Last Updated: January 2026

Choosing between a conventional loan and an FHA loan is one of the most important decisions in your homebuying journey. Both are popular types of loans that can help you purchase a home, but they serve different borrower profiles with distinct advantages and costs.

This comprehensive FHA vs conventional comparison covers everything you need to know, from credit requirements and down payments to mortgage insurance costs, so you can determine whether a conventional loan or FHA loan is the best loan option for your situation.

FHA vs Conventional Loans: Quick Comparison

When comparing conventional loans vs FHA loans, here's what you need to know:

Both conventional loans and FHA loans can help you become a homeowner, but they serve different needs.

Understanding Conventional Loans

A conventional loan is a mortgage that isn't insured by a government agency. Instead, conventional loans are backed by private lenders and typically sold to Fannie Mae or Freddie Mac. Conventional loans have specific credit and financial requirements.

Advantages of Conventional Loans

Removable Mortgage Insurance: Unlike FHA mortgage insurance that lasts the life of the loan, private mortgage insurance (PMI) on conventional loans can be removed once you reach 20% equity. You don't have to pay mortgage insurance forever.

Lower Total Insurance Costs: For borrowers who qualify for a conventional loan with good credit, you'll often pay for mortgage insurance at lower rates than FHA. This makes conventional loans cost less over the life of the loan.

Flexible Property Types: You can use a conventional home loan to purchase primary residences, second homes, and investment properties, unlike FHA loans that are restricted to primary residences.

No Upfront Insurance Premium: Conventional loans don't require an upfront mortgage insurance payment at closing.

Higher Loan Limits: The 2026 conventional loan limit of $806,500 for conforming conventional loans exceeds the FHA floor limit. You can also get an FHA jumbo loan, but a conventional jumbo loan often has better rates.

Monthly Mortgage Flexibility: Your monthly mortgage payment depends on your loan terms, which are more flexible with conventional options.

Disadvantages of Conventional Loans

• Stricter credit requirements (620 minimum vs FHA's 500-580)
• Higher down payment for some buyers (5% for repeat buyers)
• Stricter DTI requirements than FHA loans

Understanding FHA Loans

FHA loans are mortgages insured by the Federal Housing Administration, a government agency within HUD. FHA mortgage insurance protects lenders, allowing for more flexible qualification requirements than conventional loans. FHA loans are designed to help borrowers who may not qualify for conventional loans.

Advantages of FHA Loans

Lower Credit Score Requirements: FHA loans allow credit scores as low as 500 with 10% down, or 580 with 3.5% down, significantly lower than conventional requirements. FHA loans tend to be easier to qualify for than conventional loans.

More Forgiving DTI Ratios: FHA guidelines allow DTI ratios up to 56.9% with compensating factors, compared to conventional loans' typical 43-45% maximum.

Shorter Waiting Periods: FHA loans have shorter waiting periods after bankruptcy (2 years) and foreclosure (3 years) than conventional loans require.

Assumable Loans: FHA loans are assumable by future buyers, potentially making your home more attractive in higher-rate environments.

Lower Interest Rates: FHA loans often have lower interest rates than conventional loans because FHA mortgage insurance reduces lender risk.

Disadvantages of FHA Loans

Permanent Mortgage Insurance: For loans with less than 10% down, FHA mortgage insurance premiums (MIP) last the entire loan term. Borrowers pay FHA mortgage insurance for the life of the loan unless they refinance into a conventional loan. This is the biggest difference between FHA and conventional loans.

Upfront MIP: FHA loans require a 1.75% upfront mortgage insurance premium at closing (can be financed into the loan). This adds to your loan amount and total cost.

FHA Appraisal Requirements: FHA loans have stricter property requirements. FHA appraisals require properties to meet HUD's minimum property standards.

Primary Residence Only: FHA loans cannot be used for investment properties or vacation homes, a key difference between FHA and conventional loans.

FHA Loan Limits: FHA loan limits are lower than conventional loan limits in most areas, restricting purchasing power.

Difference Between FHA and Conventional Credit Requirements

Credit requirements represent the biggest difference between FHA and conventional loans.

Credit Score Comparison

Interest Rate Differences

FHA loans often have lower interest rates than conventional loans because government insurance reduces lender risk. However, borrowers with excellent credit (740+) may qualify for conventional loan rates equal to or lower than FHA rates.

Why Choose Conventional for High Credit: Conventional loans don't require permanent mortgage insurance, so total costs are often lower for borrowers with good credit.

Why Choose FHA for Lower Credit: FHA offers better rates to borrowers with credit scores between 580-679 compared to conventional loans.

Mortgage Insurance: FHA MIP vs Conventional PMI

Mortgage insurance requirements are a critical difference between FHA and conventional loans.

Conventional PMI

When Required: Down payment less than 20%

Cost: 0.3% to 1.5% of loan amount annually

Removal: Can be removed at 80% LTV with good payment history

FHA MIP

When Required: All FHA loans, regardless of down payment

Two Components:

• Upfront MIP: 1.75% of loan amount, paid at closing or financed
• Annual MIP: 0.50-0.55% for most loans over 15 years

Duration:

• 10%+ down: MIP for 11 years
• Less than 10% down: MIP for the life of the loan

Mortgage Insurance Cost Comparison

Example: $386,000 loan, 3.5% down, 700 credit score

Key Insight: FHA's lower monthly MIP looks attractive initially, but permanent mortgage insurance for a conventional loan is often cheaper than FHA loans over the life of the loan.

FHA Loan vs Conventional Loan: Which Is Better?

The best loan option depends on your financial situation.

Choose a Conventional Loan If:

• ✓ Credit score 680 or higher
• ✓ You have 5%+ down payment
• ✓ You want to remove mortgage insurance eventually
• ✓ You're buying an investment property or second home
• ✓ You're buying a fixer-upper that might not meet FHA standards
• ✓ You have stable employment and clean credit history

Choose an FHA Loan If:

• ✓ Credit score between 500-679, you can get an FHA loan with lower scores
• ✓ You need the lowest possible down payment (3.5%)
• ✓ You have a higher debt-to-income ratio
• ✓ You've had bankruptcy or foreclosure within 4-7 years
• ✓ You qualify for FHA but not conventional due to credit
• ✓ You need more flexibility with gift funds

If you want to get an FHA loan, you'll work with an FHA-approved lender. The process to get an FHA loan is similar to conventional, but with different credit and down payment requirements.

Compare FHA and Conventional: Case Studies

Case Study 1: Good Credit Buyer (720 Score)

Profile: First-time buyer, 5% down, $400,000 home

Winner: Conventional loan, similar early costs, $80,000+ savings long-term

Case Study 2: Credit-Challenged Buyer (620 Score)

Profile: First-time buyer, 3.5% down, $300,000 home

Winner: FHA loan, significantly lower payment with better rate. Consider refinancing to conventional when credit improves.

Can You Switch From FHA to Conventional?

Yes, many borrowers start with an FHA loan and refinance into a conventional loan to:

• Eliminate permanent FHA mortgage insurance
• Take advantage of improved credit scores
• Access better conventional mortgage rates

Requirements to refinance a conventional loan:

• At least 20% equity (to avoid PMI)
• Improved credit score (680+ recommended)
• Stable income and employment

This strategy lets you qualify for an FHA loan initially, then refinance into a conventional loan to eliminate mortgage insurance requirements.

FHA vs Conventional: Frequently Asked Questions

Which loan is good, FHA or conventional?

Whether FHA or conventional is better depends on your credit score and financial situation. Conventional loans are typically better for borrowers with 680+ credit scores who want removable mortgage insurance. FHA loans are better for borrowers with credit scores between 500-679 or those who need more flexible DTI requirements. Compare both to see which loan option offers lower total costs for your situation.

Do you have to put 20% down on a conventional loan?

No, conventional loans don't require 20% down. First-time homebuyers can get a conventional loan with as little as 3% down using Conventional 97, HomeReady, or Home Possible programs. Repeat buyers need 5% minimum. However, putting less than 20% down requires paying private mortgage insurance until you reach 20% equity.

What are the disadvantages of a conventional loan?

The main disadvantages of conventional loans include: stricter credit requirements (620 minimum vs FHA's 500-580), higher interest rates for borrowers with lower credit scores, and less flexible DTI requirements. Additionally, conventional loans require a larger down payment for repeat buyers (5% vs FHA's 3.5%).

Why do I qualify for FHA but not conventional?

You may qualify for FHA but not conventional due to: credit score below 620 (FHA allows 580 or even 500 with larger down payment), higher DTI ratio (FHA allows up to 56.9% vs conventional's ~45% max), or recent bankruptcy/foreclosure (FHA has shorter waiting periods). FHA loans are designed to help borrowers who can't meet conventional loan requirements.

Do sellers prefer conventional loans over FHA loans?

Many sellers prefer conventional loans because they typically have faster, smoother closing processes, less strict appraisal requirements, lower likelihood of repair requests, and perception of stronger buyers. However, in a buyer's market, sellers often accept FHA offers. Work with your real estate agent to present a competitive offer regardless of loan type.

How to Compare FHA and Conventional Loans

When you compare FHA and conventional loans, consider:

1. Total Cost Over the Life of the Loan: FHA loans may cost more due to permanent mortgage insurance
2. Monthly Payment: FHA loans and conventional loans may have similar payments initially
3. Upfront Costs: FHA loans require upfront MIP; conventional loans don't
4. Flexibility: Conventional and FHA loans serve different needs
5. Future Plans: If you'll stay long-term, conventional loans often win on total cost

Summary: FHA vs Conventional Loans

When deciding between FHA vs conventional loans, remember these key points:

Choose Conventional Loans If:

• You have a credit score of 680 or higher
• You want to eventually stop paying mortgage insurance
• You're buying an investment property or second home
• You want a jumbo loan above FHA loan limits

Choose FHA Loans If:

• You have a credit score between 500-679
• You want to get an FHA loan with flexible DTI requirements
• You've had recent credit events like bankruptcy
• You need a lower down payment (3.5%)

Both conventional loans and FHA loans are popular types of loans for home purchases. FHA loans require mortgage insurance for the life of the loan, while conventional loans let you remove PMI at 20% equity.

If you can qualify for a conventional loan, you'll often pay less over the life of the loan compared to FHA. However, FHA loans tend to be easier to get an FHA loan approval for borrowers with credit challenges.

The best way to compare: get pre-approved for both and see actual rates and monthly mortgage payment options.