FHA vs Conventional Loans Compared

FHA and conventional loans are the two most common ways people buy a home in the United States. An FHA loan is insured by the government, which lets lenders accept lower credit scores and smaller down payments. A conventional loan is not government-insured, so it usually asks for stronger credit, but it can cost less over time once you build equity. Neither loan is better for everyone. The right choice depends on your credit score, how much cash you have saved, and how long you plan to keep the loan.

What Is an FHA Loan?

An FHA loan is a mortgage insured by the Federal Housing Administration, a part of the U.S. Department of Housing and Urban Development. The government does not lend the money itself. Instead, it insures the lender against loss if the borrower stops paying.

That insurance lowers the risk for lenders, so they can approve borrowers who might not qualify for a conventional loan. FHA loans commonly allow a down payment around 3.5% for borrowers with a credit score of 580 or higher. Some lenders will go lower, often down to the mid-500s, but usually require a larger down payment in that range, commonly around 10%.

Because the rules are more forgiving, FHA loans are popular with first-time buyers, people rebuilding their credit, and buyers who have not saved a large down payment yet. The tradeoff is mortgage insurance that can last much longer than it would on a conventional loan.

What Is a Conventional Loan?

A conventional loan is a mortgage that is not insured or guaranteed by a government agency. It is originated by a private lender and often follows underwriting guidelines set by Fannie Mae or Freddie Mac, which buy many conventional loans from lenders.

Conventional loans generally ask for a stronger credit profile than FHA loans, since there is no government backing to offset the lender’s risk. Down payments commonly range from around 3% for certain first-time buyer programs up to 20% or more. A larger down payment usually means a better rate and can help you skip mortgage insurance entirely.

Conventional loans tend to suit buyers with good to excellent credit and a larger down payment saved, since they can offer more flexibility once mortgage insurance drops off. They are also the more common choice for move-up buyers and repeat homeowners.

Down Payment: The Biggest Practical Difference

The single biggest quantifiable difference between these two loan types is the minimum down payment. FHA commonly asks for around 3.5% down, while conventional loans span a wider range, commonly from about 3% up to 20% or more depending on the program and the borrower’s profile.

A smaller down payment means a smaller upfront cost, but it also means a larger loan balance and more mortgage insurance paid over time. A larger down payment lowers your monthly payment and can remove mortgage insurance sooner, but it ties up more cash at closing.

Because this tradeoff plays out differently for every budget, it helps to run your own numbers. Our Down Payment Calculator lets you compare a 3.5% FHA-style down payment against a range of conventional down payment percentages, so you can see the real dollar difference for a home price you are considering.

Credit Score Expectations

FHA loans generally have more forgiving credit requirements. A score of 580 or higher commonly unlocks the lowest FHA down payment, and some lenders will approve scores in the mid-500s with a larger down payment. This flexibility is a major reason FHA loans are popular with newer or rebuilding credit profiles.

Conventional loans generally expect stronger credit, and requirements vary by lender and loan program. Borrowers with higher scores typically see better interest rates on conventional loans, since pricing is closely tied to credit tiers. A lower score can still qualify in some cases, but the terms are usually less favorable than what an equivalent FHA borrower might get.

If your credit score is still developing, FHA may open the door sooner. If your credit is strong, a conventional loan can often be the cheaper path once you account for mortgage insurance rules, which is the next big difference.

Mortgage Insurance: MIP vs PMI

Both loan types can require mortgage insurance when the down payment is small, but the insurance behaves very differently once you own the home.

FHA loans use MIP, or mortgage insurance premium. It includes an upfront premium at closing plus an ongoing annual premium built into your monthly payment. Depending on your down payment and loan term, FHA MIP commonly stays in place for the life of the loan or for a long stretch of years, rather than dropping off automatically at a set equity level.

Conventional loans use PMI, or private mortgage insurance, which generally applies only when the down payment is below 20%. The advantage is that PMI can usually be removed once you reach around 20% equity, either automatically under federal rules or by requesting removal from your servicer. If you already have a conventional loan and PMI is currently on your payment, our guide on how to remove PMI from your mortgage walks through the steps.

This is often the deciding factor for buyers comparing the two loan types long term. FHA MIP can add real cost over many years, while conventional PMI is generally a temporary expense that disappears once equity builds.

Loan Limits: How Much You Can Borrow

Both FHA and conventional loans have maximum loan amounts, known as loan limits, and these limits are set separately for each type.

FHA loan limits are set by county and are generally lower than conventional conforming limits in most areas. They are adjusted each year and can vary widely depending on local housing costs, with higher-cost counties getting higher FHA limits than lower-cost counties.

Conventional conforming loan limits are also set annually and adjusted for local housing costs, but the baseline conventional limit is generally higher than the baseline FHA limit. If you need to borrow above the conventional conforming limit, you would typically move into jumbo loan territory rather than a standard conventional loan.

If your target home price is near either limit, it is worth checking the current limit for your specific county before assuming either loan type will cover the full purchase price.

A Simple Side-by-Side Example

Here is an illustrative example using made-up numbers on a $350,000 home, just to show how the pieces compare. These are not quotes, and your real numbers will differ.

In this made-up example, the FHA path needs less cash upfront but carries mortgage insurance longer. The conventional path needs more cash upfront but can shed mortgage insurance sooner. Neither outcome is automatically better. It depends on how much cash you have now and how long you expect to keep the loan.

Which Loan Might Suit Which Buyer

These are general patterns, not personalized recommendations, since every situation is different.

FHA loans often suit buyers who are newer to credit, still building savings for a down payment, or working to recover from past credit issues. The lower entry barrier can make homeownership possible sooner.

Conventional loans often suit buyers with stronger credit and a larger down payment saved, especially if they plan to stay in the home long enough to benefit from PMI eventually dropping off. Repeat buyers with home equity to roll into a new purchase frequently lean conventional.

Some buyers may also qualify for other zero-down or low-down programs worth exploring, such as VA loans for eligible veterans and service members, or USDA loans in eligible rural and suburban areas, before settling on FHA or conventional.

FAQs About FHA vs Conventional Loans

Sources

This article is for general education only, not tax, legal, or financial advice. Rules and numbers vary by lender, loan program, and situation, so confirm your own details with a licensed loan officer or financial advisor. Reviewed for accuracy by Prof. Dr. Khalil Mudassar, PhD. Last updated September 17, 2026.