FHA vs Conventional Loan: Which Is Right for You?

The FHA vs conventional debate is one of the most common decisions facing homebuyers, especially first-time buyers trying to figure out the cheapest way to get into a home. With home affordability still stretched in many markets, the loan type you choose can make a real difference in your monthly costs.

Here's the quick take: conventional loans are cheaper for borrowers with good credit (700+) and at least 5% down. FHA loans are the better deal if your credit score is below 680 or you have limited savings for a down payment.

But the details matter a lot. Let's break down exactly how these two loan types compare.

Table of Contents

• The Key Differences at a Glance
• Down Payment: Not as Different as You'd Think
• Mortgage Insurance: Where the Real Money Is
  • FHA Mortgage Insurance (MIP)
  • Conventional Private Mortgage Insurance (PMI)
  • A Real Cost Comparison
• Interest Rates
• Credit Score Requirements
• Loan Limits
• Property Requirements
• Who Should Choose an FHA Loan
• Who Should Choose a Conventional Loan
• Can You Switch Later?
• Which Loan Fits Your Situation?

The Key Differences at a Glance

Down Payment: Not as Different as You'd Think

The common assumption is that FHA wins on down payment. And technically, it does: FHA requires just 3.5% down with a credit score of 580 or higher.

But conventional loans have narrowed the gap significantly. Programs like Fannie Mae's HomeReady and Freddie Mac's Home Possible allow just 3% down for qualifying borrowers.

On a $400,000 home, here's how the down payments compare:

• FHA (3.5% down): $14,000
• Conventional (3% down): $12,000
• Conventional (5% down): $20,000

The difference between 3% and 3.5% is only $2,000 on a $400,000 home. So down payment alone shouldn't drive your decision. The real cost difference shows up in mortgage insurance.

Mortgage Insurance: Where the Real Money Is

This is the biggest distinction between FHA and conventional loans, and it's where most borrowers either save or lose thousands of dollars.

FHA Mortgage Insurance (MIP)

FHA loans come with two types of mortgage insurance:

1. Upfront MIP: 1.75% of the loan amount, paid at closing (usually rolled into the loan). On a $386,000 loan (the $400,000 home minus 3.5% down), that's $6,755 added to your balance.

2. Annual MIP: 0.55% of the loan amount, paid monthly. On a $386,000 loan, that's about $177 per month.

Here's the kicker: if you put less than 10% down on an FHA loan, the annual MIP never goes away. You pay it for the entire life of the loan, even after you have 50% equity. The only way to get rid of it is to refinance into a conventional loan once you reach 20% equity.

Conventional Private Mortgage Insurance (PMI)

Conventional loans require PMI when you put less than 20% down, but with two major advantages:

1. No upfront premium. You only pay the monthly cost.
2. PMI goes away. Once you reach 20% equity (based on your loan-to-value ratio), you can request PMI removal. At 22% equity, it's automatically cancelled.

The monthly cost depends heavily on your credit score. With a 750 credit score and 5% down, you might pay 0.25% to 0.40% annually. With a 660 score and 3% down, it could be 1.0% to 1.5% annually.

A Real Cost Comparison

Let's compare total mortgage insurance costs over 10 years on a $386,000 loan:

Borrower A: 720 credit score, 5% down

• FHA: $6,755 upfront + $177/month = $27,995 over 10 years
• Conventional: $0 upfront + $97/month (removed at ~year 7) = $8,148 total
• Conventional saves: $19,847

Borrower B: 640 credit score, 3.5% down

• FHA: $6,755 upfront + $177/month = $27,995 over 10 years
• Conventional: $0 upfront + $275/month (removed at ~year 9) = $29,700 total
• FHA saves: $1,705 (plus FHA likely offers a better interest rate for this credit profile)

The crossover point is roughly around a 680 credit score. Above that, conventional usually wins. Below it, FHA is often cheaper.

Interest Rates

FHA loans often have slightly lower advertised interest rates than conventional loans. But this can be misleading.

When you factor in the upfront MIP (which increases your loan balance) and the lifetime annual MIP, the true cost expressed as an APR is often higher for FHA than conventional, especially for borrowers with good credit.

For borrowers with lower credit scores (below 680), FHA rates are typically more favorable because FHA is more forgiving of credit blemishes. Conventional lenders charge steeper rate adjustments for lower credit scores.

Credit Score Requirements

This is where FHA really shines for some borrowers.

FHA will accept credit scores as low as 500 (with 10% down) or 580 (with 3.5% down). While individual lenders may set higher minimums, the program itself is designed for borrowers who are still building their credit.

Conventional loans technically require a 620 minimum, but in practice, most lenders want to see 680 or higher for competitive rates. Below 680, you'll face significantly higher PMI costs and interest rates.

If your credit score is below 680, an FHA loan is likely your best path to homeownership. If your score is above 720, conventional is almost certainly cheaper.

Loan Limits

Both loan types have limits on how much you can borrow:

• FHA: $524,225 in most areas (up to $1,209,750 in high-cost areas)
• Conventional: $806,500 in most areas (conforming limit for 2026)

If you need a loan above the FHA limit but below the conforming limit, conventional is your only option (unless you qualify in a high-cost area). For loans above the conventional limit, you'd need a jumbo loan, which has its own set of requirements and trade-offs.

Property Requirements

FHA loans come with stricter property standards. The home must meet HUD's minimum property requirements, which means the appraiser checks for health and safety issues beyond just the home's value.

Issues that might fail an FHA appraisal but pass a conventional one include peeling paint on homes built before 1978, a roof with less than 2 years of remaining life, missing handrails, and broken windows.

This can be a problem in competitive markets where sellers may prefer buyers with conventional financing to avoid potential appraisal complications.

Who Should Choose an FHA Loan

An FHA loan makes the most sense if:

• Your credit score is below 680. The combination of lower rates and more lenient qualifying for lower credit profiles makes FHA the cheaper option.

• You had a recent financial setback. FHA has shorter waiting periods after bankruptcy (2 years vs 4 to 7 for conventional) and foreclosure (3 years vs 7).

• Your debt-to-income ratio is higher. FHA allows DTI ratios up to 57% with compensating factors, while conventional typically caps at 45% to 50%.

• You have a smaller down payment and lower credit. The combination of low down payment and lower credit is where FHA's pricing advantage is strongest.

Who Should Choose a Conventional Loan

A conventional loan makes the most sense if:

• Your credit score is 700 or higher. You'll get a lower APR when you factor in the lack of upfront MIP and cancelable PMI.

• You can put 20% down. No mortgage insurance at all, which isn't possible with FHA.

• You want to drop mortgage insurance eventually. With FHA (and less than 10% down), MIP is permanent. With conventional, PMI goes away.

• You're buying a home that might not pass FHA inspection. Older homes, fixer-uppers, or condos not on the FHA-approved list are easier to finance conventionally.

• You need a loan above FHA limits. If you're buying in a higher-priced market, conventional gives you more borrowing room.

Can You Switch Later?

Yes. Many borrowers start with an FHA loan and later refinance into a conventional loan once they've built equity and improved their credit score. This is a common strategy to get rid of the permanent FHA mortgage insurance.

The key is making sure the savings from dropping MIP outweigh the closing costs of refinancing. A general rule: if you've reached 20% equity and your credit score has improved to 700+, it's worth running the numbers. Keep in mind that refinancing does restart your loan clock.

Which Loan Fits Your Situation?

For most borrowers with decent credit (700+) and at least 5% down, a conventional loan will cost less over time thanks to cancelable PMI and no upfront insurance premium. If your credit is below 680 or you've had recent financial difficulties, FHA provides a more accessible and often more affordable path to homeownership.

Don't let anyone tell you one is universally better than the other. The right choice depends entirely on your credit profile, down payment, and how long you plan to keep the loan.

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For more on understanding mortgage costs, see our guides on what PMI is and how it works, APR explained, and loan-to-value ratios.