Choosing between a conventional loan and an FHA loan is one of the most important decisions a first-time home buyer makes. Both can get you into a home, but the right choice depends on your credit score, down payment, and long-term plans.
The Core Difference
Conventional loans are not backed by the government — they are privately funded mortgages that follow guidelines set by Fannie Mae and Freddie Mac. FHA loans are insured by the Federal Housing Administration, which allows lenders to offer more flexible terms to borrowers who might not qualify for conventional financing.
Credit Score Requirements
This is where FHA loans shine for buyers with imperfect credit:
- Conventional: Typically requires a 620 minimum; best rates at 740+
- FHA: 580 minimum for 3.5% down; 500-579 with 10% down
If your score is between 580 and 619, FHA is likely your only conventional-style option. If your score is 700+, conventional loans often offer better overall terms.
Down Payment Comparison
- Conventional: As low as 3% for first-time buyers (some programs); 5-10% is common
- FHA: 3.5% minimum with 580+ credit score
The down payment amounts are comparable. The key difference is what happens to mortgage insurance at each down payment level.
Mortgage Insurance: The Biggest Difference
This is where conventional loans often win long-term:
Conventional PMI
- Required when down payment is under 20%
- Automatically cancels when loan balance reaches 80% of original home value
- You can request cancellation when equity reaches 20%
- Cost: typically 0.1% to 2% of loan amount annually
FHA MIP
- Required regardless of down payment amount
- Upfront MIP: 1.75% of loan amount (can be financed)
- Annual MIP: 0.55% to 0.75% of loan balance
- For loans with less than 10% down: MIP lasts the entire loan term — it never cancels
- For loans with 10%+ down: MIP cancels after 11 years
On a $280,000 FHA loan, that 1.75% upfront MIP is $4,900 added to your loan. Plus annual MIP of about $1,540/year that never goes away. Over 30 years, this adds up to $46,200+ in mortgage insurance — never going away unless you refinance.
Debt-to-Income Flexibility
- Conventional: Standard limit of 43-50% DTI
- FHA: Up to 57% DTI in some cases with automated approval
FHA is more forgiving if you have significant existing debt (student loans, car payments).
Property Condition Requirements
- Conventional: More flexible — the property just needs to be habitable
- FHA: Stricter minimum property standards; homes in poor condition may not pass the FHA appraisal
If you are eyeing a fixer-upper, conventional financing is typically easier to obtain. FHA’s 203(k) renovation loan exists for this use case but is more complex.
Loan Limits
- Conventional conforming: $766,550 in most areas (2024); higher in high-cost areas
- FHA: $498,257 floor; up to $1,149,825 in high-cost areas
For most buyers, FHA limits are sufficient. If you are buying in a very high-cost area, confirm the FHA limit for your county before assuming FHA is an option.
When to Choose FHA
- Credit score is below 660
- You have significant existing debt pushing DTI over 45%
- You have had recent credit events (bankruptcy, foreclosure — though waiting periods still apply)
- You need the most flexible qualification standards available
When to Choose Conventional
- Credit score is 660 or higher
- You can put down 20% (eliminates PMI entirely)
- You want mortgage insurance to eventually cancel
- You are buying a property that might not meet FHA property standards
- You are buying a second home or investment property (FHA requires primary residence)
The “Best of Both” Strategy
Some buyers use FHA to get into a home when their credit is lower, then refinance to a conventional loan once their credit improves and their equity reaches 20%. This eliminates permanent MIP and often results in a lower rate. The downside is paying refinance closing costs of 2-5% of the loan amount.
Bottom Line
FHA wins on flexibility and accessibility. Conventional wins on long-term cost when your credit qualifies. Run the numbers with a lender before deciding — the right answer depends entirely on your specific credit score, down payment amount, and how long you plan to stay in the home.