When you are buying a home, you will likely choose between an FHA loan and a conventional loan. Both can help you finance a home, but they work differently. Understanding the key differences can save you money and help you avoid problems at closing.
FHA Loan vs. Conventional Loan: Quick Comparison
| Feature | FHA Loan | Conventional Loan |
|---|---|---|
| Min. credit score | 500 (10% down) / 580 (3.5% down) | 620 |
| Min. down payment | 3.5% | 3% |
| Mortgage insurance | Required for life of loan (if <10% down) | Drops off at 20% equity |
| Loan limits (2026) | $524,225 (most areas) | $806,500 (conforming limit) |
| DTI limit | Up to 57% | Typically 45-50% |
| Property requirements | Strict (must meet HUD standards) | Less strict |
What Is an FHA Loan?
An FHA loan is a mortgage backed by the Federal Housing Administration. Because the government insures the loan, lenders face less risk and can offer the loan to borrowers with lower credit scores or smaller down payments. FHA loans are a popular choice for first-time homebuyers.
The main trade-off is mortgage insurance. FHA loans require an upfront mortgage insurance premium (MIP) of 1.75% of the loan amount and a monthly MIP that typically ranges from 0.45% to 1.05% of the loan. If you put less than 10% down, you pay MIP for the full life of the loan.
What Is a Conventional Loan?
A conventional loan is not backed by any government agency. It follows guidelines set by Fannie Mae and Freddie Mac. Because there is no government guarantee, lenders require stronger credit and larger down payments compared to FHA loans.
If you put less than 20% down, you will pay private mortgage insurance (PMI). However, PMI on a conventional loan automatically cancels when your loan balance reaches 80% of the home’s original value — something that does not automatically happen with FHA loans.
When an FHA Loan Makes More Sense
An FHA loan is likely the better choice if:
- Your credit score is below 620 — conventional lenders typically will not approve you
- Your debt-to-income ratio is above 45%
- You can only put 3.5% down and do not have much in reserves
- You had a bankruptcy or foreclosure in the past few years
When a Conventional Loan Makes More Sense
A conventional loan is likely better if:
- Your credit score is 620 or higher, especially 720+
- You can put 10-20% down, which reduces or eliminates mortgage insurance
- You want the option to remove mortgage insurance later
- You are buying a home that would not pass FHA’s property standards (older homes, investment properties)
- You want to buy a more expensive home above FHA loan limits
The True Cost Difference
Borrowers sometimes assume FHA is always cheaper because of the lower credit requirements. That is not always true. The ongoing MIP on an FHA loan can add hundreds of dollars per month compared to PMI on a conventional loan — and that cost does not go away automatically.
Example: On a $350,000 FHA loan with 3.5% down, monthly MIP might run $175 to $250 per month on top of principal and interest. On a conventional loan with 5% down, PMI might run $100 to $180 per month — and it cancels once you reach 20% equity.
If your credit score is 740 or above, a conventional loan will almost always cost less over time.
FHA Loan Property Requirements
FHA has strict property standards. The home must be safe, sound, and secure to qualify. An FHA appraiser will flag issues like:
- Peeling lead paint (homes built before 1978)
- Missing handrails on stairs
- Roof with less than two years of useful life remaining
- No working HVAC in cold climates
These requirements can kill deals on fixer-uppers. Conventional loans have no such strict property standards, which makes them better for homes that need work.
Bottom Line
If your credit is below 620 or your down payment is limited, an FHA loan may be your only realistic option. If you have good credit and can put down 10% or more, a conventional loan will likely cost less over time due to the ability to cancel mortgage insurance.
Get quotes from lenders for both loan types before deciding. The best loan for you depends on your credit, down payment, and the specific property you are buying.