FHA vs Conventional Loans: Which One Should You Choose?

FHA and conventional loans are the two most common paths to homeownership. They differ sharply on credit flexibility, mortgage insurance, and long-term cost — here is the full head-to-head.

The Basics in One Paragraph Each

FHA loans are insured by the Federal Housing Administration and issued by approved lenders. They allow a down payment of just 3.5% with a credit score of 580 or higher, and they are forgiving of past credit mistakes. In exchange, you pay mortgage insurance — an upfront premium of 1.75% of the loan amount plus an annual premium, typically 0.55%, usually for the life of the loan.

Conventional loans are not government-backed. They follow guidelines from Fannie Mae and Freddie Mac, and many lenders offer 3% down programs for qualified buyers. Private mortgage insurance (PMI) is required when you put less than 20% down, but it can be cancelled once your loan balance reaches 80% of the home's value — a major long-term advantage.

Down Payment and Credit Scores

• Down payment: FHA needs 3.5% at a 580 score (10% if your score is 500–579). Conventional programs go as low as 3% down, but typically require scores of 620 or higher.
• Credit history: FHA is more lenient with collections, late payments, and shorter time since major credit events. Conventional underwriting penalizes weak credit more heavily in both approval and pricing.
• Debt-to-income: FHA often allows higher DTI ratios than conventional loans. Check yours with the guidance in our debt-to-income ratio guide.

The Real Difference: Mortgage Insurance Over Time

Mortgage insurance is where the lifetime cost gap opens up. On an FHA loan, the 1.75% upfront premium is usually rolled into the loan, and the annual premium typically stays for the entire loan term if you put less than 10% down. On a $300,000 loan, that upfront premium alone is $5,250 added to your balance.

With a conventional loan, PMI is often cheaper for borrowers with good credit, and it disappears at 80% loan-to-value — automatically at 78%. A buyer with a 740 score putting 5% down will usually pay far less in total insurance with conventional financing. A buyer with a 620 score may find FHA cheaper initially, with a plan to refinance later. Model both scenarios using the FHA mortgage calculator and the mortgage payment calculator, and review the loan types overview in types of mortgages.

Property Standards and Loan Limits

FHA appraisals include a health-and-safety review: peeling paint, broken handrails, water damage, or a failing roof can block the loan until fixed. Conventional appraisals are generally less strict. Both loan types have limits — FHA limits vary by county, while the standard conforming limit is $806,500 in 2025 for most counties.

Who Should Pick Which?

• Choose FHA if your credit score is under roughly 680, your DTI is high, or you need flexible rules after a credit event.
• Choose conventional if your credit is solid, you want PMI that eventually ends, or you are buying a condo or property that may struggle with FHA appraisal standards.

Either way, compare full costs — rate, insurance, and fees — over the years you realistically expect to keep the loan, not just the monthly payment in year one.

A Worked Example: $320,000 Home, 5% Down

Consider a $320,000 purchase with 5% down, producing a $304,000 loan. With FHA, the 1.75% upfront premium adds about $5,320 to the balance, and the annual premium of 0.55% adds roughly $139 per month — and for most borrowers it never goes away. With a conventional loan at a strong credit score, PMI on the same loan might run noticeably less per month and drop off entirely once the balance reaches 80% of the value, which happens through a mix of payments and appreciation.

Now flip the credit profile. At a 620 score, conventional PMI pricing becomes expensive and approval less certain, while FHA insurance costs the same regardless of whether your score is 620 or 720. That is why the honest answer to the FHA-versus-conventional question is always: it depends on your score, your down payment, and how long you will keep the loan. Get quotes for both from the same lender on the same day, ask for the total insurance cost over five and ten years, and compare those figures side by side before deciding.