.

This is a massive long-term cost. On a 30-year FHA loan, you'll pay the upfront MIP ($5,950) plus roughly $40,000–$50,000 in annual MIP over the life of the loan. That's $45,000–$56,000 in total mortgage insurance.

Conventional Private Mortgage Insurance (PMI)

Conventional loans require PMI when you put less than 20% down. PMI rates vary based on credit score and LTV ratio:

• Excellent credit (760+): 0.2–0.5% of loan balance per year
• Good credit (720–759): 0.3–0.7% per year
• Average credit (680–719): 0.5–1.0% per year
• Below average (620–679): 0.8–1.5% per year

On a $340,000 loan with good credit, PMI costs about $85–$198/month. That's comparable to or lower than FHA's $156/month MIP in many cases.

But here's the crucial advantage: PMI is removable. Once you reach 20% equity (80% LTV), you can request PMI cancellation. At 22% equity, it's automatically removed. This happens through a combination of paying down your balance and home appreciation.

For many borrowers, PMI is eliminated within 5–8 years. After that, your monthly payment drops, and you save $100–$200/month for the remaining 22–25 years of the loan.

Loan Limits: How Much Can You Borrow?

FHA Loan Limits (2026)

• Standard limit: $498,257 (most U.S. counties)
• High-cost areas: Up to $1,149,825 (parts of CA, NY, DC, etc.)

FHA limits are lower than conventional, which can be a problem in expensive markets. If you're buying a $600,000 home in a standard-limit area, FHA isn't an option.

Conventional Loan Limits (2026)

• Conforming limit: $806,500 (most counties)
• High-cost areas: Up to $1,209,750
• Jumbo loans: Above conforming limits, separate qualification requirements

Conventional loans offer significantly higher limits, making them the only viable option for more expensive homes in many markets.

Property Requirements: FHA's Stricter Standards

FHA Property Standards

FHA loans come with strict property requirements — the home must meet HUD's Minimum Property Standards (MPS). These include:

• Sound roof with at least 2 years of remaining life
• No peeling paint (especially in homes built before 1978 — lead paint rules)
• Functioning heating system
• No safety hazards (broken stairs, exposed wiring, etc.)
• Proper drainage and no standing water
• Working kitchen and bathroom facilities

This means fixer-uppers often don't qualify for FHA financing. If the home needs significant repairs before move-in, the FHA appraiser will flag it, and you'll either need the seller to make repairs or look at an FHA 203(k) renovation loan.

Conventional Property Standards

Conventional appraisals focus primarily on value — is the home worth what you're paying? The standards are less rigid about condition. A home with cosmetic issues, minor deferred maintenance, or an older roof would likely pass a conventional appraisal but might fail an FHA appraisal.

This matters more than you'd think. In competitive markets, sellers often prefer offers with conventional financing because there's less risk of appraisal issues derailing the deal.

FHA Loan: Pros and Cons

Pros

• Low down payment — just 3.5% with 580+ credit score
• Accessible credit requirements — 580 for standard, 500 for 10% down
• Higher DTI ratios accepted (up to 50% in some cases)
• More forgiving after bankruptcy or foreclosure
• Assumable loans — huge advantage if you sell when rates are higher
• Generous seller concession allowance (up to 6%)
• Flexible down payment sources (gifts, grants, assistance programs)

Cons

• Permanent MIP — can't remove it (must refinance to eliminate)
• Upfront MIP adds 1.75% to your loan balance
• Lower loan limits than conventional
• Strict property standards can eliminate fixer-upper options
• Sellers may prefer conventional offers in competitive markets
• Must be primary residence (no investment properties)
• Total mortgage insurance cost over loan life can exceed $50,000

Conventional Loan: Pros and Cons

Pros

• PMI is removable at 20% equity — saves thousands long-term
• No upfront mortgage insurance premium
• Higher loan limits for expensive markets
• Less strict property requirements
• Available for primary residence, second homes, and investment properties
• Better rates for borrowers with 720+ credit scores
• Preferred by sellers — stronger competitive position

Cons

• Higher credit score requirements (620 minimum, 680+ preferred)
• Less forgiving of credit issues (bankruptcy, foreclosure)
• PMI can be expensive with lower credit scores
• Tighter DTI requirements (36–45%)
• Higher interest rates for borrowers below 680 credit score
• Income limits on some 3% down programs

Which Should You Choose?

Choose FHA if your credit score is below 680, you have limited savings for a down payment, you've had a recent bankruptcy or foreclosure, or you need a higher DTI ratio to qualify. FHA is specifically designed to help borrowers who can't meet conventional requirements. Just have a plan to refinance into a conventional loan once you reach 20% equity to eliminate MIP.

Choose conventional if your credit score is 700+, you can put at least 5% down (ideally 20%), you want to avoid permanent mortgage insurance, you're buying in an expensive market, or you want the flexibility to buy investment property. The savings from removable PMI and better interest rates make conventional the cheaper option long-term for qualified borrowers.

Use our mortgage calculator to compare monthly payments and total costs for both loan types with your specific numbers.

The Credit Score Tipping Point

Here's the practical rule of thumb that simplifies this decision:

• Credit score below 680: FHA is probably cheaper (better rates and easier qualification)
• Credit score 680–719: Compare both — it's close, and the answer depends on your specific rate quotes and down payment
• Credit score 720+: Conventional is almost always cheaper (better rates and removable PMI)

Get quotes for both options from your lender. A good loan officer will run both scenarios and show you the total cost comparison over 5, 10, and 30 years. If they only push one option without comparing, find a different lender.

For a deeper dive into FHA specifics, read our FHA loan guide. For understanding current rates and how they affect your payment, check the mortgage rates guide.

The Bottom Line

FHA loans open the door to homeownership for millions of Americans who wouldn't qualify for conventional financing. They're a fantastic tool for what they're designed to do — get people into homes with less-than-perfect credit and limited savings.

But they're not meant to be forever loans. The permanent MIP makes FHA more expensive over the long run. The ideal strategy: use FHA to buy your home, build equity, improve your credit, and refinance into a conventional loan within 3–5 years to eliminate mortgage insurance.

Conventional loans are the better deal for borrowers with strong credit profiles. The ability to remove PMI at 20% equity, combined with better interest rates for 720+ credit scores, means conventional borrowers typically pay tens of thousands less over the life of the loan.

Whichever you choose, get pre-approved for both and compare the numbers side by side. The right choice is the one that costs you less based on your specific financial profile — not the one that sounds better in a blog post. Use our mortgage calculator to run your numbers today.