How FHA and conventional loans differ

An FHA loan is backed by the Federal Housing Administration, meaning the government insures the lender against loss if you stop paying. A conventional loan is not backed by any government agency — the lender takes the full risk themselves. This one difference ripples through almost everything else: who can borrow, how much down payment you need, what your credit score has to be, and how much the loan costs you each month.

The choice between them usually comes down to your down payment size and credit history. If you have less than 20 percent down or a credit score below 620, an FHA loan may be your only path to homeownership. If you have a larger down payment and stronger credit, a conventional loan often costs less over time, even though it has stricter upfront requirements.

Key Takeaways

  • FHA loans require a minimum down payment of 3.5 percent; conventional loans typically require 5 to 20 percent, and you pay private mortgage insurance if you put down less than 20 percent.
  • FHA loans accept credit scores as low as 500 to 580; conventional loans usually require 620 or higher, though some lenders go lower.
  • FHA loans charge an upfront mortgage insurance premium of 1.75 percent of the loan amount plus an annual premium; conventional loans with less than 20 percent down charge private mortgage insurance that varies by lender and credit profile.
  • FHA loans have stricter rules about the property itself — it must pass an FHA appraisal and meet minimum property standards — while conventional loans have fewer property restrictions.
  • Conventional loans let you remove mortgage insurance once you reach 20 percent equity; FHA mortgage insurance stays for the life of the loan if you put down less than 10 percent.

Down payment requirements and what they cost

FHA loans require a minimum down payment of 3.5 percent of the purchase price. On a $250,000 home, that is $8,750. Conventional loans typically start at 5 percent down, which would be $12,500 on the same home. Some conventional lenders will go as low as 3 percent, but this is less common and usually requires a higher credit score or larger cash reserves.

The real cost difference appears in mortgage insurance. With an FHA loan, you pay an upfront mortgage insurance premium (UFMIP) of 1.75 percent of the loan amount, rolled into your loan balance. You also pay an annual mortgage insurance premium (MIP) that ranges from roughly 0.55 percent to 0.80 percent of the loan balance per year, depending on your down payment size and loan term. On a $241,250 FHA loan (the $250,000 home minus your 3.5 percent down payment), the upfront premium alone is about $4,222.

Conventional loans with less than 20 percent down require private mortgage insurance (PMI), which varies by lender, your credit score, and the size of your down payment. PMI typically ranges from 0.5 percent to 1.5 percent of the loan amount annually. Unlike FHA mortgage insurance, PMI can be removed once you reach 20 percent equity in the home through a combination of down payment and principal paydown.

Credit score and debt requirements

FHA loans accept credit scores as low as 500, though most lenders prefer 580 or higher. If your score is between 500 and 579, you may need to put down 10 percent instead of 3.5 percent. Conventional loans typically require a minimum credit score of 620, though some lenders will go to 600 or even lower for borrowers with other strong factors like a large down payment or low debt.

Both loan types look at your debt-to-income ratio — the percentage of your monthly gross income that goes to debt payments. FHA loans typically allow up to 50 percent debt-to-income ratio, though some lenders cap it at 43 percent. Conventional loans usually cap debt-to-income at 43 to 50 percent as well, but the exact limit depends on your credit score, down payment, and the lender's own rules.

FHA loans are more forgiving of past credit problems. If you had a bankruptcy, foreclosure, or late payments, FHA has set waiting periods — typically two years after a bankruptcy discharge, three years after a foreclosure — before you can borrow. Conventional lenders often have longer waiting periods or may decline you entirely based on the same history.

Property appraisal and condition standards

FHA loans require the property to pass an FHA appraisal, which is more detailed than a standard appraisal. The appraiser checks not just the market value but also whether the home meets FHA minimum property standards. The property must be safe, sound, and sanitary. Specific issues that can fail an FHA appraisal include a roof with less than two years of life remaining, missing handrails on stairs, exposed wiring, mold, or a basement with standing water.

Conventional loans use a standard appraisal focused on market value. The appraiser notes the condition of the property, but there is no checklist of minimum standards the home must meet. You can buy a home that needs significant repairs with a conventional loan; with an FHA loan, the seller often has to fix those issues before closing, or you have to walk away.

This difference matters most when buying older homes, homes in poor condition, or properties in rural areas. If you are buying a fixer-upper, a conventional loan gives you more flexibility, though you will need cash reserves or a renovation loan to handle the repairs yourself.

Loan limits and maximum borrowing amounts

FHA loan limits vary by county and change each year. In 2024, the baseline limit for most of the country is $498,257 for a single-family home, but limits are higher in expensive areas. You can find your county's specific limit on the HUD website. Conventional loans have no government-set limit — Fannie Mae and Freddie Mac (the government-sponsored enterprises that buy most conventional mortgages) set their own limits, which are higher than FHA limits and also vary by county.

In practice, conventional loans are easier to get for higher-priced homes because the limits are higher and lenders have more flexibility in structuring the loan. If you are buying a home above your county's FHA limit, a conventional loan is your only option.

Monthly costs and long-term expense comparison

On a $250,000 home with 3.5 percent down, an FHA loan costs more per month in insurance alone. The upfront mortgage insurance premium of $4,222 gets added to your loan balance, increasing your principal. The annual mortgage insurance premium of roughly 0.80 percent (on a loan with less than 10 percent down) adds about $193 per month to your payment. Over 30 years, you pay this insurance for the entire life of the loan.

A conventional loan with 5 percent down on the same home ($237,500 borrowed) would have PMI of roughly 0.75 percent annually, or about $149 per month. However, once you reach 20 percent equity — either through additional principal payments or home appreciation — you can request PMI removal. If you stay in the home for 10 years and pay down principal, you may eliminate PMI entirely. With an FHA loan, if you put down less than 10 percent, you cannot remove the mortgage insurance no matter how much equity you build.

The total cost difference depends on how long you keep the loan. For a first-time buyer staying in the home for 7 to 10 years, an FHA loan often costs less upfront but more over time. For someone planning to stay 15+ years or refinance, the lifetime cost difference narrows.

Loan assumption and transferability

FHA loans are assumable, meaning if you sell the home, the buyer can take over your loan at your interest rate instead of getting their own new mortgage. This is valuable in a rising-rate environment — if you locked in a 4 percent rate and rates are now 7 percent, a buyer might pay a premium to assume your loan. Conventional loans are generally not assumable unless the lender specifically allows it, which is rare.

Assumability matters most if you think you might sell in a high-rate environment or if you want to leave the option open for a family member to take over the loan. For most borrowers, this is a minor factor compared to monthly cost and upfront requirements.

Frequently Asked Questions

Can I switch from an FHA loan to a conventional loan later?

Yes, through a process called refinancing. You would take out a new conventional loan to pay off the FHA loan. This makes sense if your credit score has improved, your income has risen, or you have built enough equity to put down 20 percent and avoid PMI. Refinancing costs closing costs again, so you need to calculate whether the savings in mortgage insurance justify the upfront expense.

Which loan is better if I have bad credit?

FHA loans are almost always the better choice if your credit score is below 620. Conventional lenders rarely work with scores that low, and when they do, they charge much higher interest rates. FHA's willingness to lend to borrowers with lower scores and past credit problems makes it the accessible option for many first-time buyers.

Do I need a larger down payment with a conventional loan?

Not necessarily. Both FHA and conventional loans now offer 3 to 3.5 percent down options. The difference is that conventional loans with low down payments charge PMI, which you can eventually remove, while FHA mortgage insurance is permanent if you put down less than 10 percent. Over time, conventional PMI may cost less.

What happens if the home doesn't pass the FHA appraisal?

The seller can repair the issues and resubmit for appraisal, you can renegotiate the price to account for repairs you will make yourself, or you can walk away. With a conventional loan, you have more freedom to buy the home as-is and handle repairs on your own timeline and budget.

Is the interest rate different between FHA and conventional loans?

Interest rates are set by the lender based on market conditions, your credit score, and the loan type. FHA loans sometimes have slightly lower interest rates because the government insurance reduces the lender's risk, but the difference is usually small — a quarter percent or less. The mortgage insurance premiums, not the interest rate, are where the real cost difference shows up.