Choosing between an FHA loan and a conventional loan is one of the most important decisions a first-time homebuyer makes. The wrong choice can cost thousands of dollars over the life of the mortgage. The right choice depends on your credit score, down payment amount, and how long you plan to stay in the home.
Here is a clear breakdown of both loan types, who each one is right for, and how to decide.
What Is an FHA Loan?
An FHA loan is a mortgage backed by the Federal Housing Administration, a government agency. Because the FHA insures the loan, lenders face less risk if a borrower defaults — which allows them to extend credit to buyers who might not qualify for conventional financing.
Key features of FHA loans:
- Minimum credit score of 580 with 3.5% down (or 500 with 10% down)
- Down payments as low as 3.5%
- More lenient debt-to-income ratio limits
- Mortgage insurance premium (MIP) required for the life of the loan in most cases
- Available through most major lenders and many local banks
What Is a Conventional Loan?
A conventional loan is a mortgage not backed by any government agency. It follows guidelines set by Fannie Mae and Freddie Mac, the government-sponsored entities that purchase most conventional mortgages from lenders. Because these loans do not carry government backing, lenders have stricter requirements — but the terms can be more favorable for qualified borrowers.
Key features of conventional loans:
- Minimum credit score of 620 for most lenders (higher scores get better rates)
- Down payments as low as 3% with some programs
- Private mortgage insurance (PMI) required if down payment is less than 20%
- PMI can be removed once you reach 20% equity
- More loan program flexibility for condos, investment properties, and jumbo amounts
FHA vs. Conventional: Side-by-Side Comparison
Credit Score Requirements
FHA allows scores as low as 580 for a 3.5% down payment. Conventional loans require at least 620, and to access the most competitive rates, you generally need 740 or above. If your credit score is below 620, FHA is your primary option. If your score is 740 or above, conventional will almost always deliver better terms.
Down Payment
Both loans allow down payments as low as 3% to 3.5%. However, FHA requires at least 3.5% down (with a 580 credit score), while some conventional programs — like Fannie Mae HomeReady and Freddie Mac Home Possible — allow 3% down for eligible buyers. If your credit score is above 620 and you qualify for a conventional program with 3% down, you may prefer that to FHA’s 3.5% minimum.
Mortgage Insurance
This is the most important difference between the two loan types.
FHA loans require two types of mortgage insurance:
- Upfront MIP: 1.75% of the loan amount, added to the loan balance at closing
- Annual MIP: Typically 0.55% of the loan balance per year, paid monthly
For most FHA loans originated today, the annual MIP lasts for the life of the loan — it does not go away when you reach 20% equity, unless you refinance into a conventional loan.
Conventional loans require private mortgage insurance (PMI) only if your down payment is less than 20%. PMI typically costs 0.5% to 1.5% of the loan amount annually, but it can be canceled once your loan balance reaches 80% of the home’s original value — usually in seven to ten years for most buyers.
For buyers who plan to stay in the home for many years, conventional loan PMI that eventually goes away is usually a better deal than FHA’s permanent MIP.
Interest Rates
FHA loan rates are often slightly lower than conventional loan rates because of the government backing. However, the MIP you pay on top of an FHA loan typically erases the rate advantage. When comparing the two options, look at the annual percentage rate (APR), which includes fees and insurance in the cost comparison, not just the stated interest rate.
Loan Limits
FHA loans have county-specific loan limits set by the Department of Housing and Urban Development. In high-cost areas like San Francisco and New York City, FHA limits are higher, but in many parts of the country, FHA limits may be lower than the price of homes you are considering. Conventional conforming loan limits in 2026 are $806,500 in most areas. If you need to borrow more than the FHA limit in your county, conventional is your only option without going into jumbo territory.
Which Loan Is Right for You?
Choose FHA if:
- Your credit score is below 620
- You have a higher debt-to-income ratio that does not meet conventional guidelines
- You need the lowest possible down payment and have a lower credit score
- You plan to sell or refinance within five to seven years (before the PMI advantage of conventional kicks in fully)
Choose conventional if:
- Your credit score is 620 or above, especially 680 or higher
- You plan to stay in the home long enough for PMI to be removed (eight to ten years or more)
- You want to avoid permanent mortgage insurance
- You are purchasing a condo or a property that does not meet FHA property standards
The Break-Even Calculation
If you are on the fence, calculate the break-even point. Compare your total monthly payment under each loan — including insurance, principal, and interest. Then factor in when the conventional loan PMI would be eliminated. If the higher conventional payment is offset by PMI elimination within a reasonable time horizon and you plan to stay that long, conventional is likely the better choice.
A mortgage broker or loan officer can run these numbers for you with your specific purchase price, down payment, and credit score.
Bottom Line
FHA loans are the better fit when your credit is limited or your debt-to-income ratio is high. Conventional loans win for buyers with solid credit who plan to stay in the home for many years, primarily because PMI can be removed while FHA mortgage insurance typically cannot. Run the numbers on both options before you commit, and consider getting pre-approved for both to compare the actual rates and fees each lender offers you.