mortgage-types-compared-2026) Loan: Which Is Better for You?

Choosing between an FHA loan and a [conventional mortgage](/blog/conventional-loan-requirements) is one of the most important decisions in your home buying journey. Both loan types offer unique advantages and drawbacks, and the right choice depends on your credit profile, down payment savings, and long-term financial goals. This comprehensive comparison helps you understand which option best fits your situation.

Understanding the Fundamental Differences

What Is an FHA Loan?

FHA loans are mortgages insured by the Federal Housing Administration, a government agency within the Department of Housing and Urban Development (HUD). Created in 1934, the FHA doesn't lend money directly—instead, it insures loans made by approved private lenders, protecting them against losses if borrowers default.

This government backing allows lenders to offer more flexible qualification requirements, making homeownership accessible to borrowers with lower credit scores or smaller down payments.

What Is a Conventional Loan?

Conventional loans are mortgages not insured or guaranteed by any government agency. Private lenders originate these loans, which typically conform to standards set by Fannie Mae and Freddie Mac, government-sponsored enterprises that purchase mortgages from lenders.

Without government insurance, conventional loans generally require stronger credit profiles and larger down payments, though they offer advantages like removable mortgage insurance and higher loan limits.

Credit Score Requirements: A Critical Difference

FHA Loan Credit Standards

Minimum Score: 500 with 10% down payment, or 580 with 3.5% down Typical Requirement: Most lenders set overlays requiring 580-620 minimum Recent Credit Issues: More forgiving of past bankruptcies (2 years) and foreclosures (3 years)

FHA loans shine for borrowers rebuilding credit after financial hardships. The program's flexibility helps those who've experienced bankruptcy, foreclosure, or other credit events get back into homeownership sooner.

Conventional Loan Credit Standards

Minimum Score: 620 for most lenders Best Rates: 740+ credit scores qualify for optimal pricing Recent Credit Issues: Typically requires 4-7 years after bankruptcy or foreclosure

Conventional loans reward strong credit with significantly better rates and terms. The difference between a 680 and 760 credit score can mean tens of thousands in savings over the loan's life.

Down Payment Comparison

[FHA Down Payment](/blog/fha-loan-requirements-2026) Requirements

Minimum: 3.5% with 580+ credit score Higher Down Payment: 10% required for credit scores 500-579 Gift Funds: Entire down payment can come from gift funds Seller Concessions: Up to 6% of purchase price

FHA's 3.5% minimum makes homeownership accessible sooner, requiring less upfront savings. For a $300,000 home, that's just $10,500 compared to potentially higher conventional requirements.

Conventional Down Payment Requirements

Minimum: 3% for qualified borrowers through specific programs Standard: 5% down is common for conventional loans 20% Down Sweet Spot: Eliminates PMI requirement Investment Properties: Typically require 15-25% down

While conventional loans can match FHA's low down payment, the 20% threshold to eliminate mortgage insurance makes saving more worthwhile for those who can afford it.

Mortgage Insurance: The Game-Changer

This is where FHA and conventional loans differ most significantly, and understanding these differences can save you thousands.

FHA Mortgage Insurance Premium (MIP)

Upfront MIP: 1.75% of loan amount, typically financed into the loan Annual MIP: 0.45% to 1.05% of loan amount annually, paid monthly

Critical Detail: For loans with less than 10% down, MIP remains for the entire loan term. You cannot remove it without refinancing.

Example: On a $300,000 FHA loan with 3.5% down:

Upfront MIP: $5,250 (added to loan balance)
Annual MIP: ~$2,475/year ($206/month) for the life of the loan

Conventional [Private Mortgage Insurance](/blog/mortgage-insurance-pmi-guide) (PMI)

No Upfront Premium: Unlike FHA, no upfront fee Annual PMI: 0.3% to 1.5% of loan amount, varies by credit score and down payment Removable: Cancels automatically at 22% equity or by request at 20%

Example: On a $300,000 conventional loan with 5% down and good credit:

Annual PMI: ~$1,800/year ($150/month)
Removable after reaching 20% equity through payments and appreciation

Long-Term Cost Impact

For borrowers planning to stay in their homes long-term, the inability to remove FHA mortgage insurance becomes expensive. After 5-7 years of payments and normal appreciation, conventional loan borrowers typically eliminate PMI, while FHA borrowers continue paying indefinitely.

10-Year Comparison:

FHA: $24,750 in MIP (continuing forever)
Conventional: ~$10,800 in PMI (stops after 6-7 years)

Loan Limits and Property Eligibility

FHA Loan Limits

FHA loan limits vary by county, ranging from $498,257 in low-cost areas to $1,149,825 in high-cost markets for 2026. These limits are lower than conventional conforming limits in most areas.

Property Requirements:

Must meet FHA minimum property standards
More stringent inspection requirements
Some condos must be FHA-approved
Primary residence only (no investment properties)

Conventional Loan Limits

Conventional conforming limits reach $806,500 for most areas in 2026, with higher limits up to $1,209,750 in expensive markets. Jumbo loans exceed these amounts for luxury properties.

Property Eligibility:

Primary residences, second homes, and investment properties
More flexible property condition standards
Broader condo acceptance
Fewer inspection requirements

Interest Rates: Who Gets the Better Deal?

Interest rates vary based on individual qualifications, but general patterns emerge:

When FHA Offers Better Rates

Borrowers with credit scores below 680 often receive better rates on FHA loans than conventional options. The government insurance allows lenders to offer more competitive pricing despite higher risk.

When Conventional Offers Better Rates

Borrowers with credit scores above 720 typically get significantly better rates on conventional loans. The lack of ongoing mortgage insurance and lower default risk translates to better pricing.

The Breakeven Point

Generally, borrowers with 680-720 credit scores find similar rates between FHA and conventional loans. The choice then depends more on down payment, mortgage insurance costs, and long-term plans.

[Debt-to-Income Ratio](/blog/dti-ratio-explained) Flexibility

FHA DTI Standards

Maximum: Typically 43%, though up to 50% with compensating factors Flexibility: More lenient with high DTI ratios if other factors are strong Manual Underwriting: Available for borrowers who don't meet automated underwriting standards

Conventional DTI Standards

Maximum: Generally 43%, up to 50% with excellent credit Stricter Standards: Less flexibility for high DTI ratios Compensating Factors: Strong reserves and credit can help but with less flexibility than FHA

Which Loan Type Costs Less Overall?

The answer depends on your specific situation and timeline.

FHA Costs Less If:

Your credit score is below 680
You plan to sell or refinance within 5-7 years
You can only afford 3.5% down
You need more flexible qualification standards

Conventional Costs Less If:

Your credit score is above 720
You plan to stay in the home long-term (10+ years)
You can put down 10% or more
You want the option to remove mortgage insurance

Real-World Scenarios

Scenario 1: First-Time Buyer with Good Credit

Profile: 740 credit score, 5% down payment, $350,000 home Better Choice: Conventional loan Reason: Excellent credit gets great conventional rates, and PMI removes after several years of payments and appreciation

Scenario 2: Buyer Rebuilding Credit

Profile: 620 credit score, 3.5% down payment, $250,000 home Better Choice: FHA loan Reason: Lower credit score means better FHA rates, and the low down payment requirement makes the home affordable now

Scenario 3: Strong Finances, Long-Term Plans

Profile: 760 credit score, 15% down payment, $400,000 home Better Choice: Conventional loan Reason: Excellent credit, substantial down payment, and long-term ownership make conventional the clear winner

Scenario 4: Moderate Credit, Small Down Payment

Profile: 660 credit score, 3.5% down payment, $300,000 home Better Choice: Depends on timeline Reason: Similar rates make this a toss-up. Choose FHA if selling within 5 years, conventional if staying longer

The Refinance Factor

Many homebuyers start with FHA loans and refinance to conventional mortgages later, combining the benefits of both:

Initial FHA Advantages:

Easier qualification with lower credit or smaller down payment
Get into homeownership sooner
Start building equity and credit

Later Conventional Refinance:

Remove FHA mortgage insurance
Take advantage of improved credit for better rates
[Access home equity](/blog/tappable-equity-explained) built through payments and appreciation

Timing: Refinancing makes sense once you've reached 20% equity and your credit score has improved, typically after 2-5 years of responsible payments.

Special Considerations

Closing Costs

FHA loans typically have higher closing costs due to the 1.75% upfront mortgage insurance premium, even though this is usually financed. Conventional loans have lower upfront costs but may have higher lender fees.

Seller Perspective

Some sellers prefer conventional loan offers because:

Fewer inspection requirements mean smoother transactions
Slightly higher appraisal standards reduce renegotiation risk
Stronger buyer qualifications suggest more reliable closing

However, in competitive markets or with motivated sellers, loan type rarely determines offer acceptance.

[Appraisal Requirements](/blog/appraisal-process-explained)

FHA appraisals include minimum property standards that conventional appraisals don't require. Properties needing repairs might not qualify for FHA financing without addressing issues first, while conventional lenders may allow the purchase as-is.

Making Your Decision: Key Questions

How long do you plan to stay in the home?

Less than 5 years: FHA might make sense
10+ years: Conventional usually costs less overall

What's your credit score?

Below 680: FHA likely offers better terms
Above 720: Conventional provides better value

How much can you put down?

3.5% only: FHA or conventional 3% programs
10-19%: Compare both carefully
20%+: Conventional wins by eliminating PMI

Are you comfortable with long-term mortgage insurance?

Yes: FHA is acceptable
No: Conventional or plan to refinance FHA later

What's your debt-to-income ratio?

Above 45%: FHA offers more flexibility
Below 43%: Both work equally well

Frequently Asked Questions

Can I switch from FHA to conventional later?

Yes, refinancing from FHA to conventional is common once you've built 20% equity and improved your credit score. This eliminates FHA mortgage insurance and often secures better rates.

Which loan closes faster?

Conventional loans typically close slightly faster because they have fewer inspection requirements and less stringent property standards. Expect 30-40 days for conventional versus 35-45 for FHA.

Can I use FHA for investment properties?

No, FHA loans require the property to be your primary residence where you'll live for at least one year. Conventional loans allow investment property purchases.

Is it harder to get an FHA loan approved?

No, FHA loans are generally easier to qualify for due to lower credit score requirements and more flexible underwriting. However, property requirements are stricter.

Which loan is better for low-income buyers?

FHA loans typically better serve low-income buyers through lower credit requirements and smaller down payments. However, conventional programs like HomeReady and Home Possible specifically target low-income borrowers with competitive terms.

Can I put more than 3.5% down on an FHA loan?

Yes, you can put down any amount. Larger down payments (10%+) reduce your annual mortgage insurance premium, and putting 10% or more allows MIP to cancel after 11 years.

Do FHA loans have prepayment penalties?

No, FHA loans cannot include prepayment penalties. You can pay extra toward principal or pay off the loan early without fees.

Which loan type has more flexible income requirements?

FHA loans accept more diverse income sources and are generally more flexible with income documentation, making them better for self-employed borrowers or those with non-traditional income.

Conclusion

Neither FHA nor conventional loans are universally "better"—the right choice depends on your individual circumstances. FHA loans excel at helping borrowers with lower credit scores or smaller down payments achieve homeownership sooner, while conventional loans offer better long-term value for those with strong credit and larger down payments.

Consider your credit score, savings, down payment amount, and how long you plan to stay in the home. Run the numbers for both loan types, factoring in total costs over your expected ownership period. Many borrowers benefit from starting with an FHA loan and refinancing to conventional later, combining the advantages of both programs.

Work with an experienced mortgage professional who can analyze your specific situation and provide personalized comparisons. With the right guidance and clear understanding of each loan type's strengths, you'll make the choice that best supports your financial goals and homeownership dreams.

[Using a HELOC for an [Investment Property Down Payment](/blog/investment-property-down-payment): Smart Strategy or Risky Move?](/blog/heloc-for-investment-property-down-payment)
Home Equity Explained: What It Is and How to Build It
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Fha Vs Conventional Loan

Key Takeaways