FHA vs Conventional Loan: Which Mortgage Is Right for You?

Choosing between an FHA loan and a conventional mortgage is one of the first big decisions you’ll make as a homebuyer. The right choice hinges on your credit score, how much you’ve saved for a down payment, and how long you plan to stay in the home. Let’s break down the key differences so you can pick the mortgage that actually fits your finances.

What Is an FHA Loan?

The Federal Housing Administration (FHA) doesn’t lend money directly. It insures loans made by approved lenders, which reduces risk and allows those lenders to offer more lenient qualifying standards. That’s why FHA loans are a popular route for first-time buyers and people with less-than-perfect credit.

With an FHA loan, you can put down as little as 3.5% if your credit score is 580 or higher. If your score falls between 500 and 579, you’ll need a 10% down payment. FHA loans also come with more forgiving debt-to-income (DTI) ratios, often allowing up to 50% in some cases. Many lenders will approve scores as low as 620 for a conventional loan, but FHA is generally more flexible.

One major trade-off: FHA loans require mortgage insurance premium (MIP) both upfront and annually. The upfront premium is typically 1.75% of the loan amount, and the annual premium depends on loan term and loan-to-value. You’ll pay this for the life of the loan in most cases, unless you refinance or sell. That’s a cost that doesn’t disappear once you reach 20% equity.

What Is a Conventional Loan?

A conventional loan is a mortgage that isn’t backed by the government. It follows guidelines set by Fannie Mae and Freddie Mac, the two government-sponsored enterprises that buy most of these mortgages. Because the lender takes on more risk, conventional loans usually demand stronger credit and a bigger down payment.

You can get a conventional loan with as little as 3% down if you qualify for a conventional 97 program, but you’ll typically need a credit score of at least 620, and lenders often look for 660 or 680 for the best rates. The sweet spot is a 20% down payment. Do that, and you avoid private mortgage insurance (PMI) altogether. If you put down less than 20%, you’ll pay PMI, but unlike FHA’s MIP, PMI drops off automatically once your equity reaches 22%—or you can request removal at 20%.

Conventional loans also come in fixed-rate and adjustable-rate versions, and you can choose terms from 10 to 30 years. Rates for conventional loans are often lower than FHA rates, especially if you have strong credit and a solid down payment.

Key Differences Between FHA and Conventional Loans

The table below summarizes the most important comparisons to help you see the differences at a glance.

Feature	FHA Loan	Conventional Loan
Minimum credit score	580 for 3.5% down; 500-579 with 10% down	620 typically, but 660+ for best rates
Minimum down payment	3.5% (some 100% loan programs exist but rare)	3% (with qualifying), but 20% avoids PMI
Mortgage insurance	Upfront MIP (1.75%) + annual MIP for life	PMI if down payment <20%; removed at 22% equity
Debt-to-income ratio	Up to 50% in some cases	Typically max 43% or 45%
Loan limits	Set by county, vary by area	Set by FHFA, higher than FHA in most areas
Interest rates	Often higher than conventional for good credit	Lower for well-qualified buyers
Property standards	Strict appraisal and property requirements	Less strict, but still standard appraisal

FHA loans are often more forgiving on credit, but they come with higher insurance costs that you may carry for decades. Conventional loans can save you money over the long run if you can afford a larger down payment and have a decent credit score.

Which Loan Is Better for First-Time Buyers?

Many first-time buyers assume they need an FHA loan because they’re just starting out. That’s not always true. If you have good credit—say, 680 or above—and you can manage a 5% down payment, a conventional loan might be the better deal. You’ll likely get a lower interest rate, and you can remove PMI once you hit 22% equity.

But if your credit is in the 580-620 range, or you only have 3.5% to put down, FHA might be your only realistic option. The trade-off is that you’ll pay higher insurance premiums, but the lower barrier to entry allows you to get into a home sooner. Once your credit improves and you’ve built some equity, you could refinance into a conventional loan to drop the MIP. That’s a common strategy, but factor in refinancing costs before committing.

Before applying, it’s wise to check your credit score so you know where you stand. That will give you a clear picture of which loan type you can qualify for.

Cost Comparison: Which Saves You More?

Cost is where the decision gets tricky. Let’s compare a $250,000 house with a 3.5% down payment on an FHA loan versus a 5% down payment on a conventional loan, both at 30-year fixed rates.

With an FHA loan, you’d borrow $241,250 after a $8,750 down payment. You’d also pay an upfront MIP of about $4,222, which can be rolled into the loan. The annual MIP is roughly 0.85% of the loan balance, which comes to about $2,050 each year. That’s $171 per month on top of your principal and interest.

With a conventional loan at 5% down ($12,500), you’d borrow $237,500. PMI for a borrower with good credit might be about 0.5% of the loan amount annually, or about $99 per month. When your equity reaches 22%, that PMI disappears. Over a 30-year period, the conventional loan often ends up cheaper, especially if you stay in the home long-term.

But if you only have 3.5% saved, FHA wins for upfront affordability. Also remember that FHA rates are often slightly higher to compensate for the additional risk. Run the numbers with your exact scenario using a mortgage calculator, and don’t forget to include taxes, insurance, and HOA fees.

Can You Refinance From FHA to Conventional Later?

Yes, many borrowers refinance from an FHA loan to a conventional loan once they’ve built equity or improved their credit. The goal is usually to shed the FHA’s lifetime mortgage insurance and potentially get a lower rate.

To make that move worthwhile, you’ll need at least 20% equity to avoid PMI on the conventional loan, or accept PMI if you have less. You’ll also need your credit score to have climbed to 620 or higher, ideally closer to 680 or 700. Refinancing costs money—typically 2% to 5% of the loan amount—so you need to calculate the break-even point. If the monthly savings from dropping MIP and getting a lower rate exceed the closing costs within a reasonable timeframe, it makes sense.

If you’re not planning to stay in the home for more than five years, refinancing may not be worth it. But if you’re settling in for the long haul, transitioning from FHA to conventional can be a smart money move.

How to Decide: Action Steps

Ready to pick? Use these steps to narrow down your choice.

1. Pull your credit report and scores. You can get free reports from each bureau annually. If your score is below 620, FHA is likely your best bet. If it’s above 680, conventional may be cheaper.
2. Calculate your true down payment savings. Figure out how much you can put down comfortably. Don’t drain your emergency fund—lenders want to see reserves.
3. Compare loan estimates from multiple lenders. Ask for the same loan term and rate type, then compare annual percentage rate (APR), closing costs, and monthly payment.
4. Consider your long-term plans. If you expect to move within five years, FHA’s upfront costs might be okay. If you’ll stay for years, a conventional loan’s cheaper insurance could save you thousands.
5. Get pre-approved for both. A lender can pre-approve you for both FHA and conventional to show you concrete numbers. That makes the cost comparison real.

Once you’ve decided, you can start the application process. If you’re also considering other financing options, understanding how to apply for a personal loan might help if you need a bridge loan for a down payment, but be careful about adding too much debt.

FHA or Conventional: Which Should You Choose?

There’s no universal winner. The best loan is the one that matches your financial reality. FHA offers a lifeline to buyers with lower credit scores and smaller down payments, but you’ll pay for that flexibility with lifetime mortgage insurance. Conventional loans reward strong credit with lower rates and the ability to drop PMI, but they demand more upfront savings.

Crunch the numbers with your actual credit score and down payment amount. Look at the total cost over five, ten, and thirty years. And remember: you aren’t stuck forever. Many homeowners start with FHA and refinance to conventional later. Whichever you choose, make sure you understand every fee and how long you’ll plan to stay in the home.

Before you apply, take the time to assess your credit and save as much as you reasonably can. Even a little extra down payment can shrink your monthly payment significantly.

Frequently asked questions

Can I get an FHA loan with a 500 credit score?

Yes, FHA loans allow credit scores as low as 500, but you’ll need a 10% down payment. Scores between 580 and 579 require only 3.5% down. Some lenders may have higher minimums, so shop around for a lender willing to work with lower scores.

How much is FHA mortgage insurance?

FHA mortgage insurance includes an upfront premium of 1.75% of the base loan amount and an annual premium that ranges from 0.45% to 1.05% depending on loan term, amount, and down payment. The annual premium is paid monthly as part of your mortgage payment.

When does conventional PMI drop off?

Conventional private mortgage insurance (PMI) automatically terminates when your loan-to-value ratio reaches 78%, which typically means you have at least 22% equity in your home. You can also request removal earlier at 20% equity, though your lender may require an appraisal.

Which loan has lower interest rates, FHA or conventional?

Interest rates can vary by lender and your financial profile, but conventional loans often have lower rates for borrowers with good credit and a larger down payment. FHA rates tend to be slightly higher, partly to offset the cost of mortgage insurance. Always compare quotes from multiple lenders.

Can I use an FHA loan to buy a fixer-upper?

FHA loans have stricter property standards than conventional loans, so the home must meet minimum health and safety requirements. If you’re buying a fixer-upper, consider an FHA 203(k) loan, which includes renovation costs, or a conventional renovation loan. Both have their own rules.