Choosing between an FHA loan and a conventional loan is one of the first decisions you face as a homebuyer. Both programs can get you into a house, but they differ in credit requirements, down payment minimums, mortgage insurance rules, and long-term costs. Understanding those differences helps you pick the option that saves you the most money over the life of the loan.
What Is an FHA Loan
An FHA loan is a mortgage insured by the Federal Housing Administration. The government does not lend you money directly. Instead, it guarantees a portion of the loan so private lenders are willing to approve borrowers who might not qualify for conventional financing.
You can qualify with a credit score as low as 580 with a 3.5 percent down payment, or as low as 500 if you put at least 10 percent down. That flexibility makes FHA popular among first-time buyers and borrowers recovering from financial setbacks.
The trade-off is mortgage insurance. Every FHA loan requires an upfront mortgage insurance premium and an annual premium you pay monthly for most or all of the loan term. That added cost is the main reason some buyers refinance into a conventional mortgage once they build equity and improve their credit.
What Is a Conventional Loan
A conventional loan is any mortgage not insured or guaranteed by a federal agency. Most follow the guidelines set by Fannie Mae or Freddie Mac, making them conforming loans.
Conventional loans typically require a credit score of at least 620, with the best rates going to borrowers above 740. You can put down as little as 3 percent on certain programs, but anything below 20 percent triggers private mortgage insurance. Unlike FHA insurance, PMI on a conventional loan drops off automatically once your loan-to-value ratio reaches 78 percent. That cancellation feature can save you thousands over a 30-year term compared to FHA insurance that sticks around for the life of the loan.
Key Differences at a Glance
| 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% to 5% |
| Mortgage insurance | Upfront + annual for life of loan (most cases) | PMI until 78% LTV, then drops off |
| Loan limits | County-based FHA limits | Conforming limits set by FHFA |
| Property standards | Must meet FHA appraisal requirements | Standard appraisal |
| Seller concessions | Up to 6% of sale price | 3% to 9% depending on down payment |
| Assumability | Yes, with lender approval | Generally not assumable |
When an FHA Loan Makes Sense
Consider FHA if any of the following apply to you:
- Your credit score falls between 580 and 619, putting conventional approval out of reach or resulting in very high rates.
- You have limited cash reserves and need the lowest possible down payment.
- You have a recent bankruptcy or foreclosure on your record and have completed the required FHA waiting period but not yet the conventional waiting period.
- You want to use FHA’s higher allowance for seller concessions to reduce out-of-pocket closing costs.
FHA also tends to be more forgiving of higher debt-to-income ratios. If your monthly obligations eat up a larger share of your income, FHA underwriting may give you more room than conventional guidelines allow.
When a Conventional Loan Is the Better Pick
You may prefer a conventional loan in these situations:
- Your credit score is 680 or above, unlocking competitive interest rates and favorable PMI pricing.
- You can put 20 percent down and avoid mortgage insurance entirely.
- You want mortgage insurance that cancels automatically rather than lasting the full loan term.
- You are buying a condo, vacation home, or investment property that may not meet FHA eligibility requirements.
Conventional loans offer more flexibility in property types. Vacation homes, second homes, and multi-unit investment properties are all eligible, while FHA restricts you to owner-occupied primary residences.
How to Run the Numbers
Comparing these loans requires more than looking at interest rates. Factor in total mortgage insurance cost, how long you expect to keep the loan, and how quickly you plan to build equity.
- Get pre-approval quotes from at least two lenders for both FHA and conventional options.
- Ask each lender for a Loan Estimate breaking down the interest rate, monthly payment, and all closing costs.
- Calculate the total mortgage insurance cost for each scenario over the period you plan to own the home.
- Add up principal, interest, and insurance payments for both options over five years, ten years, and the full loan term.
- Compare the total costs at each milestone to find the crossover point.
Buyers with credit scores between 620 and 679 often find that FHA is cheaper in the short term but conventional becomes cheaper after several years once PMI cancels. The break-even point depends on your specific rate, loan amount, and PMI pricing.
How Your Credit Score Steers the Decision
Your credit score is the single most influential factor in this choice:
- 500 to 579: FHA is likely your only mainstream option. Expect a 10 percent down payment.
- 580 to 619: FHA is usually the better deal. Conventional approval comes with high rates and expensive PMI.
- 620 to 679: Both options are available. Run the total-cost comparison to see which saves more over your ownership period.
- 680 to 739: Conventional typically wins with competitive PMI rates that eventually cancel.
- 740 and above: Conventional is almost always the better choice with the best rates and lowest PMI premiums.
Lenders price risk differently, so one may offer a better FHA rate while another gives a better conventional rate. Shopping multiple lenders is essential.
Frequently Asked Questions
Can you switch from an FHA loan to a conventional loan later
Yes. Many borrowers start with FHA and refinance into a conventional mortgage once their credit improves and they have at least 20 percent equity. This eliminates the ongoing FHA mortgage insurance premium and can lower your monthly payment.
Do FHA loans take longer to close than conventional loans
Not necessarily. Closing timelines depend more on the lender and your documentation than on the loan type. FHA appraisals can be slightly more involved, but most FHA loans close within the same 30- to 45-day window as conventional loans.
Is the FHA upfront mortgage insurance premium refundable
The upfront premium is partially refundable if you pay off your FHA loan within the first few years. The refund decreases over time and drops to zero after about five years. Your lender or loan servicer can provide the exact refund schedule for your loan.
Can you use gift funds for a down payment with both loan types
Yes. Both FHA and conventional loans allow gift funds for the down payment and closing costs. FHA is slightly more flexible about the source, accepting gifts from family, employers, and certain government programs. Conventional loans typically require gift funds to come from a family member or domestic partner.
Final Thoughts
There is no universally better loan type. The right choice depends on your credit score, savings, how long you plan to stay in the home, and how much you value the ability to cancel mortgage insurance. Get Loan Estimates for both options from multiple lenders, run the total-cost comparison at realistic time horizons, and let the numbers guide your decision. The few hours you spend comparing could save you tens of thousands of dollars over the life of your mortgage.
By CashX Flora Editorial · Updated July 13, 2026