FHA vs Conventional Loan: Which Mortgage Is Right for You?

If you're comparing an FHA vs conventional loan, here's the core difference: FHA loans are government-backed mortgages designed for buyers with lower credit scores or smaller down payments. Conventional loans are not government-insured, have stricter qualification requirements, but offer more flexibility and cheaper mortgage insurance that eventually goes away.

Here's the quick rule of thumb. If your credit score is below 680 and you have less than 5% saved for a down payment, FHA is probably your better path. If your score is 700+ and you can put 5–10% down, conventional will almost certainly save you money over the life of the loan — primarily because you won't be stuck paying mortgage insurance forever.

Both loan types can get you into a home with relatively little money down. The real question is which one costs less over time for your specific situation. Let's break it all down.

Quick Comparison: FHA vs Conventional at a Glance

This table covers the key differences between FHA and conventional loans in 2026. Bookmark it — it's the fastest way to compare.

FHA Loans Explained

FHA loans are insured by the Federal Housing Administration, a division of HUD. The government doesn't lend you money directly — it insures the loan so that private lenders feel comfortable offering mortgages to borrowers with lower credit scores and smaller down payments.

Who FHA loans are for

FHA loans are built for buyers who don't check every box on a conventional application. That includes:

• Credit scores 580–679 — you'll qualify for the 3.5% down payment option
• Credit scores 500–579 — you'll need 10% down, but you can still get approved
• First-time buyers with limited savings — your entire down payment and closing costs can come from gift funds
• Buyers recovering from credit events — FHA allows you to qualify 2 years after bankruptcy and 3 years after foreclosure

FHA mortgage insurance: the catch

Every FHA loan requires two types of mortgage insurance premium (MIP):

• Upfront MIP: 1.75% of the loan amount, due at closing (usually rolled into the loan balance)
• Annual MIP: 0.55% of the loan balance per year for most borrowers, paid monthly

Here's the part that trips people up: if you put less than 10% down, MIP stays for the entire life of the loan. It never drops off. The only way to remove it is to refinance into a conventional loan.

If you put 10% or more down on an FHA loan, MIP drops off after 11 years. But at that point, many buyers wonder why they didn't just go conventional in the first place.

FHA pros

• Lower credit score requirements (580 for 3.5% down)
• Lower interest rates than conventional for most borrowers
• Gift funds can cover 100% of down payment
• Higher DTI allowed (up to 57% with strong compensating factors)
• Seller can contribute up to 6% toward closing costs
• Loans are assumable (a major advantage in high-rate environments)

FHA cons

• Upfront MIP of 1.75% adds to your loan balance
• Annual MIP for life of loan (on 3.5% down)
• Lower loan limits than conventional ($524,225 vs $806,500 in most areas)
• Primary residence only — no investment properties or second homes
• Stricter property appraisal standards (HUD minimum requirements)

Conventional Loans Explained

Conventional loans aren't backed by the government. They follow guidelines set by Fannie Mae and Freddie Mac, which buy mortgages from lenders on the secondary market. Because there's no government guarantee, lenders take on more risk — so qualification standards are tighter.

Who conventional loans are for

• Buyers with credit scores of 680+ — you'll get the best rates and lowest PMI
• Buyers with 5–20%+ down payment — more equity up front means less insurance cost
• Buyers who want flexibility — conventional loans work for primary residences, second homes, and investment properties
• Buyers who plan to stay long-term — PMI drops off at 80% LTV, saving you thousands compared to FHA's lifetime MIP

Conventional mortgage insurance (PMI)

If you put less than 20% down on a conventional loan, you'll pay private mortgage insurance (PMI). The rate depends on your credit score and down payment amount:

• Excellent credit (740+): PMI runs about 0.2%–0.5% of the loan balance per year
• Good credit (680–739): PMI runs about 0.5%–0.8% per year
• Fair credit (620–679): PMI can hit 1.0%–1.5% per year

The key advantage: PMI drops off automatically once you reach 78% LTV (loan-to-value ratio), or you can request removal at 80% LTV. No refinancing required. With FHA, the insurance never goes away unless you refinance.

Low-income conventional programs

Think conventional loans are only for higher-income buyers? Not anymore. Two programs specifically target low-to-moderate income borrowers:

• Fannie Mae HomeReady: 3% down, reduced PMI, allows income from boarders and non-borrower household members
• Freddie Mac Home Possible: 3% down, discounted PMI, designed for buyers earning at or below 80% of area median income

Both programs offer conventional terms with down payments as low as FHA — and without the lifetime mortgage insurance penalty.

Conventional pros

• No upfront mortgage insurance fee
• PMI drops off at 80% LTV (automatic at 78%)
• Higher loan limits ($806,500 standard in 2026)
• Works for primary, second home, and investment properties
• No HUD property requirements — simpler appraisal process
• Lower total cost for borrowers with 700+ credit scores

Conventional cons

• Higher minimum credit score (620, practically 680+ for good rates)
• PMI can be expensive with lower credit scores
• Stricter DTI limits (typically 45%, max 50%)
• Not assumable
• Gift funds may require the buyer to contribute some of their own money (depends on down payment amount)

The Real Cost Comparison: FHA vs Conventional on a $350,000 Home

Numbers talk. Let's look at what each loan actually costs on a $350,000 home purchase, comparing a typical FHA scenario against a typical conventional scenario.

5-year cost comparison

30-year cost comparison

*Conventional PMI drops off around year 9 when LTV reaches 80%, so insurance costs stop accruing after that point.

Bottom line: On a $350,000 home, the conventional loan saves approximately $8,400 over 5 years and roughly $67,800 over 30 years — mostly because FHA mortgage insurance never goes away. The gap widens even more if your credit score qualifies you for lower PMI rates.

When to Choose FHA

FHA loans make financial sense in specific situations. Choose FHA if:

• Your credit score is 580–619. You'll get approved where most conventional lenders would deny you or charge prohibitively high PMI.
• You have minimal savings. FHA's 3.5% down payment can come entirely from gift funds — you don't need to contribute any of your own money.
• You went through a recent credit event. FHA allows qualification 2 years after a Chapter 7 bankruptcy and 3 years after a foreclosure. Conventional loans typically require 4 and 7 years, respectively.
• Your DTI is high. FHA allows debt-to-income ratios up to 57% with compensating factors. If your monthly debts are high relative to your income, FHA gives you more room.
• You plan to refinance within a few years. If your credit score is climbing and you expect to hit 700+ within 2–3 years, start with FHA and refinance to conventional once your score improves.

When to Choose Conventional

Conventional loans are the better deal whenever your credit and savings allow it. Choose conventional if:

• Your credit score is 700+. You'll qualify for PMI rates well under 0.5% — far cheaper than FHA's 0.55% annual MIP plus the 1.75% upfront MIP.
• You can put 10%+ down. Higher down payment means lower PMI rates, and you'll reach the 80% LTV threshold faster to eliminate PMI entirely.
• You want to buy a second home or investment property. FHA is limited to primary residences only.
• You want to avoid lifetime mortgage insurance. PMI drops off automatically — FHA MIP does not.
• The home price exceeds FHA limits. If you're buying above $524,225 in a standard-cost area, you'll need a conventional loan (or an FHA loan in a designated high-cost county).
• You want a simpler appraisal process. FHA has stricter property requirements. Conventional appraisals are more straightforward, which can matter in competitive markets.

Can You Switch from FHA to Conventional Later?

Yes. You can refinance from an FHA loan to a conventional loan at any time, as long as you meet the conventional qualification requirements at that point. This is one of the most common mortgage moves in America, and it's often a smart one.

When refinancing from FHA to conventional makes sense

• You've built 20%+ equity. Whether through payments, home appreciation, or both — once you hit 80% LTV, refinancing eliminates all mortgage insurance. On a $350,000 home, that can save you $155/month ($1,860/year).
• Your credit score has improved. If you started at 600 and now you're at 720, you'll qualify for conventional rates that make the refinance worthwhile even before you hit 20% equity.
• Interest rates have dropped. Refinancing gives you a shot at both a lower rate and the removal of FHA mortgage insurance — a double win.

What you need to refinance

• Minimum 620 credit score (680+ for the best rates)
• Enough equity or a new appraisal showing sufficient value
• Stable income and employment verification
• Closing costs of 2–5% of the new loan amount (can sometimes be rolled in)

The Consumer Financial Protection Bureau (CFPB) has a free tool for comparing loan options side by side, including refinance scenarios.