An FHA loan may be the better option when you have a smaller down payment, a weaker credit profile, or difficulty qualifying for conventional financing.
A conventional loan may cost less when your credit is strong, you can make a reasonable down payment, and you want mortgage insurance that may be removed later.
The main difference is who takes the lending risk. An FHA loan is made by a private lender but insured by the Federal Housing Administration. A conventional loan is not insured or guaranteed through a government mortgage program.
Do not choose based on the down payment alone.
Compare the interest rate, annual percentage rate, mortgage insurance, upfront fees, monthly payment, cash needed at closing, and how long you expect to keep the loan.
The practical difference at a glance
| Feature | FHA loan | Conventional loan |
|---|---|---|
| Loan backing | Insured by the Federal Housing Administration | Not insured or guaranteed by a government mortgage program |
| Minimum down payment | As low as 3.5% under FHA rules | Some programs allow 3%, but eligibility rules apply |
| Credit flexibility | Generally more flexible for lower credit scores | Generally easier and cheaper with stronger credit |
| Upfront mortgage insurance | Usually required | Not normally charged as an FHA-style upfront premium |
| Monthly mortgage insurance | Required on most FHA loans | Typically required with less than 20% down |
| Insurance removal | May last 11 years or the full loan term, depending on starting LTV | PMI can often be canceled after enough equity is built |
| Property use | Generally intended for a principal residence | Options may exist for principal residences, second homes, and investment properties |
| Loan limits | County-based FHA limits apply | Conforming limits apply, with jumbo conventional loans available above them |
| Property review | Property must meet FHA eligibility and appraisal requirements | Property must meet the lender’s and applicable conventional program’s requirements |
CFPB guidance says conventional loans typically cost less than FHA loans but can be harder to obtain. It also notes that FHA may be cheaper for borrowers with lower credit scores or small down payments, while conventional financing may be cheaper for borrowers with good credit and a medium down payment.
There is no automatic winner.
The better loan is the one that produces the better complete offer for your actual application.
What is an FHA loan?
An FHA loan is a mortgage made by an FHA-approved private lender and insured by the Federal Housing Administration, which is part of the Department of Housing and Urban Development.
The government does not usually hand you the purchase money directly. FHA insurance protects the lender against certain losses if the borrower defaults. The cost of that insurance is passed to the borrower through mortgage insurance premiums.
FHA loans are commonly associated with first-time buyers, but they are not restricted only to people buying their first home. HUD reported that about 83% of FHA purchase mortgages in fiscal year 2025 went to first-time buyers, which also means other eligible buyers used them.
Why FHA loans exist
FHA insurance allows approved lenders to make loans under FHA program rules, including options with lower down payments and more flexible credit qualification than many conventional products.
This can help a borrower who has enough income to make the payment but does not have a large down payment or a spotless credit history.
The catch is mortgage insurance.
You may receive easier entry into homeownership, but that access can create a higher long-term cost.
What is a conventional loan?
A conventional loan is a mortgage that is not insured or guaranteed by a federal or state government mortgage program.
Some conventional loans are conforming loans, meaning they meet applicable requirements for purchase by Fannie Mae or Freddie Mac. Other conventional mortgages are non-conforming loans, including jumbo loans that exceed conforming loan limits.
Conventional does not mean one single mortgage with one universal set of rules.
The category includes different:
- Down payment options
- Credit standards
- Property types
- Loan amounts
- Fixed and adjustable rates
- Underwriting methods
A conventional loan may be easier to customize to a strong borrower’s circumstances. It can also be less forgiving when the application contains lower credit scores, limited reserves, or a high debt burden.
FHA does not automatically require the smallest down payment
FHA purchase loans can allow a down payment as low as 3.5% when the borrower meets the program’s requirements.
Some conventional programs also permit down payments as low as 3%.
For example, Fannie Mae offers eligible 97% loan-to-value purchase options, while Freddie Mac offers programs such as Home Possible and HomeOne with 3% down options. First-time buyer, occupancy, income, education, and other requirements can apply depending on the product.
So this comparison is too simple:
- FHA means low down payment.
- Conventional means 20% down.
That is not how the current mortgage market works.
Down payment example on a $350,000 home
| Down payment | Cash amount | Starting base loan |
|---|---|---|
| 3% | $10,500 | $339,500 |
| 3.5% | $12,250 | $337,750 |
| 5% | $17,500 | $332,500 |
| 10% | $35,000 | $315,000 |
| 20% | $70,000 | $280,000 |
A conventional 3% option uses less down-payment cash than an FHA loan at 3.5%.
But that does not mean the conventional loan will be approved or cost less. The rate, private mortgage insurance, credit profile, lender fees, and program eligibility still matter.
FHA has published credit-score financing thresholds
Under FHA program rules, a borrower with a minimum decision credit score of at least 580 may be eligible for maximum FHA financing. A score between 500 and 579 generally limits the loan to 90% LTV, which effectively requires at least 10% equity or down payment in a standard purchase calculation.
Those are FHA program thresholds.
They are not approval promises.
The lender still reviews income, debts, payment history, assets, property eligibility, and the rest of the application. A lender may also use standards that are more restrictive than FHA’s program floor.
Conventional credit requirements are less tidy
There is no single credit-score number that applies to every conventional mortgage, lender, property, and underwriting method.
Conventional financing generally becomes easier and less expensive as the borrower’s credit profile improves. Lower scores may lead to:
- A higher interest rate
- More expensive private mortgage insurance
- Higher risk-based pricing charges
- A larger down-payment requirement
- A declined application
The CFPB notes that conventional loans tend to be more difficult to qualify for than FHA loans and that government programs can be useful for borrowers with lower scores or smaller down payments.
Your complete credit profile matters
A lender does not look only at the score displayed by a credit-monitoring app.
It may also examine:
- Recent late payments
- Collections
- Credit card balances
- Length of credit history
- Recent applications
- Bankruptcy or foreclosure history
- Whether housing payments were made on time
A borrower with a lower score but stable income, cash reserves, and a manageable debt load may produce a different result from someone with the same score and several recent missed payments.
Mortgage insurance is the biggest cost difference
Both loan types can involve mortgage insurance.
They do not use the same system.
FHA uses mortgage insurance premiums
Most FHA forward mortgages require an upfront mortgage insurance premium, or UFMIP, plus an annual mortgage insurance premium collected through monthly installments.
At the time checked, the standard upfront premium for most FHA purchase and refinance loans was 1.75% of the base loan amount.
You can often finance that premium rather than paying it entirely in cash.
Financing it sounds painless because it reduces the money needed at closing.
It also means you borrow the premium and pay interest on it.
FHA upfront premium example
Suppose you buy a $350,000 home with 3.5% down.
Down payment:
$350,000 × 3.5% = $12,250
Base FHA loan:
$350,000 − $12,250 = $337,750
Upfront MIP:
$337,750 × 1.75% = $5,910.63
If the premium is financed, the starting mortgage becomes approximately:
$337,750 + $5,910.63 = $343,660.63
You put down $12,250, but the mortgage starts only about $6,339 below the $350,000 purchase price.
That is the part the 3.5% advertisement does not show clearly.
FHA annual MIP
The annual FHA premium depends on factors including the loan term, original loan-to-value ratio, and loan amount. It is normally divided into monthly installments and included in the mortgage payment.
For a common 30-year FHA loan with an original LTV above 95% and a loan amount below the applicable threshold, the current schedule uses a 0.55% annual MIP rate.
Using the $337,750 base loan:
$337,750 × 0.55% = $1,857.63 per year
Initial monthly estimate:
$1,857.63 ÷ 12 = approximately $154.80
The exact monthly premium is calculated under FHA’s rules and can change as the outstanding balance changes.
FHA mortgage insurance may last for the entire loan
For current FHA loans with case numbers assigned after June 3, 2013, the original LTV generally determines how long annual MIP is collected.
- When original LTV is 90% or lower, annual MIP is generally collected for 11 years.
- When original LTV is above 90%, annual MIP is generally collected for the mortgage term.
HUD reaffirmed this duration structure in its FHA guidance updated in May 2026.
That means a standard 3.5% down FHA buyer usually does not cancel MIP merely because the loan balance later falls below 80% of the original value.
The borrower may eventually refinance into another mortgage that does not require FHA insurance, but refinancing requires a new approval, a suitable interest rate, sufficient equity, and another set of closing costs.
Do not accept an expensive loan today because someone casually promises that you can refinance next year.
Conventional PMI can often be removed
Private mortgage insurance, or PMI, is commonly required on a conventional mortgage when the down payment is below 20%.
PMI protects the lender, not the homeowner, if the borrower stops making payments. Its cost varies with the loan, down payment, credit profile, insurer, and other risk factors.
Unlike FHA MIP on many low-down-payment loans, borrower-paid PMI on many conventional principal-residence mortgages can be canceled.
Under federal rules applying to many eligible loans:
- You can generally request cancellation when the scheduled principal balance reaches 80% of the home’s original value, provided you meet the applicable conditions.
- PMI generally terminates automatically when the scheduled balance reaches 78% of the original value and the loan is current.
The borrower-requested cancellation can require a written request, good payment history, no disqualifying junior liens, and evidence that the property has not declined in value.
Some lenders may allow cancellation based on current value under their own rules, perhaps after appreciation or improvements.
Do not assume.
Ask for the PMI cancellation policy in writing.
An apples-to-apples cost example
Consider a $350,000 home with a 5% down payment.
To isolate the mortgage-insurance difference, assume both loans have a hypothetical fixed rate of 6.5% for 30 years.
This is an illustration, not a current rate quote.
Conventional example
- Home price: $350,000
- Down payment: $17,500
- Loan amount: $332,500
- Principal and interest: approximately $2,101.63
- Hypothetical PMI rate: 0.60% annually
- Initial PMI: approximately $166.25 per month
Initial principal, interest, and PMI:
$2,101.63 + $166.25 = $2,267.88
FHA example
- Home price: $350,000
- Down payment: $17,500
- Base loan: $332,500
- Upfront MIP at 1.75%: $5,818.75
- Total mortgage after financing UFMIP: $338,318.75
- Principal and interest: approximately $2,138.40
- Initial annual MIP at 0.50%: approximately $138.54 per month
Initial principal, interest, and MIP:
$2,138.40 + $138.54 = $2,276.94
| Initial comparison | Conventional | FHA |
|---|---|---|
| Cash down payment | $17,500 | $17,500 |
| Starting mortgage balance | $332,500 | $338,318.75 |
| Principal and interest | $2,101.63 | $2,138.40 |
| Initial monthly insurance estimate | $166.25 | $138.54 |
| Initial total before taxes and homeowners insurance | $2,267.88 | $2,276.94 |
The initial payments are close in this hypothetical example.
The long-term result is not.
With 5% down, the FHA loan begins above 90% LTV, so current FHA rules generally require MIP for the loan term. The conventional borrower may eventually cancel PMI.
Using the conventional amortization schedule in this example, the balance would reach 80% of the original $350,000 value after approximately 124 scheduled payments, or about 10 years and four months. Automatic termination at 78% would occur later, assuming the applicable legal requirements are met.
The actual conventional PMI rate could be much lower or higher than 0.60%. The actual FHA and conventional interest rates could also differ.
That is why you need real Loan Estimates.
A larger FHA down payment changes the insurance duration
Suppose you put 10% down on an FHA loan instead of 5%.
Original LTV:
90%
Under current FHA rules, annual MIP would generally last 11 years rather than the full 30-year term.
That sounds better, and it is.
But a borrower with 10% down and strong credit should compare conventional financing carefully. The CFPB says borrowers with good credit and a medium down payment of around 10% to 15% often find FHA loans more expensive than conventional loans.
FHA can still win in a particular quote.
It should not win by default.
Interest rate and APR can point in different directions
An FHA loan may be offered with a lower note rate than a conventional loan.
That does not prove it costs less.
The annual percentage rate attempts to reflect the interest rate plus certain finance charges and costs. FHA’s upfront and annual mortgage insurance can make the APR noticeably different from the note rate.
Compare:
- Interest rate
- APR
- Points
- Lender fees
- Mortgage insurance
- Cash to close
- Five-year cost
- Total interest and insurance over your expected ownership period
A 6.25% FHA loan can cost more than a 6.50% conventional loan after insurance and upfront charges are included.
It can also cost less.
The numbers decide.
Both loan types have limits
FHA mortgage limits vary by county and property size.
Conforming conventional loans are also subject to annually established limits. A conventional mortgage above the relevant conforming limit may be treated as a jumbo loan with different underwriting, down-payment, reserve, and pricing requirements.
Do not assume FHA is available for any purchase price merely because the payment fits your income.
Check the current limit for:
- The property’s county
- The number of units
- The calendar year of the loan
The exact limits can change each year.
Property use can affect the choice
Standard FHA purchase financing is generally intended for a property that will be used as the borrower’s principal residence.
FHA single-family programs can include eligible one-to-four-unit properties, provided the borrower and property meet the program requirements.
Conventional financing is a broader category. Depending on the product and underwriting, conventional loans may be available for:
- Principal residences
- Second homes
- Investment properties
Low-down-payment conventional programs are generally focused on eligible principal residences. Fannie Mae’s 97% options, for example, are limited to eligible one-unit principal residences.
If you are buying a vacation home or rental property, a standard FHA purchase loan is unlikely to be the right tool.
The FHA appraisal also checks program eligibility
An FHA appraisal is used to estimate value and help determine whether the property meets FHA eligibility and minimum property requirements.
It is not a home inspection, and FHA does not guarantee that the property is free from defects.
Some property problems may need to be repaired before an FHA loan can close.
Examples could include conditions affecting:
- Safety
- Structural soundness
- Basic property security
- Required utilities or systems
The exact result depends on the property, appraiser, lender, and current FHA requirements.
Conventional does not mean no appraisal standards
A conventional lender also needs acceptable collateral and may require an appraisal, valuation, or repairs.
But the property is evaluated under the lender’s applicable conventional requirements rather than FHA’s insurance rules.
A house that has repair issues may be eligible for one loan type and not another, or it may require a renovation loan rather than ordinary purchase financing.
Ask before making the offer:
- Could this condition create an FHA repair requirement?
- Will the seller complete required work?
- Is the property eligible for the conventional product?
- Would renovation financing be needed?
Debt-to-income ratios matter for both
Both FHA and conventional lenders examine whether your income can support the proposed mortgage and existing debts.
A basic debt-to-income ratio is:
Total monthly debt payments ÷ gross monthly income × 100
There is no single DTI figure that guarantees approval for every FHA or conventional loan. Automated underwriting, credit history, reserves, loan type, and other risk factors can affect the decision.
DTI example
Suppose your gross monthly income is $8,000.
Your monthly obligations would be:
- Proposed mortgage-related payment: $2,450
- Auto loan: $500
- Student loan: $250
- Credit card minimums: $150
Total monthly debt payments:
$2,450 + $500 + $250 + $150 = $3,350
DTI:
$3,350 ÷ $8,000 × 100 = 41.88%
An FHA lender and a conventional lender may reach different results from the same application.
Neither approval tells you whether the payment fits after childcare, groceries, maintenance, retirement saving, and the rest of your real budget.
Both options may allow gifts and assistance
A low down payment does not mean every dollar must always come from the borrower’s personal checking account.
Depending on the program, eligible sources may include:
- Personal savings
- Gift funds
- Grants
- Down-payment assistance
- Eligible subordinate financing
Fannie Mae and Freddie Mac low-down-payment products permit certain gifts, grants, and assistance arrangements under their rules.
FHA also has rules governing acceptable sources and documentation for the minimum required investment.
Do not move money into your account and assume the lender will ignore where it came from.
Ask:
- Is this source allowed?
- What documentation is required?
- Does the donor need to sign a gift letter?
- Can the seller provide a credit?
- Will assistance create a second lien?
- Does the assistance need to be repaid?
“Down-payment assistance” can mean a grant.
It can also mean another loan attached to the home.
When FHA may be the stronger choice
Your credit profile is limiting conventional approval
FHA may provide a practical path when conventional underwriting produces a denial or a very expensive offer.
You have a small down payment
The 3.5% option may work when you have enough cash for the down payment, closing costs, and emergency savings but cannot reach a larger conventional down payment.
The FHA rate is meaningfully better
A lower FHA rate may offset some of the mortgage-insurance cost, particularly when the conventional quote includes expensive PMI.
You expect to improve your position later
FHA may provide access now, followed by a possible conventional refinance after income, credit, and equity improve.
The catch is that future refinancing is not guaranteed.
When conventional may be the stronger choice
Your credit is strong
Strong credit can produce a competitive conventional rate and cheaper PMI.
You have 10% to 20% down
A medium down payment may make conventional financing cheaper, especially when PMI can be removed later.
You want mortgage insurance to end
Conventional PMI cancellation rights can create meaningful long-term savings.
You are buying a second home or investment property
Conventional products may be available for property uses that standard FHA purchase financing does not cover.
The property may have FHA eligibility problems
A conventional appraisal may still identify serious issues, but it does not apply FHA’s particular insurance requirements.
How to compare FHA and conventional offers properly
Ask the same lender for both
Request an FHA and conventional scenario using the same:
- Purchase price
- Down payment
- Loan term
- Rate-lock period
- Occupancy
- Property type
Then contact other lenders.
The CFPB recommends obtaining multiple offers and comparing the total costs because the cheaper loan type can vary with the borrower and market.
Compare Loan Estimates
A Loan Estimate provides key information about the mortgage, including the loan type, rate, payment, estimated closing costs, and mortgage insurance.
Compare Loan Estimates rather than relying on numbers written in an email or spoken over the phone.
Check:
- Loan amount
- Interest rate
- APR
- Monthly principal and interest
- Mortgage insurance
- Estimated taxes and insurance
- Origination charges
- Points or lender credits
- Cash to close
- Five-year cost
Ask when the insurance ends
Do not accept “it drops off later.”
Ask for the estimated date and conditions.
Compare your expected ownership period
If you expect to keep the mortgage for five years, a 30-year insurance comparison may be less useful than the five-year cost.
If you plan to stay for 20 years, the ability to remove conventional PMI becomes much more important.
Common FHA and conventional loan mistakes
Assuming FHA is always cheaper for first-time buyers
First-time status does not automatically make FHA the best loan.
Assuming conventional requires 20% down
Eligible conventional programs may allow 3% down.
Comparing only the interest rate
A lower note rate can come with higher insurance, points, or fees.
Ignoring the FHA upfront premium
Financing UFMIP increases the mortgage balance and the interest paid.
Assuming FHA MIP will disappear at 80% LTV
For current low-down-payment FHA loans, annual MIP commonly lasts for the loan term.
Assuming conventional PMI disappears automatically at 80%
Borrower-requested cancellation generally requires action and conditions. Automatic termination generally occurs at the scheduled 78% point when requirements are met.
Using every dollar for the down payment
A larger down payment does not help when the first repair becomes credit card debt.
Planning around a future refinance
A future refinance depends on rates, credit, income, equity, lender rules, and closing costs you cannot guarantee today.
Taking the first lender’s answer
One lender’s FHA approval or conventional denial does not prove that every lender will reach the same result.
Frequently asked questions
Is FHA better than conventional?
FHA may be better for a smaller down payment or weaker credit profile. Conventional may be better for strong credit, a medium down payment, and lower long-term insurance costs.
Is an FHA loan only for first-time buyers?
No. FHA is widely used by first-time buyers, but eligible repeat buyers may also qualify.
What is the minimum FHA down payment?
FHA allows a down payment as low as 3.5% for borrowers eligible for maximum financing.
Can a conventional loan require only 3% down?
Yes. Fannie Mae and Freddie Mac have eligible 3% down options, but requirements involving occupancy, income, first-time buyer status, education, or other factors may apply.
What credit score do I need for FHA?
FHA’s current handbook permits maximum financing with a qualifying score of at least 580 and limits borrowers with scores from 500 to 579 to 90% LTV. The lender still has to approve the complete application.
What credit score do I need for conventional?
There is no universal score applying to every conventional mortgage. Requirements depend on the lender, loan program, underwriting result, property, down payment, and other risks.
Does FHA mortgage insurance go away?
For current FHA loans, annual MIP generally lasts 11 years when original LTV is 90% or lower. When original LTV is above 90%, it generally lasts for the mortgage term.
Can conventional PMI be canceled?
For many eligible principal-residence loans, you can request cancellation at the scheduled 80% point when conditions are met. Automatic termination generally occurs at the scheduled 78% point when the loan is current.
Does FHA always have a lower interest rate?
No. Rates vary by lender, borrower, property, points, market conditions, and loan terms. Request quotes for both loan types.
Does FHA always have higher closing costs?
No. FHA has an upfront mortgage insurance premium, but total closing costs also depend on lender fees, points, title charges, taxes, credits, and other transaction details.
Can I use an FHA loan for a rental property?
Standard FHA purchase financing is generally intended for a principal residence. An eligible two-to-four-unit property may be possible when the borrower occupies a unit and meets the program rules.
Can I refinance an FHA loan into conventional?
Possibly. You must qualify for the new conventional loan and have sufficient equity, credit, and income. Compare the closing costs and new rate with the insurance saving.
Can I switch loan types after making an offer?
Possibly, but changing financing can affect underwriting, appraisal requirements, timing, costs, and the purchase contract. Discuss the change with the lender and real estate professionals before relying on it.
Does FHA require a home inspection?
An FHA appraisal is required for FHA financing, but it is not a substitute for an independent home inspection. FHA does not guarantee the home’s condition.
Which loan is better with 10% down?
A borrower with good credit and 10% down should compare conventional carefully because it may have cheaper insurance and lower long-term costs. FHA can still be competitive when its rate or underwriting is better.
Which loan is better with poor credit?
FHA may be easier or cheaper, but approval is not automatic. Compare the FHA offer with any conventional options available and consider whether improving credit before buying would produce a safer result.
Can my down payment be a gift?
Both FHA and conventional programs may permit eligible gift funds under their documentation rules. Confirm the acceptable donor, source, transfer method, and required gift letter before moving the money.
Should I choose FHA now and refinance later?
Only when the FHA loan works even if the refinance never happens. Future rates and approval are unknown.
The bottom line
FHA loans can make homeownership more accessible through a low down payment and more flexible credit standards.
The trade-off is mortgage insurance. Most borrowers pay an upfront premium, and someone putting down less than 10% will generally pay annual MIP for the full loan term.
Conventional loans may be harder to qualify for, but they can be cheaper for borrowers with strong credit. Low-down-payment conventional options exist, and private mortgage insurance can often be removed after enough equity is built.
Ask lenders for both FHA and conventional Loan Estimates using the same purchase price and down payment.
Then compare the rate, APR, insurance, fees, cash to close, five-year cost, and long-term payment.
The smallest down payment gets your attention.
The complete loan determines what the home really costs.