FHA vs Conventional Loans: What You Need to Know

If you’re starting your homebuying journey, chances are you’ve come across two of the most popular mortgage options: conventional loans and FHA loans. While both can help you achieve your goal of homeownership, they work in slightly different ways—and one may be a better fit for your situation than the other. 

In this guide, we’ll break down the main differences between conventional and FHA loans, explore the pros and cons of each, and help you decide which one aligns best with your financial goals and needs. 

What is an FHA loan? 

An FHA loan is a type of mortgage that’s insured by the Federal Housing Administration. These loans were created to make homeownership more accessible, especially for first-time buyers and those who may not have perfect credit. 

Because the loan is backed by the government, lenders are more willing to offer flexible qualification requirements. You may be able to qualify for an FHA loan with a credit score as low as 580, and the required down payment can be as little as 3.5%. 

However, there’s a trade-off for those easier requirements. All FHA loans require mortgage insurance, which includes both an upfront fee and monthly payments. This insurance protects the lender if you stop making payments—but it adds to your overall loan cost. 

FHA loans also have specific guidelines for the condition and use of the property, which means the home must meet certain safety and livability standards. This means certain properties, like fixer-uppers, may not qualify. 

What is a conventional loan? 

A conventional loan is a mortgage that’s not backed by a government agency. Instead, it’s offered and managed by private lenders—like banks, credit unions, or mortgage companies—and typically conform to guidelines set by Fannie Mae and Freddie Mac, two government-sponsored enterprises. 

To qualify for a conventional loan, borrowers typically need a stronger credit profile and a down payment of at least 5% (or 3% for first-time homebuyers). However, putting down 20% or more can help you avoid paying private mortgage insurance (PMI), which can save you money over the life of the loan. 

Conventional loans also tend to offer more flexibility when it comes to property types and loan terms. If you have strong financials and a good credit history, a conventional loan can often result in a lower overall cost than an FHA loan—especially if you’re able to skip the mortgage insurance. 

Key Differences Between FHA vs. Conventional Loan 

When deciding between an FHA and a conventional loan, it helps to compare the main features side by side. Here’s a quick breakdown of how they differ: 

	FHA Loan	Conventional Loan
Credit Score Requirements	Minimum of 580, though lenders may set higher standards	Typically 620 or higher
Down Payment	As little as 3.5% down	Most conventional loans require at least 5% down (or 3% for first-time homebuyers)
Mortgage Insurance	Required (both upfront and monthly); lasts for the life of the loan unless you put 10% down	Required if putting less than 20% down; can be removed later
Loan Limits	Set by the FHA; lower than conventional loan limits	Higher limits; varies by county and loan type
Property Requirements	Property must meet FHA standards of safety, security, and soundness.	Flexible, if any, property requirements
Flexibility of Use	Primarily for primary residences	Can be used for primary, secondary, or investment properties

Pros and Cons of FHA Loans 

Like any mortgage option, FHA loans come with benefits and drawbacks. Here’s what to consider if you’re thinking about going the FHA route: 

Advantages of FHA Loans 

• Lower credit score requirements: You may qualify with a score as low as 580—or even lower in some cases. 
• Smaller down payment: You can put down as little as 3.5%, making it easier to get into a home without years of saving. 
• Easier to qualify: FHA loans are generally more forgiving when it comes to your credit history, income, and debt-to-income ratio. 

Disadvantages of FHA Loans 

• Mortgage insurance is required: You’ll pay both an upfront premium and monthly premiums, which can add up over time. 
• Mortgage insurance may last for the life of the loan: If you put less than 10% down, you can’t remove mortgage insurance unless you refinance later. 
• Property restrictions: The home must meet certain safety and livability standards, which can limit your options—especially if you’re considering a fixer-upper. 

Pros and Cons of Conventional Loans 

Conventional loans offer plenty of advantages—especially for buyers with strong credit and some savings—but they’re not the right fit for everyone. Let’s look at the pros and cons: 

Advantages of Conventional Loans 

• No mortgage insurance with 20% down: If you can put down at least 20%, you can skip private mortgage insurance (PMI) entirely. 
• PMI is not forever: Even if you put down less than 20%, you can request to remove PMI once you reach 20% equity. If you don’t request to remove it, PMI automatically drops off once the loan-to-value ratio reaches 78%. 
• Lower long-term costs: For qualified borrowers, conventional loans can have lower overall costs than FHA loans. 
• More flexible property types: You can use a conventional loan for a primary home, second home, or investment property.

Disadvantages of Conventional Loans 

• Stricter credit requirements: You’ll typically need a credit score of at least 620, and higher scores get better interest rates. 
• Larger down payment may be needed: While 3% down options exist, most lenders prefer 5% or more—especially for competitive rates. 
• Harder to qualify: Lenders often expect a stronger financial profile, including steady income and a lower debt-to-income ratio. 

Which loan is right for you? 

There’s no one-size-fits-all answer when it comes to choosing between an FHA loan and a conventional loan. The right option depends on your financial situation, long-term plans, and what matters most to you as a homebuyer. 

Here are a few questions to help you decide: 

• How’s your credit score? If your score is below 620, you may have a better chance of qualifying for an FHA loan. If it’s higher, you might get better terms with a conventional loan. 
• How much do you have saved for a down payment? FHA loans allow for smaller down payments, which is great if you haven’t saved much yet. But if you’ve got 5% or more, a conventional loan could be more cost-effective in the long run. 
• How long do you plan to stay in the home? If you’re only planning to stay for a few years, paying ongoing mortgage insurance might not be a big deal. But if this is your forever home, avoiding long-term insurance costs could save you thousands. 
• Are you buying a fixer-upper? FHA loans have strict property condition requirements. If you’re looking at a home that needs repairs, a conventional loan might offer more flexibility. 

Still not sure which way to go? That’s totally normal. Talking to a local lender can help you explore your options, compare costs, and choose the loan that fits your goals best. 

The Bottom Line 

When it comes to FHA vs. conventional loans, both options can open the door to homeownership—it just depends on your starting point. 

FHA loans are great for buyers who need more flexible credit or down payment requirements, while conventional loans often reward stronger financial profiles with lower long-term costs and fewer restrictions. Understanding the differences between the two helps you make an informed decision—and puts you one step closer to finding a mortgage that fits your life and your budget. 

Before you apply, consider speaking with a lender who can walk you through your options and help you compare real numbers. A little planning now can go a long way in making your homebuying journey smoother. 

This article was first published October 26, 2022.