Choosing between an FHA loan and a conventional loan is one of the first major decisions you’ll face as a homebuyer, and getting it right can save you thousands of dollars over the life of your mortgage. Both loan types will get you into a home, but they differ significantly in down payment requirements, credit score thresholds, mortgage insurance costs, and long-term affordability. This guide compares every aspect of FHA and conventional loans so you can choose the option that best fits your financial situation.
FHA Loans at a Glance
FHA loans are insured by the Federal Housing Administration, which means the government guarantees a portion of the loan if you default. This guarantee allows lenders to offer more flexible qualification requirements, making FHA loans one of the most accessible mortgage options for first-time buyers and borrowers with less-than-perfect credit.
The trade-off for that flexibility is mandatory mortgage insurance that’s generally more expensive and harder to remove than private mortgage insurance on conventional loans. For many buyers, this trade-off is worthwhile in the short term, but it’s important to understand the long-term cost implications.
Conventional Loans at a Glance
Conventional loans are not backed by a government agency. They’re originated by private lenders and typically sold to Fannie Mae or Freddie Mac, which set the qualification guidelines. Because there’s no government guarantee, conventional loans generally require stronger credit and larger down payments, but they offer more favorable terms for borrowers who meet those thresholds.
Down Payment Comparison
FHA: 3.5% Minimum
FHA loans require a minimum down payment of 3.5% for borrowers with credit scores of 580 or above. Borrowers with scores between 500 and 579 must put down at least 10%. On a $300,000 home, the minimum FHA down payment is $10,500 with a 580+ score.
Conventional: 3% to 5% Minimum
Conventional loans are available with as little as 3% down through programs like Fannie Mae’s HomeReady and Freddie Mac’s Home Possible, which are designed for low-to-moderate income borrowers. Standard conventional loans typically require 5% down. On a $300,000 home, that’s $9,000 to $15,000.
While the minimum down payments are similar, putting 20% down on a conventional loan eliminates the need for private mortgage insurance entirely, a significant cost advantage that FHA loans don’t offer at any down payment level.
Credit Score Requirements
FHA: More Lenient
FHA’s official minimums are 580 for the 3.5% down payment option and 500 for the 10% down option. However, individual lenders often impose higher minimums, with many requiring 620 even for FHA loans. If your score is below 620, you’ll need to shop around for lenders who follow FHA’s actual minimums. Our guide on credit scores for home buying covers what each score range means for your options.
Conventional: 620 Minimum, 740+ for Best Rates
Conventional loans generally require a minimum score of 620, with the best interest rates reserved for borrowers at 740 and above. The rate difference between a 680 and a 760 score can be significant, potentially adding tens of thousands of dollars in interest over 30 years.
Mortgage Insurance: The Biggest Difference
Mortgage insurance is where these two loan types diverge most significantly, and it’s often the deciding factor in which option costs less over time.
FHA Mortgage Insurance Premium (MIP)
FHA loans carry two forms of mortgage insurance. The upfront mortgage insurance premium is 1.75% of the loan amount, which is typically rolled into the loan. On a $290,000 loan, that adds $5,075 to your balance. The annual MIP ranges from 0.45% to 1.05% of the loan amount depending on the loan term, amount, and down payment, paid monthly as part of your mortgage payment.
The critical detail is that for FHA loans with less than 10% down, which is the vast majority of FHA borrowers, the annual MIP lasts for the entire life of the loan. It never goes away unless you refinance into a conventional loan. For borrowers who put 10% or more down, MIP drops off after 11 years.
Conventional Private Mortgage Insurance (PMI)
Conventional loans require PMI when the down payment is less than 20%. PMI rates typically range from 0.5% to 1.5% of the loan amount per year, depending on your credit score and down payment. A borrower with a 740 score and 10% down might pay 0.3% to 0.5%, while a borrower with a 660 score and 5% down could pay 1% or more.
The major advantage of conventional PMI is that it can be canceled. Once you reach 20% equity through payments and appreciation, you can request PMI removal. At 22% equity, the lender is required to remove it automatically. This means conventional borrowers eventually eliminate this cost entirely, while most FHA borrowers pay MIP for the full 30 years. Our complete guide to PMI explains all the details.
Interest Rates
FHA loans often advertise slightly lower base interest rates than conventional loans because of the government guarantee that reduces lender risk. However, when you factor in the upfront MIP and the ongoing annual MIP, the effective cost of an FHA loan is often higher than a conventional loan for borrowers with good credit.
For borrowers with credit scores above 700, conventional loans typically offer better overall economics when you account for all costs. For borrowers with scores in the 580 to 680 range, FHA loans may offer lower total costs because the rate advantage and easier qualification offset the mortgage insurance expense.
Property Requirements
FHA Property Standards
FHA loans have stricter property requirements because the government wants to ensure the home is safe, habitable, and structurally sound. FHA appraisals evaluate not just the market value but also the condition of the property. Issues like peeling paint in homes built before 1978, missing handrails, broken windows, and certain structural defects can require repairs before the loan can close.
These requirements can be a challenge when buying older homes or properties that need work. If you’re interested in a fixer-upper, an FHA 203(k) rehabilitation loan allows you to finance both the purchase and the repairs, but the process is more complex.
Conventional Property Standards
Conventional appraisals focus primarily on market value and are generally less strict about the property’s condition. This gives conventional borrowers more flexibility when purchasing homes that might not pass FHA’s condition requirements.
Loan Limits
Both FHA and conventional loans have maximum loan amounts that vary by county.
FHA loan limits for 2026 range from approximately $498,257 in low-cost areas to $1,149,825 in high-cost areas for single-family homes. Conventional conforming loan limits are $766,550 in most areas and $1,149,825 in high-cost areas. If you need to borrow more than these limits, you’ll need a jumbo loan, which has its own qualification requirements.
Which Loan Is Better for You?
Choose FHA If:
Your credit score is below 680 and you need the more lenient qualification requirements. You have limited savings and need the 3.5% minimum down payment with a lower score threshold. You have a higher debt-to-income ratio that would disqualify you from conventional programs. You plan to refinance within a few years when your credit improves or you build enough equity to switch to a conventional loan.
Choose Conventional If:
Your credit score is 680 or above, where you’ll likely get competitive rates. You can put at least 5% down and want the option to remove mortgage insurance. You’re buying a property that might not meet FHA’s condition requirements. You’re focused on minimizing total long-term costs, since eliminating PMI at 20% equity saves significantly compared to lifetime FHA MIP.
The Bottom Line
There’s no universally better loan type. The right choice depends on your credit score, down payment, the property you’re buying, and how long you plan to keep the loan. Run the numbers for both options with your specific financial profile, and ask your lender to provide side-by-side comparisons showing the total cost over five, ten, and thirty years.
Getting pre-approved with multiple lenders allows you to compare actual FHA and conventional offers tailored to your situation. A knowledgeable local agent can also help you understand which loan types work best in your market. Connect with a vetted agent through our free matching service and take the next step toward finding the right home and the right mortgage. For more on the full buying journey, visit our complete guide to buying your first home.