FHA loans vs. conventional loans, it’s one of the first decisions homebuyers face, and it can shape their entire mortgage experience. Both loan types help people buy homes, but they serve different needs and come with distinct requirements. FHA loans offer government backing and lower barriers to entry. Conventional loans provide more flexibility for buyers with stronger financial profiles. This guide breaks down the key differences between FHA loans vs. conventional options so buyers can make a confident, informed choice.
Key Takeaways
- FHA loans vs conventional loans comes down to your credit score, down payment, and long-term homeownership plans.
- FHA loans accept credit scores as low as 500 and require just 3.5% down, making them ideal for first-time buyers or those rebuilding credit.
- Conventional loans require a minimum 620 credit score but allow PMI cancellation at 20% equity, saving thousands over the loan’s life.
- FHA mortgage insurance typically lasts the life of the loan, while conventional PMI can be removed once you build sufficient equity.
- Buyers in high-cost markets may need conventional financing since FHA loans have lower borrowing limits.
- Compare quotes from multiple lenders and calculate total ownership costs to determine the best loan for your situation.
What Is an FHA Loan?
An FHA loan is a mortgage insured by the Federal Housing Administration. The government doesn’t lend the money directly. Instead, it backs loans issued by approved lenders, which reduces the risk for those lenders.
This backing makes FHA loans accessible to buyers who might struggle to qualify for other mortgage types. First-time homebuyers often choose FHA loans because they require lower down payments and accept lower credit scores than many alternatives.
FHA loans have been around since 1934. They were created during the Great Depression to stimulate the housing market and help more Americans become homeowners. Today, they remain popular among buyers with limited savings or credit challenges.
The program does come with rules. Borrowers must use FHA loans for primary residences, not investment properties or vacation homes. The property itself must meet certain safety and livability standards set by the FHA.
One important detail: FHA loans require mortgage insurance throughout much of the loan’s life. This cost protects the lender if the borrower defaults, but it adds to monthly payments.
What Is a Conventional Loan?
A conventional loan is any mortgage that isn’t backed by a government agency. Private lenders fund these loans and assume the risk themselves, which means they set stricter qualification standards.
Conventional loans come in two categories: conforming and non-conforming. Conforming loans meet guidelines set by Fannie Mae and Freddie Mac, including loan limits that vary by location. In 2024, the conforming loan limit for most U.S. counties is $766,550. Non-conforming loans, often called jumbo loans, exceed these limits.
Buyers with strong credit scores and stable income often prefer conventional loans. These mortgages typically offer competitive interest rates for well-qualified borrowers. They also provide more flexibility in property types, including second homes and investment properties.
Conventional loans require private mortgage insurance (PMI) when the down payment is less than 20%. But, borrowers can cancel PMI once they build enough equity, a significant advantage over FHA loans.
Lenders evaluate conventional loan applications based on credit score, debt-to-income ratio, employment history, and assets. The standards are higher, but the benefits can outweigh the stricter requirements for those who qualify.
Key Differences Between FHA and Conventional Loans
When comparing FHA loans vs. conventional loans, three factors matter most: down payment, credit score requirements, and mortgage insurance costs. Each can significantly impact a buyer’s upfront costs and long-term expenses.
Down Payment Requirements
FHA loans require a minimum down payment of 3.5% for borrowers with credit scores of 580 or higher. Those with scores between 500 and 579 need 10% down.
Conventional loans offer some low down payment options too. Many lenders accept 3% down for first-time buyers. But, putting down less than 20% triggers PMI requirements.
Here’s a quick comparison for a $300,000 home:
| Loan Type | Minimum Down Payment | Amount |
|---|---|---|
| FHA (580+ credit) | 3.5% | $10,500 |
| FHA (500-579 credit) | 10% | $30,000 |
| Conventional | 3% | $9,000 |
Conventional loans may actually require less money upfront in some cases. But FHA loans remain more accessible for buyers with lower credit scores.
Credit Score Requirements
FHA loans accept credit scores as low as 500, though most lenders prefer 580 or higher. This flexibility opens homeownership to buyers still building their credit.
Conventional loans typically require a minimum credit score of 620. Some lenders set their bar even higher at 640 or 660. Buyers with scores below 620 will likely find FHA loans more accessible.
Credit scores also affect interest rates. Higher scores earn lower rates on both loan types. A buyer with a 750 score will pay less interest than someone with a 620 score, regardless of which loan they choose.
Mortgage Insurance Costs
Mortgage insurance represents one of the biggest differences between FHA loans vs. conventional options.
FHA loans charge two types of mortgage insurance. First, there’s an upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount. Second, borrowers pay an annual premium of 0.55% for most loans, divided into monthly payments. Here’s the catch: FHA mortgage insurance typically lasts for the life of the loan if the down payment is less than 10%.
Conventional loans handle mortgage insurance differently. PMI rates vary based on credit score and down payment size, typically ranging from 0.5% to 1.5% annually. The major advantage? Borrowers can request PMI cancellation once they reach 20% equity, and it automatically drops off at 22% equity.
Over a 30-year loan, this difference can add up to tens of thousands of dollars. Buyers planning to stay in their homes long-term should factor this into their FHA loans vs. conventional loans decision.
How to Choose the Right Loan for Your Situation
The best loan depends on individual circumstances. There’s no universal answer when weighing FHA loans vs. conventional loans.
Choose an FHA loan if:
- Credit score falls below 620
- Savings for a down payment are limited
- Recent credit issues make conventional qualification difficult
- The goal is buying a primary residence
Choose a conventional loan if:
- Credit score is 620 or higher
- A 20% down payment is possible (to avoid PMI entirely)
- The property is a second home or investment
- Long-term ownership is planned (to benefit from PMI cancellation)
Buyers should also consider their timeline. Someone expecting a significant income increase or credit score improvement might start with an FHA loan and refinance to conventional later. This strategy captures the accessibility of FHA loans now while planning for better terms in the future.
Interest rates deserve attention too. FHA loans and conventional loans can have similar rates, but the actual offer depends on the lender, market conditions, and borrower profile. Getting quotes from multiple lenders helps buyers find the best deal.
Another factor: loan limits. FHA loans have lower limits than conventional conforming loans in many areas. Buyers in high-cost markets may need conventional financing simply because FHA loans won’t cover their purchase price.
Finally, consider total cost of ownership. A lower down payment might seem attractive, but higher mortgage insurance over 30 years could cost more than saving for a larger down payment. Running the numbers with a mortgage calculator reveals the true long-term picture.
