FHA vs. Conventional Loan: A Complete Comparison

For most homebuyers with less than 20% to put down, the choice comes down to an FHA loan or a conventional loan. Each has distinct advantages — and significant trade-offs. Understanding the real differences in cost, eligibility, and long-term impact is essential before you choose.

What Makes Each Loan Type Different

A conventional loan is not insured or guaranteed by any government agency. It is issued by private lenders and typically sold to Fannie Mae or Freddie Mac on the secondary market. Because there is no government backing, lenders apply stricter eligibility standards — but the mortgage insurance rules are considerably more borrower-friendly.

An FHA loan is insured by the Federal Housing Administration, a division of the U.S. Department of Housing and Urban Development. The FHA does not lend money directly — it insures the lender against default. This insurance allows lenders to accept borrowers with lower credit scores and smaller down payments, making FHA loans accessible to a wider range of buyers.

Credit Score Requirements

FHA's more lenient credit standards make it the practical choice for buyers who have had credit difficulties — late payments, collections, bankruptcy, or limited credit history. However, borrowers with scores in the 620–660 range often find that FHA rates and fees make it more expensive than a conventional loan despite the lower minimum score requirement.

For borrowers with scores above 700, conventional loans frequently offer a better deal overall once mortgage insurance costs are factored in.

Down Payment Requirements

FHA: 3.5% minimum with a credit score of 580 or above. 10% minimum with a score of 500–579.

Conventional: As low as 3% through programs like Fannie Mae HomeReady or Freddie Mac Home Possible for income-qualified buyers. Standard conventional loans typically start at 5% down. A 20% down payment eliminates the need for mortgage insurance entirely.

On the surface, FHA's 3.5% minimum looks competitive with conventional's 3% programs. But the mortgage insurance structure (discussed below) often makes the low-down-payment FHA loan more expensive over time — sometimes significantly so.

Mortgage Insurance: The Critical Difference

This is where FHA and conventional loans diverge most significantly, and where many borrowers make their decision.

Conventional PMI

Conventional loans require Private Mortgage Insurance (PMI) when the down payment is below 20%. PMI rates typically range from 0.3% to 1.5% of the original loan amount per year, depending on credit score and LTV. Critically, PMI on a conventional loan is cancellable: once your loan balance reaches 80% of the original purchase price, you can request removal. It is automatically cancelled at 78% LTV.

FHA Mortgage Insurance Premium (MIP)

FHA loans require two types of mortgage insurance: an upfront MIP (UFMIP) and an annual MIP. The UFMIP is 1.75% of the loan amount, paid at closing or rolled into the loan. For a $300,000 FHA loan, that is $5,250 added to your loan balance from day one.

The annual MIP is currently 0.55% for most 30-year FHA loans (with <5% down and loan amounts under $726,200). For a $300,000 loan, that is $1,650 per year — or $137.50 per month — added to your payment.

The most significant downside: for FHA loans originated after June 3, 2013 with a down payment below 10%, the annual MIP is required for the entire life of the loan. It never cancels automatically. The only way to eliminate FHA MIP is to pay down the loan to 10% or more at origination (enabling 11-year MIP term) or refinance into a conventional loan.

The Long-Term Cost Implication

Consider two borrowers, each taking a $300,000 loan with a 5% down payment:

• FHA: 0.55% annual MIP for the life of the loan + $5,250 UFMIP upfront. MIP never cancels. Over 30 years, total MIP cost: ~$54,750 (plus the UFMIP).
• Conventional: PMI at ~0.7% annually until 80% LTV is reached (roughly year 9 with standard payments). Total PMI cost: ~$16,800.

The lifetime mortgage insurance cost difference can exceed $40,000. This is the primary reason financial advisors often recommend refinancing out of an FHA loan into a conventional loan once sufficient equity is established.

Use our PMI vs. MIP calculator and FHA vs. Conventional calculator to run these numbers with your specific loan details.

Interest Rates

FHA loan interest rates are typically lower than conventional rates — often by 0.1% to 0.5% — because the government guarantee reduces lender risk. However, once you factor in the higher mortgage insurance premiums on FHA loans, the effective cost is usually higher than a comparable conventional loan for borrowers with good credit.

For borrowers with credit scores below 640, FHA may still be the cheaper overall option because conventional PMI rates increase sharply for lower credit scores, potentially exceeding FHA MIP rates. Each borrower's situation is different, which is why running the actual numbers is essential.

Loan Limits

Both loan types have maximum loan limits, though they differ by geography.

Conventional conforming limits are set by the Federal Housing Finance Agency (FHFA) and are adjusted annually. In 2026, the baseline conforming loan limit is $806,500 for a single-family home in most U.S. counties, with higher limits in high-cost areas (up to $1,209,750).

FHA loan limits are set by county and are generally lower than conventional conforming limits. In 2026, FHA limits range from approximately $524,225 in lower-cost areas to $1,209,750 in the highest-cost markets. In some markets, FHA limits may be too low to finance the home you want, making a conventional loan the only viable path.

Which Loan Is Right for You?

FHA may be the better choice if:

• Your credit score is below 620 and you cannot qualify for a conventional loan
• Your credit score is 620–660 and the conventional PMI rate is comparable to or exceeds FHA MIP
• You have had a recent bankruptcy, foreclosure, or other significant credit event and need more flexible underwriting
• Your DTI ratio is above 45% and conventional underwriting is too restrictive
• You plan to refinance into a conventional loan within 5 to 7 years once your equity increases

Conventional may be the better choice if:

• Your credit score is 680 or above and you can access competitive PMI rates
• You plan to stay in the home long-term — the cancellable PMI is a major long-term advantage
• Your loan amount exceeds local FHA limits
• You are purchasing a second home or investment property (FHA is for primary residences only)
• You want to avoid the 1.75% UFMIP that FHA adds to your loan balance at closing