Conventional vs FHA Loan: Which Is Right for You?

Conventional vs FHA Loan: Which Is Right for You?

Conventional loans and FHA loans are the two most popular mortgage types in the United States, accounting for approximately 85% of all purchase mortgages. The right choice depends on your credit score, down payment savings, debt-to-income ratio, and long-term plans. In general, conventional loans are better for borrowers with credit scores above 680 and at least 5% down, while FHA loans benefit borrowers with lower credit scores or minimal savings. However, the total cost comparison is more nuanced than the minimum requirements suggest — in many cases, a borrower who qualifies for both should run the numbers on each to determine which costs less over time.

According to the Consumer Financial Protection Bureau (CFPB), FHA loans accounted for approximately 15% of purchase mortgages in 2025, while conventional loans made up about 70%. The remaining 15% were VA, USDA, and other loan types. The ratio has shifted toward conventional in recent years as home prices have risen and more borrowers seek to avoid FHA's lifetime mortgage insurance requirement.

At a Glance: Conventional vs FHA

**Minimum Credit Score:** Conventional 620 / FHA 580 (3.5% down) or 500 (10% down)

**Minimum Down Payment:** Conventional 3% / FHA 3.5%

Mortgage Insurance: Conventional PMI (cancelable at 80% LTV) / FHA MIP (upfront 1.75% + annual 0.55%, often for life of loan)

Loan Limits (2026): Conventional $766,550 (higher in high-cost areas) / FHA $498,257 to $1,149,825 depending on county

DTI Maximum: Conventional 45% (50% with strong compensating factors) / FHA 50% (with compensating factors)

Property Standards: Conventional Standard appraisal / FHA Stricter HUD Minimum Property Requirements

Down Payment Comparison

Conventional Loans

Conventional loans allow down payments as low as 3% for first-time buyers through Fannie Mae HomeReady and Freddie Mac Home Possible programs. Standard conventional loans require 5% down. A 20% down payment eliminates PMI entirely.

On a $400,000 home: - 3% down = $12,000 - 5% down = $20,000 - 10% down = $40,000 - 20% down = $80,000

FHA Loans

FHA loans require 3.5% down with a 580 or higher credit score, or 10% down with a 500 to 579 score. Plus, FHA charges an upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount, which is typically rolled into the loan balance.

On a $400,000 home: - 3.5% down = $14,000 plus $6,755 UFMIP added to loan balance - 10% down = $40,000 plus $6,300 UFMIP added to loan balance

For borrowers exploring minimal down payment options, our guide on no down payment mortgages covers additional programs.

Mortgage Insurance: The Biggest Difference

The mortgage insurance comparison is often the deciding factor between conventional and FHA loans.

Conventional PMI

Private mortgage insurance on conventional loans:

• When required: Down payment below 20%
• Cost: 0.2% to 1.5% of the loan amount annually, depending on credit score and LTV
• Cancellation: Automatically cancels at 78% LTV, can request removal at 80% LTV
• Payment method: Monthly premium added to your mortgage payment

The ability to cancel PMI is a significant advantage. Once your home reaches 20% equity (through payments, appreciation, or a combination), you can eliminate this cost entirely. For more details, see our guide on mortgage insurance and PMI explained.

FHA MIP

FHA mortgage insurance premiums:

• Upfront MIP (UFMIP): 1.75% of the loan amount, typically financed into the loan
• Annual MIP: 0.55% of the loan amount for most borrowers (paid monthly)
• Duration: For the life of the loan if down payment is below 10%; for 11 years if down payment is 10% or more
• Cannot be cancelled (for loans with less than 10% down) — the only way to remove it is to refinance into a conventional loan

Cost Comparison Example

Consider a $350,000 loan at 6.5% interest:

Conventional with 5% down (95% LTV), 700 credit score: - PMI: approximately $145/month - PMI duration: until 80% LTV (approximately 7 years with normal payments) - Total PMI cost: approximately $12,180

FHA with 3.5% down: - UFMIP: $6,125 (added to loan balance) - Annual MIP: approximately $163/month - MIP duration: life of loan (30 years) - Total MIP cost: approximately $64,805

In this example, the FHA loan's total mortgage insurance cost is more than five times higher despite the similar loan amount. This is why borrowers with credit scores above 680 often save money with a conventional loan even if the interest rate is slightly higher.

Credit Score Requirements

Conventional Loan Credit Tiers

Conventional loans use risk-based pricing through Loan-Level Price Adjustments (LLPAs). Your credit score significantly impacts your rate:

• 760+: Best rates, lowest fees
• 720-759: Slightly above best rates
• 680-719: Moderate rate increase
• 660-679: Significant rate increase
• 640-659: Substantial rate increase
• 620-639: Highest conventional rates; FHA may be cheaper

For a detailed look at credit score requirements across all loan types, see our guide on credit scores for mortgages.

FHA Loan Credit Tiers

FHA pricing is less sensitive to credit score variations:

• 580+: Standard pricing, 3.5% down payment
• 500-579: Higher down payment (10%) required, limited lender availability

FHA's flatter pricing means borrowers with lower credit scores often get a better deal with FHA. The crossover point — where conventional becomes cheaper than FHA — is typically around a 680 credit score, though this varies by lender and market conditions.

Debt-to-Income Ratio Comparison

Your debt-to-income ratio is another key qualification factor.

Conventional DTI Limits

• Standard maximum: 45% back-end DTI
• With strong compensating factors: Up to 50% in some automated underwriting scenarios
• Front-end ratio: Generally limited to 28% (housing expense only)

FHA DTI Limits

• Standard maximum: 43% back-end DTI
• With compensating factors: Up to 50% or even higher in some cases
• Front-end ratio: Generally limited to 31%

FHA is generally more flexible with higher DTI ratios, making it a better option for borrowers who have significant existing debt relative to their income.

Property Requirements

Conventional Appraisals

Conventional appraisals focus primarily on determining market value. The appraiser notes obvious deficiencies but does not enforce specific property condition requirements beyond what affects value and marketability.

FHA Appraisals

FHA appraisals are more thorough and require the property to meet HUD's Minimum Property Requirements (MPRs). Common issues that can delay or prevent FHA closing include:

• Peeling or chipping paint on homes built before 1978
• Missing handrails on stairs with more than three steps
• Non-functional heating, plumbing, or electrical systems
• Roof with less than two years of remaining life
• Water intrusion or evidence of structural damage

These requirements can make FHA loans more challenging in markets with older housing stock or when purchasing fixer-uppers. For more on the appraisal process, see our home appraisal guide.

Loan Limits Comparison

Conventional Loan Limits (2026)

• Standard: $766,550 in most areas
• High-cost areas: Up to $1,149,825 (Alaska, Hawaii, and high-cost mainland counties)
• Above limits: Requires a jumbo loan

FHA Loan Limits (2026)

• Floor: $498,257 (lowest-cost areas)
• Ceiling: $1,149,825 (highest-cost areas)
• County-specific: Limits vary by county based on local median home prices

In lower-cost areas, FHA limits may restrict your purchasing power compared to conventional loans. Check your county's FHA limit at HUD's loan limit lookup tool.

When to Choose Conventional

Choose a conventional loan when:

• Your credit score is 680 or higher
• You can put at least 5% down (ideally 10% to 20%)
• You want the ability to cancel mortgage insurance
• You are buying a property that may not meet FHA condition requirements
• Your DTI is below 45%
• You are purchasing above the FHA loan limit for your area

When to Choose FHA

Choose an FHA loan when:

• Your credit score is below 680 (especially below 660)
• You have limited savings and need a low down payment
• Your DTI is above 45%
• You are a first-time home buyer with limited credit history
• You want more flexible qualification standards

Can You Switch From FHA to Conventional?

Yes. Many borrowers start with an FHA loan and later refinance into a conventional loan once their credit score improves and they have at least 20% equity. This eliminates the FHA lifetime MIP and can result in a lower monthly payment and significant long-term savings.

The strategy of starting with FHA and refinancing into conventional is common among borrowers who need FHA's flexible qualification standards today but expect their financial profile to improve over the next few years.

How to Compare Both Options

The best approach is to get quotes for both conventional and FHA loans from multiple lenders through DirectLender.com. Compare:

1. Interest rate on each loan type 2. Total monthly payment including principal, interest, taxes, insurance, and mortgage insurance 3. Total mortgage insurance cost over the time you expect to hold the loan 4. Closing costs for each option 5. Long-term cost factoring in PMI cancellation on conventional vs. lifetime MIP on FHA

The CFPB recommends comparing Loan Estimates from at least three lenders for each loan type you are considering. This gives you a complete picture of which option truly costs less for your specific situation.