FHA vs Conventional Loans

The Quick Summary

FHA loans are backed by the federal government and designed to help buyers with lower credit scores or smaller down payments access homeownership. Conventional loans follow private lending guidelines (Fannie Mae/Freddie Mac) and generally require better credit, but offer lower long-term costs for qualifying borrowers — especially when it comes to mortgage insurance.

The "better" loan depends entirely on your specific situation — credit score, down payment, income, and how long you plan to stay in the home all factor in.

Side-by-Side Comparison

Credit Score Requirements

FHA Credit Requirements

FHA loans have the most flexible credit requirements of any common loan type:

• 500–579 credit score: Eligible with 10% down payment
• 580+ credit score: Eligible with 3.5% down payment
• Individual lenders may have "overlays" — stricter requirements on top of FHA minimums. Many lenders require 580+ even for the 10% down program.

FHA rates are also less sensitive to credit score. A borrower with a 620 score gets a much more competitive FHA rate than they would on a conventional loan.

Conventional Credit Requirements

• 620: Minimum for most conventional programs
• 660–679: Better rates; PMI becomes more affordable
• 700–719: Good rates; approaching competitive PMI territory
• 740+: Best available rates; cheapest PMI

Conventional loan pricing is heavily credit-score-sensitive. Every 20-point credit score band triggers a different rate and PMI cost. A borrower at 619 may save meaningfully by spending a few months improving their score to 640.

Down Payment Requirements

FHA Down Payment

FHA requires 3.5% down for borrowers with 580+ scores. The down payment can come from your own savings, gift funds (from family), or down payment assistance programs. FHA does not allow the seller to pay your down payment, but seller credits can offset closing costs.

Conventional Down Payment

Conventional loans go as low as 3% down through specific programs:

• Fannie Mae HomeReady: 3% down for income-qualifying buyers
• Freddie Mac Home Possible: 3% down for income-qualifying buyers
• Standard conventional: 5% down minimum for most buyers who do not qualify for the 3% programs

For most buyers, the practical minimum is 3.5% for FHA and 5% for conventional (unless you qualify for a 3% program). For both, putting 20% down eliminates mortgage insurance entirely.

Mortgage Insurance: MIP vs PMI

This is often the deciding factor. FHA mortgage insurance (MIP) is typically more expensive and harder to eliminate than conventional PMI.

FHA Mortgage Insurance Premium (MIP)

• Upfront MIP: 1.75% of the loan amount, paid at closing (can be rolled into the loan)
• Annual MIP: 0.55% of the loan balance per year (most common for 30-year loans with less than 10% down), paid monthly
• Duration: For loans with less than 10% down, MIP lasts the life of the loan. The only way to remove it is to refinance out of the FHA loan.
• 10%+ down: MIP drops off after 11 years

Conventional PMI

• No upfront fee in the standard borrower-paid structure
• Annual cost: 0.5%–1.5% of the loan, depending on LTV and credit score
• Cancelable: Removed automatically at 78% LTV; can request at 80% LTV

For a borrower with a 720 credit score and 5% down, the conventional loan with PMI costs dramatically less in mortgage insurance over time — even though the monthly PMI is similar. The key difference is cancellation.

Property Requirements

FHA Property Standards

FHA has strict Minimum Property Requirements (MPR). The appraiser must also determine that the property meets FHA standards for health and safety. Issues that can fail an FHA appraisal include:

• Peeling paint (in homes built before 1978 — lead paint risk)
• Missing handrails on stairs
• Roof with less than 2 years of life remaining
• Non-functional heating, electrical, or plumbing systems
• Standing water in the basement or crawl space

This makes FHA loans harder to use for fixer-upper homes or properties in poor condition. The seller must repair flagged issues before closing, or the buyer must use an FHA 203(k) rehabilitation loan.

Conventional Property Standards

Conventional appraisals focus on value, not condition requirements. Minor issues will not kill a conventional loan deal the way they might an FHA deal. This flexibility makes conventional loans preferred for older homes, estates, and properties that need work.

Which Loan Is Right for You?

Choose FHA if:

• Your credit score is below 680
• You have a high debt-to-income ratio (above 45%)
• You cannot qualify for conventional even at 5% down
• You plan to refinance to conventional once your credit and equity improve

Choose Conventional if:

• Your credit score is 680 or above
• You can put 10%+ down (greatly reduces the MIP vs PMI cost gap)
• You want to eliminate mortgage insurance faster
• You are buying an investment property or second home
• The home needs work and may not pass FHA appraisal

Frequently Asked Questions

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