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FHA vs. conventional loan: Which should you choose?

Yahoo Personal Finance· Getty Images
Updated 8 min read

If you’re on the hunt for a new home, you’re probably planning to take out a mortgage to finance the purchase. You’ll have to decide which kind of home loan makes the most financial sense for your situation.

Two popular options for homeowners are FHA and conventional loans. Here’s everything you need to know about these two types of mortgage loans to help you make an informed decision.

Learn more: Pros and cons of FHA loans

In this article:

An FHA loan is a mortgage insured by the Federal Housing Administration — which is overseen by the U.S. Department of Housing and Urban Development (HUD) — and issued by banks, credit unions, and other approved FHA lenders.

Because an FHA loan is government-backed, it typically requires a lower credit score and minimum down payment than conventional loans and some other mortgage programs. These factors make FHA loans especially popular with first-time home buyers with little savings or less-than-ideal FICO scores.

Unlike an FHA loan, a conventional loan isn’t insured by any government agency, which can make it riskier for the mortgage lender. As a result, conventional mortgages typically have stricter eligibility requirements, which means you may need a higher credit score and a larger down payment to qualify.

Conventional loans can be conforming or non-conforming loans. Conforming loans meet Fannie Mae and Freddie Mac standards and can’t exceed borrowing limits set by the Federal Housing Finance Agency (FHFA). Non-conforming mortgages (like jumbo loans) exceed those conforming loan limits.

You can apply for conventional loans at most banks, credit unions, and mortgage lenders.

In a nutshell, FHA loans have more lenient down payment and credit score requirements than conventional loans, but they come with mortgage insurance and require an FHA-approved appraisal. Though conventional loans have higher loan limits and don’t require mortgage insurance when you put 20% down, they’re a bit harder to qualify for than FHA loans.

Here’s a more detailed view of the differences between FHA and conventional loans to help you make the right decision.

Lenders will always look at your credit score, whether you’re applying for an FHA or a conventional loan. Most lenders use the FICO scoring model, which ranges from 300 to 850 points. The higher your score, the more trustworthy you are as a borrower from a lender’s point of view.

You generally need a minimum credit score of 620 to be eligible for a conventional mortgage. You can qualify for an FHA home loan with a credit score as low as 500 with a 10% down payment or 580 with a 3.5% down payment.

If you’re buying a home with a conventional loan, your lender will schedule a home appraisal to ensure the property has sufficient value. This way, both you and the lender know the amount you are paying is comparable to the actual home value.

The FHA appraisal process is more demanding than one for a conventional loan. Your property must meet the U.S. Department of Housing and Urban Development’s minimum property requirements, so the appraiser will look for specific safety and construction issues.

So, the main difference between the two in this aspect is that conventional loan appraisers do not hold your property to HUD's exact standards, whereas FHA appraisers do.

You only need to put 3.5% down for FHA loans if your credit score is 580 or higher. If your credit score falls between 500 and 579, you’ll need to come up with a higher down payment of 10%.

Down payment requirements for conventional loans vary from lender to lender. Some may only require a minimum 3% down payment, while other lenders may ask you to put at least 5% down.

Learn more: How to get a mortgage with a 1% down payment

Mortgage insurance protects your lender if you default on your loan.

For conventional loans, you’ll need to pay private mortgage insurance (PMI) if you put less than 20% down. According to the government-sponsored entity Freddie Mac, you can expect to pay between $30 and $70 monthly per $100,000 financed.

For FHA loans, you must pay a mortgage insurance premium (MIP) for the life of the loan, regardless of how much you put down. The only exceptions are if your loan origination date was June 3, 2013, or later, and you made a down payment of at least 10%. In this case, your FHA mortgage insurance is removed after 11 years. You can also remove FHA MIP if your loan origination date was between Jan. 1, 2001, and June 2, 2013, and you’ve reached 22% equity in your home.

MIP consists of two parts: the up-front mortgage premium, which is 1.75% of your base loan amount, and the annual MIP, which depends on various factors.

Learn more: How to get rid of PMI

Loan limits cap the amount you can borrow for a house, so you’ll want to pay attention to the loan limit for the area where you’re shopping for homes.

The Federal Housing Finance Agency (FHFA) publishes annual conforming loan limits that apply to all conventional loans. As of 2024, the conforming loan limit for one-unit single-family homes is $766,550, with higher-cost areas at $1,149,825. If you need to borrow more, you must take out a jumbo loan.

The 2024 FHA loan limit for a one-unit property in a lower-cost area is $498,257, but in high-cost areas such as Los Angeles, the ceiling is $1,149,825. Visit the HUD website for more information on FHA mortgage limits.

Read more: Requirements to get an FHA loan

Yes, you can refinance out of an FHA loan if you meet the eligibility for a conventional loan, such as having a credit score of at least 620 and a debt-to-income ratio (DTI) below 50%. Though refinancing from an FHA loan to a conventional loan may not be for everyone, it’s worth considering if you want to remove FHA mortgage insurance and potentially access larger loan amounts.

Learn more: FHA Streamline Refinance — how does it work, and who is eligible?

You can refinance from a conventional loan into an FHA loan with two specific types of refinancing: an FHA cash-out refinance or FHA 203(k) refinance, two options available to homeowners with any type of loan. But you typically won’t want to do so unless it’s a last resort.

By converting into an FHA loan, you’ll eat away at your equity with the mandatory FHA mortgage insurance charges, regardless of how much equity you’ve built up. So, though the rates may be lower on FHA loans, it may not make financial sense to refinance into one when you factor in MIP, closing costs, and other expenses associated with it.

Learn more: How much are FHA loan closing costs?

It depends. A conventional loan might be better if you have good or excellent credit and can manage a 20% down payment since you’ll most likely qualify for an affordable mortgage rate and avoid PMI. However, a loan backed by the FHA might be your only option if you have a less-than-ideal credit score that falls anywhere between the 500s or low 600s.

Even if you have a small down payment, it might be worth choosing a conventional loan so you don’t have to pay for FHA mortgage insurance for the life of the loan. Talk with mortgage lenders to compare overall costs and determine which mortgage makes the most sense mathematically.

Learn more:

One of the biggest downsides of an FHA loan is the up-front and annual mortgage insurance, which can be tricky to get rid of. The up-front mortgage insurance premium costs 1.75% of the original mortgage principal at closing, and the annual MIP varies depending on your mortgage size, term length, and loan-to-value. Another downside to FHA loans is the loan limit. In most parts of the U.S., FHA loans only allow you to borrow up to $498,257 for a one-unit property, whereas conventional loans may allow you to borrow up to $766,550.

One disadvantage of a conventional loan is that the rates may be higher for people with less-than-great credit scores than with other types of mortgages. Conventional loans typically have stricter eligibility requirements than government-backed loans like FHA loans.

To some sellers, a homebuyer who qualifies for conventional financing is less risky and more trustworthy than borrowers who qualify for an FHA loan. This is because conventional loans typically require a higher credit score and more money down, which means those who qualify for these loans might be considered more financially responsible and creditworthy.

This article was edited by Laura Grace Tarpley