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

When you buy a home, you will almost certainly need a mortgage. Two of the most common choices are an FHA loan and a conventional loan. They have different requirements, costs, and trade-offs. Understanding the difference helps you choose the one that saves you the most money given your credit score and down payment.

What Is an FHA Loan?

An FHA loan is a mortgage backed by the Federal Housing Administration, a government agency. The government guarantee means lenders take less risk, which allows them to offer the loan to borrowers with lower credit scores and smaller down payments.

FHA loans are not made directly by the government. You apply through a regular bank or mortgage lender. The FHA simply insures the loan against default.

What Is a Conventional Loan?

A conventional loan is not backed by any government agency. It is a private loan offered by banks, credit unions, and mortgage lenders. Conventional loans that meet certain size and standards limits can be sold to Fannie Mae or Freddie Mac, which is what allows lenders to offer competitive rates.

Conventional loans have stricter credit and income requirements than FHA loans, but they often end up being cheaper for borrowers who qualify.

FHA vs Conventional: Key Differences

Credit Score Requirements

FHA loans allow credit scores as low as 580 with a 3.5 percent down payment. With a score between 500 and 579, you can still get an FHA loan but need a 10 percent down payment.

Conventional loans typically require a minimum credit score of 620. To get the best rates, you generally want a score of 740 or higher. The better your score, the lower your interest rate.

Down Payment Requirements

FHA loans require a minimum down payment of 3.5 percent with a credit score of 580 or higher. On a $300,000 home, that is $10,500 down.

Conventional loans can go as low as 3 percent down for first-time buyers through certain programs, or 5 percent for most borrowers. However, to avoid private mortgage insurance (PMI), you need 20 percent down.

Mortgage Insurance

This is where FHA loans become more expensive over time. FHA loans charge two types of mortgage insurance:

Upfront mortgage insurance premium (UFMIP): 1.75 percent of the loan amount, added to your loan balance at closing.
Annual mortgage insurance premium (MIP): Ranges from 0.45 to 1.05 percent of the loan per year, paid monthly.

The key issue is that FHA mortgage insurance stays on the loan for the life of the loan if you put less than 10 percent down. You cannot remove it by building equity. The only way to get rid of it is to refinance into a conventional loan.

Conventional loans charge PMI if you put less than 20 percent down, but PMI cancels automatically once your equity reaches 20 percent. You can also request cancellation at 20 percent equity without refinancing.

Loan Limits

FHA loans have maximum loan limits that vary by county. In 2026, the limit in most of the country is $498,257 for a single-family home. In high-cost areas like San Francisco or New York City, the limit is higher, up to $1,209,750.

Conventional loans can go up to $806,500 in most areas in 2026 (this is called the conforming loan limit). Above this amount, you would need a jumbo loan, which has stricter requirements.

Interest Rates

FHA loans often have slightly lower interest rates than conventional loans for borrowers with lower credit scores. However, when you add mortgage insurance costs, the total monthly payment on an FHA loan is frequently higher than a conventional loan for borrowers who can qualify for both.

When an FHA Loan Makes More Sense

Your credit score is below 620 and you cannot qualify for a conventional loan.
You have a credit score between 620 and 680 and the FHA rate is meaningfully lower.
You can only afford the minimum 3.5 percent down payment and would not qualify for conventional 3 percent programs.
You plan to refinance within a few years once your credit score and equity improve.

When a Conventional Loan Makes More Sense

Your credit score is 680 or higher.
You can put 20 percent down and avoid mortgage insurance entirely.
You plan to stay in the home long-term and want to eliminate PMI by building equity rather than refinancing.
The home price exceeds FHA loan limits in your area.

Side-by-Side Comparison

Minimum credit score: FHA 580 vs Conventional 620
Minimum down payment: FHA 3.5% vs Conventional 3%-5%
Mortgage insurance: FHA for life of loan vs Conventional cancels at 20% equity
Upfront fee: FHA 1.75% of loan vs Conventional none
2026 loan limit (most areas): FHA $498,257 vs Conventional $806,500

The Bottom Line

If your credit score is below 620, an FHA loan is likely your only option. If your score is above 680 and you can afford the down payment requirements, a conventional loan will probably cost you less over time, especially if you plan to stay in the home long enough to build 20 percent equity.

Get quotes for both types before deciding. A good mortgage lender will run the numbers on both and show you the total cost difference over your expected holding period.

Related: What Is a USDA Loan? 2026.