FHA vs Conventional Loan
Choosing between an FHA and a conventional loan is one of the first big decisions you'll make as a homebuyer. Both can get you into a home, but they work very differently on down payment, credit, and long-term cost.
Quick Comparison
| Feature | FHA Loan | Conventional Loan |
|---|---|---|
| Min. Down Payment | 3.5% | 3% (first-time buyer programs) |
| Min. Credit Score | 580 (500 with 10% down) | 620 (typically) |
| Mortgage Insurance | Upfront 1.75% + annual MIP | PMI (cancels at 22% equity) |
| Loan Limits | Lower in high-cost areas | Higher conforming limits |
| Seller Concessions | Up to 6% | Up to 3-9% (varies) |
| Best For | Lower credit, smaller down payment | Stronger credit, lower long-term cost |
What is an FHA Loan?
FHA loans are mortgages insured by the Federal Housing Administration. The government doesn't lend you money — a private lender does — but FHA insurance protects the lender if you default. That protection lets lenders offer easier qualifications.
- Pros: Low 3.5% down, accepts lower credit scores, more flexible debt-to-income rules
- Cons: Required MIP (often for the life of the loan), lower conforming loan limits, must be a primary residence
- Best for: First-time buyers, borrowers rebuilding credit, those with limited savings
What is a Conventional Loan?
Conventional loans are mortgages not backed by the government. They follow guidelines set by Fannie Mae and Freddie Mac ("conforming" loans) and are offered by private lenders.
- Pros: PMI cancels at 22% equity, higher loan limits, no upfront MIP fee, can be used on any property type
- Cons: Stricter credit (usually 620+), typically needs 5-20% down to avoid PMI, higher reserve requirements
- Best for: Borrowers with strong credit and 5%+ down who want lower long-term cost
Mortgage Insurance: The Biggest Long-Term Difference
This is where FHA and conventional loans diverge the most.
FHA MIP: You pay 1.75% upfront (usually rolled into the loan) plus an annual premium (0.55% for most 30-year loans). If your down payment is less than 10%, MIP lasts the entire loan term — you can't cancel it.
Conventional PMI: Costs vary by credit and down payment, but it automatically cancels when you reach 22% equity, and you can request removal at 20%. Many borrowers eliminate PMI within 5-7 years.
Over 30 years, the difference can mean tens of thousands of dollars. Run the numbers with our FHA Loan Calculator and Mortgage Calculator.
Which Loan Should You Choose?
Use this quick rule of thumb:
- Choose FHA if: Your credit score is below 620, you have less than 5% down, or you want the lowest barrier to qualification.
- Choose conventional if: Your credit is 680+, you have at least 5% down, and you plan to stay in the home long enough for PMI to cancel.
- Consider both if: You sit in the middle (620-679 credit, 3.5-10% down) — compare total monthly payment and lifetime cost, not just qualification.
Frequently Asked Questions
Can I switch from FHA to conventional later?
Yes. Many borrowers refinance out of FHA into a conventional loan once their credit improves or their equity reaches 20%. This is a common way to escape lifetime MIP.
Are FHA rates higher than conventional?
FHA rates are often slightly lower on the surface, but when you add the upfront MIP and ongoing MIP, the effective cost is usually higher for the borrower.
Can I use an FHA loan for a second home or investment property?
No. FHA loans are only for primary residences you intend to occupy within 60 days of closing.
What credit score do I need for the best conventional rate?
Most lenders offer their best conventional rates at 740+. Below 700, you'll pay noticeably more in interest and PMI.