FHA Loans vs. Conventional Loans
Understand the key differences, eligibility rules, and trade-offs between FHA and conventional mortgages.
Choosing between an FHA loan and a conventional loan is one of the most common decisions homebuyers face. Both can help you buy a home, but they’re designed for different borrower profiles and come with different costs, rules, and long-term implications.
The Big Picture: FHA vs. Conventional
The core difference between FHA and conventional loans comes down to who insures the loan and how risk is handled.
- FHA loans are backed by the Federal Housing Administration, which allows lenders to approve borrowers with lower credit scores and smaller down payments.
- Conventional loans are not government-insured and follow guidelines set by major housing agencies, typically requiring stronger credit profiles.
Neither loan is “better” in every situation. The right option depends on your credit, down payment, long-term plans, and how much flexibility you need today versus cost over time.
FHA Loans Explained
FHA loans were created to make homeownership more accessible, especially for first-time buyers and borrowers with limited savings or imperfect credit. Because the loan is government-insured, lenders can accept more risk.
Typical FHA loan features
- Lower minimum credit score requirements
- Down payments as low as 3.5%
- More flexible credit history guidelines
- Available to first-time and repeat buyers
Mortgage insurance on FHA loans
FHA loans require mortgage insurance in two forms: an upfront premium paid at closing (or rolled into the loan) and an annual premium paid monthly. In many cases, FHA mortgage insurance lasts for the life of the loan unless you refinance later.
You have limited savings, a lower credit score, or need more flexible approval guidelines to qualify.
Conventional Loans Explained
Conventional loans are not backed by the government. Because lenders carry more risk, these loans typically favor borrowers with stronger credit, stable income, and larger down payments.
Typical conventional loan features
- Higher credit score expectations
- Down payments as low as 3% for qualified borrowers
- Lower mortgage insurance costs with good credit
- More flexibility for second homes and investments
Private mortgage insurance (PMI)
Conventional loans may require PMI if the down payment is less than 20%. Unlike FHA mortgage insurance, PMI can usually be removed once enough equity is built, reducing the long-term cost of the loan.
You have solid credit, steady income, and want lower long-term costs or the ability to remove mortgage insurance later.
FHA vs. Conventional: Side-by-Side
- Lower credit score tolerance
- 3.5% minimum down payment
- Mortgage insurance often lasts longer
- Popular with first-time buyers
- Higher credit score expectations
- Down payments as low as 3%
- PMI can usually be removed
- Lower long-term cost for strong borrowers
How to Choose Between FHA and Conventional
The decision often comes down to balancing short-term qualification with long-term cost.
- Compare how much you can put down today
- Review your current credit score and history
- Estimate how long you plan to keep the loan
- Factor in mortgage insurance over time
Some borrowers start with FHA and refinance later. Others qualify for conventional from the beginning and save on insurance long-term. The best choice depends on your full financial picture, not just today’s approval.
Run the same home price and down payment through both loan types to compare monthly payments and long-term costs. Seeing the difference side by side makes the trade-offs much clearer.