FHA vs Conventional Loans: A Side-by-Side Comparison

FHA and conventional loans are the two most popular mortgage types in the United States, and choosing between them can significantly affect your costs both at closing and over the life of the loan. Neither is universally better — the right choice depends on your credit score, down payment, and financial goals. This guide breaks down the key differences so you can make an informed decision.

Credit Score Requirements

This is often the deciding factor for many borrowers:

• FHA: Minimum credit score of 580 with 3.5% down. Scores between 500 and 579 require 10% down. FHA loans are specifically designed to make homeownership accessible to borrowers with imperfect credit.
• Conventional: Minimum credit score of 620 for most lenders, though 660+ is preferred for competitive rates. Borrowers with scores above 740 receive the best rates and terms.

If your credit score is below 620, FHA is likely your best (or only) option. If your score is above 720, conventional loans typically offer better overall value.

Down Payment

• FHA: 3.5% minimum with a 580+ credit score. On a $300,000 home, that is $10,500.
• Conventional: As low as 3% for first-time buyers through specific programs (Fannie Mae HomeReady, Freddie Mac Home Possible). Standard minimum is 5%. On a $300,000 home, 3% is $9,000 and 5% is $15,000.

The down payment difference between FHA and conventional at the minimum level is relatively small. The real cost difference lies in mortgage insurance.

Mortgage Insurance: The Critical Difference

This is where the two loan types diverge most significantly:

FHA Mortgage Insurance Premium (MIP)

• Upfront MIP: 1.75% of the loan amount, paid at closing (usually financed into the loan). On a $290,000 loan, that is approximately $5,075.
• Annual MIP: 0.55% of the loan amount per year for most borrowers, paid monthly. On a $290,000 loan, that adds about $133 per month.
• Duration: If you put down less than 10%, MIP lasts for the entire life of the loan. If you put down 10% or more, MIP is removed after 11 years.

Conventional PMI

• No upfront premium: PMI is typically paid monthly only.
• Monthly cost: Varies based on credit score and LTV, typically 0.3% to 1.5% of the loan amount per year.
• Duration: Can be removed once you reach 80% LTV. Automatically cancelled at 78% LTV.

The ability to cancel PMI on conventional loans is a major advantage. With FHA loans, the only way to eliminate the annual MIP (for loans with less than 10% down) is to refinance into a conventional loan once you have sufficient equity and credit.

Interest Rates

FHA loans often advertise lower interest rates than conventional loans, but the comparison is misleading when mortgage insurance is factored in. After adding the upfront MIP and ongoing annual MIP, the total cost of an FHA loan frequently exceeds that of a conventional loan for borrowers with good credit. However, for borrowers with lower credit scores, FHA rates may genuinely be lower because FHA insures the lender against default.

Loan Limits

• FHA: Limits vary by county. In most areas, the 2025 FHA limit for a single-family home is $524,225. In high-cost areas, it can go up to $1,209,750.
• Conventional (conforming): The 2025 conforming loan limit is $806,500 in most areas, up to $1,209,750 in high-cost areas.

If you are buying a more expensive home, conventional loans offer higher borrowing limits.

Property Requirements

• FHA: The property must meet HUD's Minimum Property Standards, which are stricter than conventional guidelines. Issues like peeling paint, missing handrails, or structural problems must be resolved before closing.
• Conventional: Property standards are less stringent. The appraisal focuses primarily on value, not habitability issues.

FHA's stricter property requirements can be an issue when buying older homes or fixer-uppers. Sellers may prefer conventional-financed offers because they involve fewer potential appraisal hurdles.

Which Should You Choose?

• Choose FHA if: Your credit score is below 680, you have limited savings, or you need a more flexible debt-to-income ratio. FHA is also a strong choice for borrowers recovering from a bankruptcy or foreclosure.
• Choose conventional if: Your credit score is above 680, you can put down at least 5% (ideally 10-20%), and you want the ability to cancel mortgage insurance.

The best way to determine which loan fits your situation is to run the numbers with a mortgage professional. The team at Home Financial Group can compare both options side by side using your actual credit profile and help you choose the loan that saves you the most money over time.