FHA vs Conventional Loan – Which Mortgage Should You Choose?
How Each Loan Type Works
FHA loans are insured by the Federal Housing Administration, which means lenders take on less risk and can offer more lenient qualification standards. You can get an FHA loan with a credit score as low as 580 and just 3.5% down. The tradeoff: you pay mortgage insurance premiums (MIP) for the life of the loan if you put less than 10% down.
Conventional loans follow guidelines set by Fannie Mae and Freddie Mac. They require higher credit scores (typically 620+) and historically needed 20% down to avoid private mortgage insurance (PMI). Today, many conventional programs accept as little as 3% down, but PMI applies until you reach 20% equity — at which point it automatically drops off.
Side-by-Side Comparison
| Feature | FHA Loan | Conventional Loan |
|---|---|---|
| Minimum Credit Score | 580 (3.5% down) or 500 (10% down) | 620+ (varies by lender) |
| Minimum Down Payment | 3.5% | 3–5% (20% to avoid PMI) |
| Mortgage Insurance | MIP — upfront 1.75% + annual 0.55% | PMI — drops off at 20% equity |
| MI Duration | Life of loan (if <10% down) | Until 20% equity reached |
| Loan Limits (2025) | $524,225 (standard); higher in HCOL areas | $766,550 (conforming); higher in HCOL areas |
| Property Standards | Must pass FHA appraisal standards | Standard appraisal |
| Rate Type | Fixed or ARM | Fixed or ARM |
| Best For | Lower credit, small down payment | Good credit, 5%+ down, long-term savings |
The Mortgage Insurance Difference
This is the biggest factor most borrowers underestimate. FHA mortgage insurance premium (MIP) stays for the entire loan term if you put less than 10% down. On a $300,000 FHA loan, that is about $1,650/year — every year, for 30 years — even after you have significant equity. With a conventional loan, PMI drops off once you reach 20% equity, either through payments or home appreciation. Over a 30-year term, eliminating PMI can save $30,000–$50,000.
When FHA Is the Better Choice
FHA loans are ideal if your credit score is below 680, you have limited savings for a down payment, or you have had credit issues like a bankruptcy or foreclosure in the past (FHA has shorter waiting periods). They are also useful for borrowers with higher debt-to-income ratios — FHA allows up to 57% DTI in some cases.
When Conventional Wins
If your credit score is 700+ and you can put 5–10% down, a conventional loan almost always costs less over time because PMI is cancellable. Conventional loans also have higher loan limits, no upfront mortgage insurance premium, and fewer property restrictions. For 15-year terms, conventional is typically the better fit.
Key Takeaways
- FHA loans are easier to qualify for but come with permanent mortgage insurance (if less than 10% down).
- Conventional loans cost less over time for borrowers with 680+ credit because PMI drops off at 20% equity.
- FHA requires just 3.5% down with a 580 credit score — the lowest barrier to homeownership.
- Always compare total cost of ownership, not just monthly payments or interest rates.
- You can refinance from FHA to conventional later to eliminate MIP once you build equity and improve your credit.
Frequently Asked Questions
Can I use an FHA loan for an investment property?
No. FHA loans are for primary residences only. You must live in the home as your main residence. For investment properties, you need a conventional loan, which typically requires 15–25% down.
Is it worth refinancing from FHA to conventional?
Often yes — especially once your credit improves and you have 20% equity. Refinancing eliminates FHA’s permanent MIP. Just weigh the closing costs (typically 2–4% of the loan) against your monthly savings to calculate the break-even point.
Do FHA loans have lower interest rates?
FHA rates are often slightly lower than conventional rates because the government insurance reduces lender risk. However, when you add MIP costs, the effective rate is usually higher than a conventional loan with PMI for borrowers with good credit.
What are FHA appraisal requirements?
FHA appraisals are more stringent. The property must meet HUD’s minimum property standards for safety, security, and soundness. Issues like peeling paint, broken windows, or structural problems can hold up or kill an FHA deal. Conventional appraisals focus mainly on market value.
Can I combine FHA with down payment assistance?
Yes. FHA loans are compatible with most state and local down payment assistance programs, grants, and gift funds from family. This makes FHA the most accessible path to homeownership for buyers with very limited savings.