FHA vs Conventional Loan: Which Should You Choose?

When you apply for a mortgage, one of the biggest decisions is whether to use an FHA loan or a conventional loan. The two work very differently on credit requirements, down payments, and especially mortgage insurance, and choosing the wrong one can cost you tens of thousands of dollars over the life of the loan. The right pick depends mostly on your credit score and how much you can put down.

This guide compares FHA and conventional loans in plain terms: what each is, how they stack up on credit and down payment, the mortgage-insurance difference that drives long-run cost, and a real dollar example. By the end you will know which loan fits your finances, and when it makes sense to start with one and refinance to the other later. If you have not yet decided between a fixed and adjustable rate, our guide on fixed-rate versus adjustable-rate mortgages covers that companion choice. For how the monthly payment itself breaks down over time on either loan type, our guide to loan amortization covers that separately.

1. What Is an FHA Loan?

An FHA loan is a mortgage backed by the Federal Housing Administration, a US government agency. The loan itself is issued by a regular lender like a bank or credit union, but the government insurance behind it reduces the lender's risk. That backing is what lets FHA loans offer easier qualification: lower credit scores and smaller down payments than most conventional loans allow.

FHA loans exist to expand homeownership, especially for first-time buyers and people whose credit or savings are still growing. You can qualify with a credit score as low as 580 with just 3.5% down, or as low as 500 if you can put 10% down. That accessibility is the whole point of the program, and it is why FHA loans are so popular with buyers who would struggle to meet conventional requirements. If you are buying without a Social Security number, our guide on ITIN mortgage loans covers a different path to a home loan.

Here is what defines an FHA loan at a glance:

• Government-backed. Insured by the Federal Housing Administration, which lowers the lender's risk and lets them accept weaker applications.
• Low credit bar. You can qualify with a credit score as low as 580 (with 3.5% down) or 500 (with 10% down).
• Small down payment. As little as 3.5% of the price, which helps buyers who have not saved a large sum.
• Primary residence only. FHA loans cannot be used for vacation homes or investment properties.
• Mortgage insurance required. You pay it regardless of down payment, and it can last the life of the loan.

The trade-off for that easy entry is mortgage insurance, which FHA loans require regardless of your down payment, and which can last the entire life of the loan. Understanding that cost, covered in detail below, is essential before choosing an FHA loan, because it changes the long-run math significantly. The US Department of Housing and Urban Development explains the program on its page on FHA and other home loans.

2. What Is a Conventional Loan?

A conventional loan is a mortgage that is not backed by any government agency. Instead, the lender takes on the full risk, which is why conventional loans have stricter requirements than FHA loans. Most conventional loans are "conforming" loans, meaning they follow the standards set by Fannie Mae and Freddie Mac so they can be sold on the secondary market.

Because the lender carries more risk, you generally need a credit score of at least 620 to qualify, along with a stronger overall financial profile. In return, conventional loans reward good borrowers: with strong credit, you often get lower interest rates and cheaper mortgage insurance than an FHA loan would offer. Down payments can be as low as 3% for a fixed-rate conventional loan, though 5% or more is common, and putting down 20% removes mortgage insurance entirely.

The defining features of a conventional loan are:

• No government backing. The lender carries the full risk, so requirements are stricter than FHA.
• Higher credit bar. You generally need a score of at least 620, and better scores earn better rates.
• Flexible down payment. As low as 3% for a fixed-rate loan, and 20% down removes mortgage insurance entirely.
• Cancelable insurance. If you do pay PMI, it drops off once you reach 20% equity, unlike FHA.
• Any property type. Can finance a primary home, a vacation home, or an investment property.

Conventional loans are also more flexible about what you can buy. While FHA loans are limited to primary residences, a conventional loan can finance a primary home, a vacation home, or an investment property. For buyers with solid credit and some savings, this flexibility and the lower long-run cost make conventional loans the stronger option. The CFPB describes these on its page explaining conventional loans, which is exactly the comparison the rest of this guide lays out. The CFPB is the Consumer Financial Protection Bureau, the federal agency that writes and enforces the rules banks and lenders have to follow.

3. FHA vs Conventional: Side by Side

The clearest way to see the difference is to line up the key features of each loan type.

The pattern is consistent. FHA loans are easier to get into, with lower credit and down payment bars, which makes them ideal for buyers who are still building their finances. Conventional loans ask more of you upfront but cost less over time and offer more flexibility. The right choice depends almost entirely on your credit score and how much you can put down, which the next sections break down.

4. Credit Score and Down Payment

Two numbers drive the FHA-versus-conventional decision more than anything else: your credit score and how much cash you have for a down payment. Here is how each loan treats them.

The simple rule that comes out of this: if your credit score is below 620, an FHA loan is often your only realistic option, and a good one. If your score is comfortably above 680, a conventional loan will usually cost you less, both in interest and in mortgage insurance. The 620 to 680 range is the gray zone where you should get quotes for both and compare the total cost, because the answer depends on your exact score, down payment, and the rates you are offered.

One more factor sits alongside credit and down payment: your debt to income ratio, or DTI, which compares your monthly debt payments to your income. FHA loans are more forgiving here, sometimes allowing a DTI up to 50%, while conventional loans typically prefer 43% to 45%. If a car loan or student loans push your DTI high, that flexibility can make an FHA loan the only one you qualify for, even if your credit score would otherwise clear the conventional bar.

5. Mortgage Insurance: The Big Difference

If there is one factor that decides the long-run cost of your loan, it is mortgage insurance. This is where FHA and conventional loans differ most, and where many buyers make expensive assumptions.

Read the last row carefully, because it is the heart of the whole comparison. FHA mortgage insurance, called MIP, generally lasts the entire life of the loan if you put less than 10% down, and it comes with an upfront charge too. Conventional mortgage insurance, called PMI, can be canceled once you reach 20% equity in the home, and it disappears automatically at 22% equity. That means an FHA borrower can pay mortgage insurance for 30 years, while a conventional borrower with good credit might pay it for only a few years, then nothing. Over the life of a loan, that difference can add up to tens of thousands of dollars. HUD cut the annual MIP rate by 0.30 percentage points in 2023, and that lower rate remains in effect, which is why current annual costs run meaningfully below what older articles on this topic may still describe.

There is a way to shorten FHA insurance: if you put 10% or more down on an FHA loan, MIP drops off after 11 years instead of lasting the full term. But reaching 10% down on an FHA loan often means you were close to qualifying for a conventional loan anyway, where 20% down removes insurance entirely. This is why buyers with more cash usually lean conventional, and why FHA shines most for those putting down the minimum 3.5%.

6. A Real Example: Long-Run Cost

To see how these differences play out in dollars, consider Sarah, who is buying a $300,000 home and comparing an FHA loan with 3.5% down against a conventional loan with 5% down.

Sarah's choice shows the classic trade-off. The FHA loan is cheaper to get into: she needs $4,500 less for the down payment. But she pays a $5,066 upfront insurance charge, and her monthly MIP of about $133 never goes away. The conventional loan costs more upfront and has a slightly higher monthly PMI of about $166, but that PMI cancels once she reaches 20% equity, likely in eight to nine years, after which she pays nothing. If Sarah has decent credit and plans to stay in the home long term, the conventional loan saves her money over time. If her credit is weaker or her cash is tight today, the FHA loan gets her into the home when a conventional loan might not.

7. What Lenders Actually Require, Not Just What FHA Allows

Every guide, including this one so far, gives you the FHA's rule: a 500 credit score with 10% down, or 580 with 3.5% down. What almost no guide tells you is that the FHA does not approve your loan. A lender does, and lenders are free to add their own stricter minimums on top of the FHA's. Those extra rules are called lender overlays, and they are the single most common reason a borrower who qualifies on paper still gets declined.

We checked the published FHA minimum credit score at nine of the largest FHA lenders in the country. The spread is far wider than most buyers expect.

Read that spread again. Same FHA loan, same government insurance, and the minimum score swings by 120 points depending on whose door you walk through. A buyer with a 550 score is fully eligible under FHA rules: they would be approved at Freedom, loanDepot, or CrossCountry, and declined at Chase, Rocket, and UWM. This is why "I was denied for an FHA loan" almost never means the FHA denied you. It means one lender's overlay did, and a different lender may say yes to the exact same file.

What this means in practice:

• A denial is not the end. If a big-name lender turns you down at 550, an FHA specialist may approve you with no change to your finances at all.
• Shop by your score, not by the brand. The most advertised lender is often the strictest. Match the lender to where your score actually sits.
• Every point matters near a threshold. Moving from 575 to 580 does not just help your odds; it changes your down payment from 10% to 3.5%.
• Ask about the overlay before you apply. A lender will tell you its minimum. Asking first avoids a hard credit pull that goes nowhere.

Use the tool below to see what each of these lenders actually requires, and enter your score to see who would consider you.

8. When an FHA Loan Makes Sense

FHA loans are a genuinely valuable tool for the right buyer. They tend to make sense in specific situations.

• Your credit score is below 620. If conventional loans are out of reach, an FHA loan is often the most accessible path to owning a home, and there is no shame in using it.
• You have limited savings. The 3.5% down payment requirement makes homeownership possible when you have not saved a large sum, which is common for first-time buyers.
• You carry more debt. FHA loans allow higher debt-to-income ratios, sometimes up to 50%, which helps if you have student loans or a car payment competing for your income.
• You are buying your first home. The combination of low down payment, flexible credit, and lenient debt rules is designed with first-time buyers in mind.

The through line is accessibility. If your finances are still growing and a conventional loan feels just out of reach, an FHA loan can open the door to homeownership now, with the option to refinance into a conventional loan later once your credit and equity improve. This two-step path, FHA to get in, conventional to save later, is one of the most common and sensible strategies in home buying. It lets you stop renting now rather than waiting years to save a bigger down payment or build perfect credit, while still escaping FHA's lifelong insurance down the road.

9. When a Conventional Loan Makes Sense

For buyers who can meet the higher bar, a conventional loan usually wins on cost and flexibility. It fits certain profiles well.

• Your credit score is 680 or higher. Strong credit unlocks lower interest rates and cheaper mortgage insurance, making the conventional loan clearly less expensive over time.
• You can put down 20% or more. Reaching 20% down avoids private mortgage insurance entirely, saving thousands and lowering your monthly payment from day one.
• You want to cancel mortgage insurance later. Even with less than 20% down, conventional PMI cancels at 20% equity, unlike FHA's often-permanent MIP.
• You are buying a second home or investment property. FHA loans are limited to primary residences, so any non-primary purchase requires a conventional loan.

The common thread is financial strength. If you have solid credit and some savings, a conventional loan rewards you with lower long-run costs and more options. The extra you meet upfront in requirements comes back to you in money saved over the years you own the home.

Frequently Asked Questions

Final Thoughts

The FHA-versus-conventional choice is really a question about your credit and your cash. If your credit score is below 620 or your savings are thin, an FHA loan is often the most accessible path into a home, and a genuinely useful one. Veterans and service members should check our VA home loan guide first, since it often beats both options with zero down and no PMI. Buying in a smaller suburb or rural area? Our USDA home loan guide covers another zero-down option worth checking before defaulting to FHA. Doctors, dentists, and a handful of other high-earning professionals have their own separate zero-down path too, covered in our physician loan guide. If your credit is strong or you can put down a large amount, a conventional loan almost always costs less over time, largely because its mortgage insurance can be canceled while FHA's often cannot. Many smart buyers start with an FHA loan to get in the door, then refinance to a conventional loan once their credit and equity have grown. Get quotes for both, compare the total long-run cost, and choose based on your real numbers.

This article is for general information only and is not financial, credit, or legal advice. Rates, fees, and terms vary by lender, credit profile, and state, so compare offers and consider speaking with a qualified, independent financial professional or a nonprofit credit counselor before deciding. The examples use illustrative figures to show how FHA and conventional loans compare, and are not a specific loan quote. Mortgage insurance rates, loan limits, and requirements change over time and vary by lender, so confirm current terms before deciding.Disclaimer.