The choice between an FHA loan and a conventional loan comes down to one practical question: does your credit score and down payment get you into conventional territory, or do you need the government-backed flexibility of FHA?
Both products are widely available from the same lenders. Both can be 30-year fixed loans. The difference is who guarantees the loan, what credit standards apply, and how mortgage insurance works — specifically whether it goes away.
The difference in one sentence
An FHA loan is insured by the federal government through the Department of Housing and Urban Development. That insurance lets lenders accept borrowers with lower credit scores and smaller down payments than conventional underwriting allows. A conventional loan is not government-backed — it meets standards set by Fannie Mae or Freddie Mac and requires stronger credit, but its mortgage insurance rules are more favorable for borrowers who build equity.
Credit score requirements
HUD's FHA eligibility guidelines set the minimum at 580 FICO for the standard 3.5% down payment. Borrowers with scores between 500 and 579 can still apply but must bring at least 10% down. Below 500, FHA is not available.
Conventional loans backed by Fannie Mae or Freddie Mac require a minimum 620 FICO score for most products. The best advertised rates — prime tier — typically require 740+ with at least 20% down. Between 620 and 739, the rate increases in steps, but conventional remains available.
What this means: If your score is below 620, FHA is your primary conforming path. At 620–679, both are available but FHA may offer better pricing at lower scores. At 740+ with 20% down, conventional almost always produces lower total cost.
Down payment requirements
FHA minimum is 3.5% with a 580+ credit score. At 500–579, the minimum jumps to 10%.
Conventional 3% down is available through Fannie Mae HomeReady and Freddie Mac Home Possible for qualifying borrowers. Standard conventional requires 5% with private mortgage insurance; 20% down eliminates PMI entirely.
Both loan types allow the down payment to come from gifts, grants, or down payment assistance programs, though lenders document gift funds differently.
Mortgage insurance: the critical difference
This is where the two products diverge most consequentially.
FHA mortgage insurance premium (MIP):
The CFPB's owning-a-home guide covers FHA MIP as a standard feature of the program. Two components apply:
- Upfront MIP: 1.75% of the loan amount. This is typically financed into the loan balance at closing rather than paid out of pocket, but it does increase the total amount you owe from day one.
- Annual MIP: HUD reduced the annual premium to 0.55% for most new 30-year FHA loans, effective March 2023. On a $350,000 loan, that is $1,925 per year — roughly $160 per month added to your payment.
- Duration: For FHA loans with less than 10% down, the annual MIP stays for the life of the loan. For loans with 10% or more down, it cancels after 11 years.
The permanent nature of FHA MIP on low-down-payment loans is the single biggest long-term cost difference between FHA and conventional.
Conventional private mortgage insurance (PMI):
PMI is required when you put less than 20% down on a conventional loan. The annual rate typically runs 0.2%–1.5% depending on credit score and loan-to-value — at the higher end for lower scores and smaller down payments.
The defining advantage: the Homeowners Protection Act gives you the right to request PMI cancellation once your loan balance reaches 80% of the original purchase price, and lenders must cancel it automatically at 78% LTV. As your home appreciates and you pay down principal, PMI disappears. FHA MIP — on most loans — does not.
Illustrative comparison on a $350,000 purchase with 3.5% down:
FHA: 1.75% upfront MIP ($5,957 financed) + 0.55% annual MIP (~$1,893/year). MIP stays for the life of the loan.
Conventional (at comparable 3.5% down): no upfront PMI, but annual PMI might run 0.85%–1.0% ($2,975–$3,500/year at this LTV). PMI cancels once equity reaches 20% — with normal appreciation and principal payments, often within 7–10 years.
The conventional PMI can cost more per month initially in this example, but once it cancels, conventional becomes clearly cheaper. For borrowers who plan to hold the home long-term, conventional often wins on total cost once the PMI elimination is factored in.
FHA loan limits
FHA loan limits vary by county and are set annually by HUD. HUD publishes current FHA mortgage limits by county — check your area before assuming FHA covers your purchase price, particularly in high-cost metro markets.
Conventional loans follow the conforming loan limits set by the Federal Housing Finance Agency (FHFA). Loans above the conforming limit require a jumbo loan, which has its own underwriting standards separate from both FHA and standard conventional.
Property requirements
FHA requires that properties meet HUD's Minimum Property Requirements (MPRs) — the home must be structurally sound and free of health or safety hazards. An FHA appraisal will flag conditions that conventional appraisals typically don't, which creates complications in distressed, as-is, or fixer-upper sales.
Conventional appraisals focus on value, not habitability standards. This makes conventional more workable for older homes with deferred maintenance or properties sold as-is, where an FHA appraiser would require repairs before closing.
For renovation financing specifically, the FHA 203(k) program wraps renovation costs into the loan — a different product from the standard FHA purchase loan, and the right tool if you're buying a home that needs significant work.
When to choose FHA
Your credit score is below 620 and conventional is not available. You have limited savings and need the 3.5% minimum down payment. You have past credit events — bankruptcy, foreclosure — where government backing is the path to qualification. You plan to stay fewer than 5–7 years, where the upfront cost spread matters more than the long-term MIP burden. Your purchase price is within FHA loan limits for your county.
When to choose conventional
Your credit score is 620 or higher, especially 740+. You can put 20% down and avoid PMI entirely. You plan to stay long enough that PMI elimination saves you versus permanent FHA MIP. The property has condition issues that might fail an FHA appraisal. Your purchase price exceeds FHA limits for your county.
Refinancing from FHA to conventional later
Some buyers start with FHA — using it to get into a home before their credit and equity are strong enough for conventional — then refinance to conventional once the situation changes. The break-even on the refinance depends on closing costs (typically 2–5% of the loan amount) versus the monthly savings from dropping MIP. Run the math before assuming it's always worth it.
For a deeper look at how mortgage term affects your total cost, see 15-Year vs. 30-Year Mortgage: Which Term Fits Your Situation in 2026. For first-time buyer loan programs beyond FHA, our first-time homebuyer mortgage guide covers down payment assistance options, state programs, and conventional alternatives side by side.
This content is educational and does not constitute mortgage or financial advice. Loan availability, rates, and terms depend on your individual credit profile, lender, and property. Consult a licensed mortgage professional before selecting a loan program.