FHA vs Conventional Loan: Key Differences

The Basics: Government-Backed vs Private

An FHA loan is insured by the Federal Housing Administration, a government agency. That insurance protects the lender if you default, which is why lenders can offer FHA loans to borrowers with smaller down payments and lower credit scores. A conventional loan is not government-insured - it follows the guidelines of Fannie Mae and Freddie Mac (or the lender's own rules) and the lender carries the risk.

Neither is objectively "better"; they are built for different borrowers. FHA opens the door wider at the start but charges you for that access every month. Conventional is harder to qualify for but cheaper to carry once you are in. The right choice depends on your down payment, your credit, and how long you plan to keep the loan.

Down Payment: 3.5% FHA vs 3% Conventional

FHA's headline feature is its 3.5% minimum down payment for borrowers with a credit score of 580 or higher. On a $350,000 home, that is $12,250 down. It is a simple, predictable rule that has made FHA the default first-time buyer program for decades.

Conventional loans can actually go lower - some first-time buyer programs allow 3% down, or $10,500 on that same $350,000 home. But 3%-down conventional loans come with stricter credit and income requirements, and private mortgage insurance costs more at high loan-to-value ratios. So while conventional can beat FHA on down payment size, FHA is usually easier to actually qualify for at low down payments.

Credit Scores: 580 vs 620 Minimums

FHA's official minimum credit score is 580 for the 3.5% down payment tier (borrowers between 500 and 579 can still qualify but need 10% down). In practice, many lenders add their own overlays and want to see 620 anyway - but FHA remains the most forgiving major loan program for imperfect credit.

Conventional loans generally require a minimum score of 620, and the best pricing goes to borrowers at 740 and above. Conventional pricing is also far more credit-sensitive: a borrower at 640 pays noticeably more than a borrower at 760, through loan-level price adjustments. With FHA, the rate you get depends much less on your exact score.

Mortgage Insurance: The Decisive Difference

This is where the two programs truly diverge. FHA charges two kinds of mortgage insurance premium (MIP): an upfront premium of 1.75% of the loan amount (usually rolled into the loan) plus an annual premium - typically 0.55% of the loan balance for most borrowers - paid monthly. The catch: on most FHA loans, that monthly MIP lasts for the life of the loan. You cannot cancel it, no matter how much equity you build.

Conventional loans with less than 20% down require private mortgage insurance (PMI) instead - but PMI can be cancelled once you reach 20% equity (80% loan-to-value), either by requesting cancellation or automatically at 78%. For a borrower who expects their home to appreciate or plans to pay down the loan steadily, cancellable PMI is worth thousands over the life of the loan. We explain exactly how PMI cancellation works in our dedicated guide.

• PMI explained: how to remove it

$350,000 Worked Example: Both Routes Side by Side

Say you buy a $350,000 home. With FHA at 3.5% down, you put down $12,250 and borrow $337,750 - plus the 1.75% upfront MIP of roughly $5,900, which is usually rolled in, bringing the loan to about $343,650. At an illustrative rate of 6.75%, principal and interest run roughly $2,230 a month, and the monthly MIP adds roughly $155 on top.

With conventional at 5% down, you put down $17,500 and borrow $332,500. At an illustrative 6.50%, principal and interest run roughly $2,100 a month, with PMI of roughly $130-170 a month depending on your credit score - but that PMI drops off once you hit 20% equity, while the FHA MIP never does.

The pattern is clear: FHA gets you in with less cash and weaker credit, but the permanent MIP makes it the more expensive loan over time. All figures here are illustrative - actual rates, MIP, and PMI vary by lender, credit profile, and market conditions.

The Classic Move: Refinancing Out of FHA

Because FHA's monthly MIP never cancels, a very common strategy is to refinance from FHA into a conventional loan once you have 20% equity - through a combination of paying down the balance and home price appreciation. At that point the conventional loan needs no PMI at all, and the monthly MIP disappears overnight.

The math has to work: refinancing costs money in closing costs, so you need to stay in the home long enough for the monthly savings to pay those back. But for borrowers who bought with FHA a few years ago and have seen their equity grow, this refinance is often the single highest-value financial move available to them.

One caution: refinancing restarts your loan term unless you choose a shorter one, so compare total interest over the remaining life of the loan, not just the monthly payment.

FHA Loan Limits Vary by County

FHA loan limits are set per county and change every year. In most counties the limit for a single-family home is well above typical starter-home prices, but in high-cost areas the ceiling is much higher - and in the most expensive markets, even the high-cost limit may not cover the home you want. Always check the current FHA limit for your specific county before assuming FHA is an option.

Conventional conforming limits also vary (standard vs high-cost areas) but are generally higher than FHA's floor limits. If you are buying above the FHA limit in your county, conventional - or jumbo - is your path by default.

Run Your Own Numbers

The FHA-vs-conventional decision lives in the monthly payment: down payment size, rate, and the very different mortgage insurance costs of each route. Small differences in any of them compound over 30 years.

Use our free US mortgage calculator to model both scenarios with your actual home price, down payment, and rate assumptions - including the insurance costs - before you choose.

• Calculate your US mortgage payment

Sources

The figures and policy details in this article come from the following primary sources, checked at the time of writing.

• HUD: FHA loan information
• Fannie Mae HomeReady mortgage (3% down conventional)