FHA vs. conventional loans: What’s the difference?
Key takeaways
- FHA loans and conventional loans are both issued by private lenders, but FHA loans are insured by the federal government, and conventional loans are not.
- Due to their federal backing, FHA loans have more lenient criteria, making them better suited for borrowers with lower credit scores or who don’t have much money for a down payment.
- Conventional loans require a higher credit score and stronger financials, but also come with lower costs, less stringent home appraisals and cancellable mortgage insurance.
If you’re getting ready to buy a house, you have a lot of decisions to make. The same way that you can explore types of properties, you can (and should) explore different types of mortgages.
The two most popular kinds of mortgages are conventional loans and FHA loans. They have substantial differences in loan limits, mortgage insurance terms and conditions and debt-to-income maximum ratios.
More on all that below — and how to choose between the two loan types.
Comparing FHA vs. conventional loans
Both FHA loans and conventional loans are mortgages originated by and issued through private lenders that allow you to finance the purchase of a home.
Conventional loans are what most people think of when they envision a mortgage. They are available through the majority of lenders in the U.S. — including banks, credit unions, savings and loan institutions and online mortgage companies — and can come in a range of terms, commonly 15 or 30 years, with a fixed or adjustable interest rate. They are not backed or guaranteed in any way by the government: The lender bears all the risk of the debt.
"The biggest difference would be the down payment."— Phil Crescenzo Jr., Vice President, Nation One Mortgage Corporation
In contrast, FHA loans are insured by the Federal Housing Administration (FHA) and are geared toward homebuyers who might have difficulty obtaining a conventional loan. When comparing conventional loan vs. FHA options, FHA-backed loans have more flexible requirements — primarily, a lower minimum credit score and a smaller down payment.
Understanding FHA loans
The FHA is a division of the U.S. Department of Housing and Urban Development. For it to insure a mortgage basically means the government will compensate the lender in case the borrower defaults on payments. In return, the lender follows the FHA’s more lenient underwriting criteria, approving borrowers with lower credit scores (as low as in the 500s) than it might normally require, and requiring smaller down payments (usually between 3.5 and 10 percent of a home’s purchase price.)
Other than that, there’s not a huge difference between FHA and convenient loan options. FHA loans come with either a fixed or adjustable interest rate and a loan term for a set number of years: 15 years or 30 years. They do require you to pay mortgage insurance premiums (MIPs) regardless of your down payment amount.
Understanding conventional loans
Conventional loans don’t have government backing. This means the underwriting criteria for approval are stricter, and you must have a higher credit score (usually, at least 620) to qualify. Also, if you put less than 20 percent down, the lender is likely to charge you private mortgage insurance (PMI) until you reach 20 percent equity in your home.
Depending on the characteristics of the loan, a conventional mortgage is either conforming or nonconforming. Often, conventional lenders sell these types of mortgages to Fannie Mae or Freddie Mac, the secondary mortgage market-makers, after they’re funded. In order to do this, the loan has to conform to, or meet, Fannie and Freddie standards around loan size, borrower financials and other factors. If it doesn’t, the mortgage is considered nonconforming.
The differences between FHA and conventional loans
| FHA loans | Conventional conforming loans | |
|---|---|---|
|
Credit score minimum |
580 (with 3.5% down) or 500 (with 10% down) |
620 |
|
Debt-to-income (DTI) maximum |
Usually 43%, but can go to 50% or more with compensating factors like a big savings account |
45% for Freddie Mac, and usually 45% for Fannie Mae but can go up to 50% in some cases |
|
Down payment minimum |
3.5% (with a 580 credit score) or 10% (with a 500 credit score) |
3% for fixed-rate loans or 5% for adjustable-rate loans |
|
Loan limits |
$524,225 in most areas |
$806,500 in most areas |
|
Mortgage insurance |
Mortgage insurance premiums (MIP) required on loans; removable under certain circumstances |
Private mortgage insurance (PMI) required on loans with less than 20% down; removable |
|
Appraisals |
Required by the FHA according to specific HUD guidelines and performed by an FHA-approved professional |
Required by the lender to evaluate the property’s value against the sales price and performed by a state-licensed professional |
|
Interest rates |
Credit score: FHA loan vs. conventional loan
One big difference between FHA and conventional loan options is the credit score requirement. FHA loan borrowers can qualify with a credit score as low as 500 or 580 depending on their down payment amount: as low as 500 with 10 percent down, or as low as 580 with 3.5 percent down. Conforming conventional loans require a credit score of at least 620, but many lenders will want to see a higher score. If you have excellent or good credit, a conventional loan is often the better choice.
DTI ratio: FHA loan vs. conventional loan
Another FHA vs. conventional loan differentiator: the debt-to-income (DTI) ratio maximum. This ratio is the measure of all your debt (the mortgage included) relative to your monthly income. For a conforming conventional loan, the maximum DTI ratio is 45 percent in most cases. For an FHA loan, the DTI ratio maximum is usually 43 percent but it can go up to 50 percent.
Down payment: FHA loan vs. conventional loan
Depending on the lender and program, some conventional loans require as little as 3 percent for a down payment.
Similarly, small down payments are also the norm with FHA loans. If your credit score is at least 580, you can put down just 3.5 percent for an FHA loan. If your score is below 580 (but not lower than 500), you’ll be required to put down 10 percent.
Loan limits: FHA loan vs. conventional loan
Depending on your location, choosing between an FHA vs. conventional loan might come down to the price of the house you want to buy.
Both types of loans have limits on the amount you can borrow. The conventional conforming loan limit, set by the Federal Housing Finance Agency each year, starts at $806,500 in 2025 and goes up to $1,209,750 in more costly housing markets. A conventional loan can exceed these limits, but at that point, it’d be considered a nonconforming jumbo loan.
The FHA loan limit is also adjusted each year, and there are different limits based on location and property type. In 2025, the FHA loan limit for a single-family home is $524,225 in most markets and goes up to $1,209,750 in higher-cost areas.
Mortgage insurance: FHA loan vs. conventional loan
If you don’t have 20 percent of the home’s purchase price for a down payment, you’ll be required to pay for mortgage insurance whether you’re getting a conventional or FHA loan. Both premiums are typically paid via your monthly mortgage payment, although you’ll pay an upfront premium with an FHA loan, too.
Because mortgage insurance makes a difference in how much you’re paying each month, it’s important to understand what it means with a conventional loan vs. an FHA loan.
FHA mortgage insurance premiums (MIPs) include an upfront premium equal to 1.75 percent of the amount you’re borrowing. Then, you’ll pay an annual premium, which is determined by the size of your down payment, how much you borrowed and the length of the loan (15 years versus 30 years). Depending on those factors, you’ll either need to pay MIPs for eleven years or the life of your loan. FHA mortgage insurance isn’t cancellable.
Aside from differences in premium structure, conventional loan borrowers don’t have to pay mortgage insurance forever — it can be canceled once the borrower achieves 20 percent equity in the home. You can get to this threshold by following your repayment schedule to pay down the loan balance, making extra payments or getting a new appraisal if your home’s value has risen substantially.
Appraisal: FHA loan vs. conventional loan
When financing your home through a conventional mortgage, your lender requires a home appraisal. They mandate this estimation of the home’s value to ensure it’s worth the amount of money they’re extending to you.
Meanwhile, FHA lenders require a more thorough process relating to appraisals, including assessing value and the condition of the property to ensure it’s HUD-compliant. This can hurt your chances of buying a home. Listing agents might suggest their sellers look elsewhere given the time it takes to do an FHA appraisal.
Interest rates: FHA loan vs. conventional loan
With both types of loans, the lender sets the interest rate, determined primarily by your credit score. That said, there can be some differences in FHA vs. conventional rates. Make sure you do the math for yourself.
FHA loans sometimes have more favorable interest rates than conventional loans — but the difference is often offset by the greater number of fees, including the MIP charges, that they have. In fact, when comparing FHA vs. conventional rates, the FHA loan’s annual percentage rate (APR) — which includes both the cost of the interest rate and all the fees — might actually be higher than that of a comparable conventional loan.
Should you get an FHA loan or conventional loan?
When comparing FHA vs. conventional loan options, you need to decide which is a better fit. To a large extent, that depends on you and your financial profile.
Generally, a conventional loan is best for those with strong credit and a bigger home-buying budget.
If your credit score is below 620, a loan backed by the FHA might be your only option. It might also be a better deal if you can’t manage a 20 percent down payment, which — given the current $419,200 median price tag on homes — amounts to $83,840.
“The biggest difference between FHA and conventional would be the down payment. FHA rates typically are lower and more flexible for less down,” says Phil Crescenzo Jr., vice president, southeast division, for Nation One Mortgage Corporation.
For buyers who have the ability to bring a 20 percent down payment to the table, there would be far less benefit in seeking an FHA mortgage, unless they’re not able to qualify for a conventional mortgage because of either credit score issues or a previous bankruptcy, says Crescenzo. “In those cases, an FHA loan would be an option, but only if it was due to approval [problems],” he advises.
Of course, the lower down payment comes at a cost. “Most FHA loans carry mortgage insurance for the duration, which is a drawback to some,” says Crescenzo. However, the premiums may be lower than those you’d incur on a conventional mortgage with less than 20 percent down, “as this cost is capped with an FHA loan,” says Crescenzo.
When to choose an FHA loan
An FHA loan is a good choice if you:
- Want to become a homeowner now but don’t have the strongest financials or credit history
- Have a credit score below 620
- Can afford a house priced at $524,225 or less in most markets
When to choose a conventional loan
Go for a conventional loan if you:
- Have a credit score above 620
- Have monthly debts well under half of your income
- Want the ability to cancel your mortgage insurance eventually
- Want a house that exceeds the FHA loan limits in your area
FAQ
