Loan types

FHA vs. conventional loans: which is right for you?

Educational guide · Updated 2026

Two of the most common loan types for buyers are FHA and conventional. They serve different situations, and the right choice usually comes down to your credit, your down payment, and how long you plan to keep the loan. Here's how they actually differ.

A side-by-side example

On a $350,000 home: FHA with 3.5% down means a $12,250 down payment plus an upfront MIP of roughly $5,800 and monthly MIP of ~$150. A conventional loan with 5% down means $17,500 down but no upfront MIP — and once you hit 20% equity, PMI drops off entirely. Which costs less over time depends on how long you stay in the home.

What is a conventional loan?

A conventional loan isn't backed by a government agency — it follows guidelines set by Fannie Mae and Freddie Mac, which is why it's sometimes called a "conforming" loan when it falls under their limits. Conventional loans tend to reward stronger credit and larger down payments with better terms.

What is an FHA loan?

An FHA loan is insured by the Federal Housing Administration. That government backing lets lenders approve buyers with lower credit scores and smaller down payments than conventional loans typically allow — which is why FHA is popular with first-time buyers.

The key differences

Mortgage insurance is the biggest long-term difference

On a conventional loan, private mortgage insurance (PMI) is required if you put down less than 20%, but it can be cancelled once you reach about 20% equity. On an FHA loan, the mortgage insurance premium (MIP) often lasts the entire life of the loan if your down payment was below 10% — the main way to remove it is to refinance into a conventional loan later.

That difference can add up over the years, which is why a buyer who qualifies for both sometimes chooses conventional even with a slightly higher upfront cost.

So which should you choose?

There's no universal answer, but as a rough guide: if your credit is strong and you can put down a meaningful amount, conventional often costs less over time. If your credit is still improving or your down payment is small, FHA may be what gets you approved in the first place. The only way to know for your situation is to compare actual offers from a lender.

Mortgage insurance: the key cost difference

Both loan types have mortgage insurance — but the structure differs significantly.

FHA requires an upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount, added to your loan balance at closing. It also requires annual MIP that's paid monthly. On a $300,000 FHA loan, the upfront MIP adds $5,250 to your loan. The annual MIP rate depends on your term and down payment — typically 0.55–0.85% per year. Crucially, FHA MIP stays for the life of the loan if you put less than 10% down. You can only remove it by refinancing into a conventional loan.

Conventional PMI is private mortgage insurance required when you put less than 20% down. Rates typically run 0.5–1.5% per year depending on your credit score and down payment. The critical difference: PMI automatically cancels when you reach 20% equity (by payment or home appreciation), or you can request cancellation at 20% equity. You're not locked in for life.

Credit score and qualification differences

FHA is more forgiving on credit. With a 580 score, you can qualify with 3.5% down. With a 500–579 score, you need 10% down. Lenders can set higher minimums (called overlays) — many require 620+ even for FHA.

Conventional loans typically require a minimum 620 credit score, though most lenders prefer 680+. The rate improvement from a higher score is more significant on conventional loans — a borrower at 760 vs. 680 can see a 0.5–0.75% difference in rate.

Loan limits

Both loan types have limits that are updated annually. FHA limits vary by county — in high-cost areas they can reach the conforming loan limit. Conventional conforming loans are capped at the FHFA conforming loan limit (updated each year). For higher-priced properties, jumbo conventional loans are available but require stricter qualification. FHA does not have a jumbo equivalent.

Property requirements

FHA has stricter property condition requirements. The home must be in habitable condition and meet HUD minimum property standards. Chipping paint, roof issues, or structural concerns can cause FHA appraisal failures that won't affect a conventional appraisal. For fixer-uppers or homes in below-average condition, conventional is often easier to finance.

Which is better for you?

FHA typically wins if your credit score is under 680, your down payment is under 5%, or you're in a high-cost area with limited savings. Conventional typically wins if your score is 720+, you can put 10–20% down, or you want to avoid lifetime mortgage insurance. Neither is universally better — run the numbers for your specific situation with both loan types before deciding.

Frequently asked questions

Can I switch from FHA to conventional later?

Yes. Once you've built enough equity, you can refinance an FHA loan into a conventional one and drop mortgage insurance entirely.

Is FHA only for first-time buyers?

No. FHA loans are available to any eligible borrower, not just first-time buyers. The name 'first-time buyer program' is a common misconception.

What credit score do I need for conventional?

Most conventional lenders want at least a 620, but 740+ gets you the best rates. FHA allows scores down to 580 with 3.5% down, or as low as 500 with 10% down.

This article is educational and general in nature. Loan eligibility, rates, and requirements vary by lender, loan program, and your individual situation. Confirm specifics with a licensed lender.