FHA loans, insured by the government, offer lower credit score and down payment options, making homeownership accessible, especially for first-time buyers. However, they require ongoing mortgage insurance. Conventional loans, not government-backed, demand stricter qualifications but can eliminate private mortgage insurance with 20% equity and may have higher loan limits. Understanding FHA loan requirements and costs versus conventional options is crucial for aligning with individual financial goals and eligibility.
In this guide, we’ll break it all down:
- Terms and qualifications
- Pros and cons
- Cost comparisons
- Actionable tips to match the right loan with your financial goals
What Are FHA and Conventional Loans?
FHA Loan Basics
An FHA loan is a government-insured mortgage backed by the Federal Housing Administration. These loans are designed to make homeownership more accessible, especially for buyers with low credit scores or minimal down payments.
Conventional Loan Basics
A conventional loan is a mortgage not insured by the federal government. These loans typically follow Fannie Mae or Freddie Mac guidelines and require stricter qualifications, but may offer better long-term financial benefits for well-qualified borrowers.
Quick Comparison: FHA vs. Conventional Loans
Feature |
FHA Loan |
Conventional Loan |
| Minimum Down Payment | 3.5% (580+ credit) | 3%–5% (620+ credit) |
| Minimum Credit Score | 500 (10% down) or 580 (3.5% down) | 620+ |
| Mortgage Insurance | MIP required for life (unless 10%+ down) | PMI required until 20% equity |
| Debt-to-Income (DTI) | Up to 50% (sometimes higher) | Usually capped at 43%–45% |
| Property Requirements | Must meet FHA appraisal guidelines | More lenient appraisals |
| Loan Limits | Lower (county-specific) | Higher in most cases |
| Refinancing Flexibility | FHA Streamline Refi available | Conventional refi options available |
| Suitable For | New buyers, lower credit/income | Stronger credit, larger down payment |
FHA Loans: Pros and Cons
Pros
- Low Credit Score Requirement: Only 580 for 3.5% down (as low as 500 with 10% down)
- Low Down Payment: As low as 3.5%
- Easier Approval: More forgiving of past credit issues (e.g., bankruptcies, late payments)
- Streamline Refinancing: Minimal paperwork and no appraisal required
Cons
- Mortgage Insurance Premiums (MIP):
- 1.75% upfront
- 0.15%–0.75% annually (usually for the life of the loan)
- Stricter Appraisal Standards: The home must meet specific health and safety standards
- Loan Limits: Varies by county and generally lower than conventional limits
- Perceived as Less Competitive: Sellers may prefer conventional buyers in bidding wars
Conventional Loans: Pros and Cons
Pros
- No Upfront Mortgage Insurance: Private Mortgage Insurance (PMI) can be removed at 20% equity
- Flexible Property Options: Easier to finance fixer-uppers or condos
- Higher Loan Limits: Ideal for buyers in high-cost areas
- Potentially Lower Long-Term Costs: Better rates and no lifelong insurance if you qualify
Cons
- Stricter Credit and Income Requirements: Generally requires 620+ credit score
- Higher Down Payment for Low Scores: May need more than 5% if credit score is under 700
- Harder to Qualify with High Debt: Lower DTI ratios allowed than FHA
Cost Comparison Example: FHA vs. Conventional
Let’s say you’re buying a $300,000 home with 5% down.
FHA Loan:
- Loan Amount: $288,750
- Upfront MIP: $5,063 (1.75%)
- Annual MIP: ~$1,300 (0.55%)
- Monthly Payment (est.): $2,140
(includes taxes, insurance, MIP)
Conventional Loan:
- Loan Amount: $285,000
- PMI: ~$120/month (until 20% equity)
- Monthly Payment (est.): $2,030
(includes taxes, insurance, PMI)
Over 5 years, the FHA loan may cost you $3,000–$5,000 more unless you refinance or put 10%+ down.
How to Choose: FHA vs. Conventional
Here’s a simple decision-making framework to help you determine which loan best suits your financial situation.
Choose an FHA Loan if:
- You have a credit score under 620
- You’re putting less than 10% down and plan to refinance later
- You have a higher DTI ratio
- You’re buying your first home and need easier approval
Choose a Conventional Loan if:
- You have strong credit (680+)
- You can put at least 5%–10% down
- You want to avoid long-term mortgage insurance
- You’re buying a second home or investment property
Real-Life Scenarios: What Fits Best?
Scenario 1: First-Time Buyer With 600 Credit Score
- Income: $60,000/year
- Savings: $10,000
- DTI: 46%
Best Fit: FHA Loan
Lower credit requirement + smaller down payment option
Scenario 2: Buyer With 700 Credit Score and $40K Savings
- Income: $90,000/year
- Looking for long-term savings
Best Fit: Conventional Loan
Better rates, avoid long-term PMI
Scenario 3: Family With Higher DTI and Recent Bankruptcy (3 years ago)
- DTI: 49%
- Decent income, minimal savings
Best Fit: FHA Loan
More lenient underwriting guidelines
Tips to Strengthen Your Mortgage Application
- Check Your Credit Reports
Dispute errors and pay down credit cards to boost your score. - Avoid Large Purchases
Don’t buy cars or open new credit lines before or during your application process. - Get Pre-Approved Early
Knowing your budget helps you shop smart and signal strength to sellers. - Compare Loan Estimates
Ask multiple lenders for FHA and conventional quotes. Rates and fees vary. - Work With a Knowledgeable Agent
An experienced real estate agent can help tailor your offer to match your loan type.
Final Thoughts
Choosing between an FHA loan and a conventional loan isn’t just about qualifying—it’s about what makes the most financial sense for your current and future goals.
Ask yourself:
- Are you optimizing for low upfront cost or long-term savings?
- Do you have strong credit or are you building back?
- Are you planning to refinance or stay put?