FHA Loan vs. Conventional Mortgage: Which Is Right for You?
When you’re shopping for a mortgage, you’ll likely hear a lot about FHA loans and conventional loans. You might assume that FHA loans are only for first-time buyers and that conventional loans are just for those with a strong financial history, but it’s not that simple.
The reality is, the gap between FHA and conventional loans has narrowed in recent years. FHA loans, backed by the Federal Housing Administration, have long been a go-to option for buyers with lower credit scores or smaller down payments. Meanwhile, conventional loans - those not insured by the government - have become more flexible and competitive.
So, how do you decide which one is right for you? Let’s break it down.
PROPERTY ELIGIBILITY
✅ Conventional Loans: More Flexibility
Can be used for a primary residence, second home, or investment property.
Less strict property condition requirements.
⚠️ FHA Loans: Stricter Rules
Must be for a primary residence only.
At least one owner must occupy the home within 60 days of closing.
The property must meet specific safety and structural standards - which means fixer-uppers might not qualify.
LOAN LIMITS
Your loan amount can determine which mortgage fits best.
FHA loans have county-specific limits based on local home prices.
Conventional loans, backed by Fannie Mae and Freddie Mac, also have loan limits, but in higher-cost areas, they can be more flexible.
If you’re buying in an expensive market, you may need a jumbo loan, which exceeds both FHA and conventional limits.
Want to check your county’s loan limits? You can find them on the HUD website.
DOWN PAYMENTS
FHA loans require as little as 3.5% down, making them ideal for buyers with limited savings.
Conventional loans can require as little as 3% down—and some lenders even offer as low as 1% with special programs.
The Bottom Line: FHA loans were once the best low-down-payment option, but today, conventional loans can be just as competitive - especially if you have a higher credit score.
Mortgage Insurance: What You Need to Know
Any loan with less than 20% down will likely require mortgage insurance - but the way it’s structured differs.
FHA Loans
Upfront mortgage insurance premium: 1.75% of the loan amount (rolled into the loan).
Monthly premium: 0.45% to 1.05% of the loan amount.
You’ll pay mortgage insurance for the life of the loan unless you put at least 10% down - then it drops off after 11 years.
Conventional Loans
Private Mortgage Insurance (PMI) varies based on credit score and down payment.
PMI can be removed once you reach 20% equity.
Key Takeaway: FHA loans always require mortgage insurance, but PMI on a conventional loan can eventually be removed - a huge cost-saving factor over time.
Credit Score Requirements
One of the biggest differences between FHA and conventional loans is credit score requirements.
FHA loans allow for lower credit scores:
Minimum 500 (with 10% down).
Minimum 580 (with 3.5% down).
Conventional loans typically require at least 620, though higher scores get better rates.
What This Means for You:
If your credit score is below 620, FHA may be your best (or only) option.
If your credit score is higher, you might save money with a conventional loan.
Debt-to-Income (DTI) Ratio
Your DTI ratio (how much you owe vs. how much you earn) is another factor.
FHA loans allow for a higher DTI (up to 50%).
Conventional loans typically require a DTI of 45% or lower.
If you have higher debt (like student loans, car payments, or credit cards), FHA loans may be easier to qualify for.
Interest Rates: FHA vs. Conventional
Generally, FHA loans offer slightly lower interest rates, but that doesn’t necessarily make them the cheapest option. The additional mortgage insurance costs can make FHA loans more expensive in the long run.
On the other hand, conventional loans may have higher rates, but lower mortgage insurance costs - especially for borrowers with strong credit.
Refinancing Options
FHA loans offer a streamline refinance option with:
No credit check
No income verification
Often no home appraisal required
Conventional loans don’t have this perk, but they do offer cash-out refinancing and other options.
Which Loan Should You Choose?
The best mortgage for you depends on your credit score, down payment, and long-term goals.
FACTORFHACONVENTIONALBest For?Buyers with lower credit scores orsmalldown paymentsBuyers with stronger credit and at least3%downProperty TypePrimary residence onlyPrimary, second home, orinvestmentpropertyDown Payment3.5% minimum3% minimum, sometimes lowerMortgage InsuranceRequired for the life of the loan(unless10% down)Required under 20% down, but can beremovedCredit ScoreAs low as 500 (with 10% down)620+DTI RatioUp to 50%Typically 45% maxInterest RatesSlightly lowerSlightly higher
Final Thoughts
If you have a lower credit score, higher debt, or a small down payment, an FHA loan may be your best option.
If you have a strong credit score and at least 3% down, a conventional loan might save you money in the long run.
If you’re a veteran or active military, VA loans are a great alternative with zero down payment.
If you’re buying in a rural area, consider a USDA loan for low or no down payment options.
Still not sure which loan is right for you? Let’s chat! I’m happy to connect you with a trusted lender who can walk you through your best options.
