What Is an FHA Loan?
An FHA loan is insured by the Federal Housing Administration, a government agency. Because the government backs the loan, FHA-approved lenders can offer more flexible qualifying standards — lower credit score requirements, higher debt-to-income ratio allowances, and a minimum down payment of just 3.5% with a 580+ credit score (10% down is required with scores between 500–579). FHA loans are originated by private lenders, not the government itself; the FHA simply guarantees them against default. This makes them especially accessible for first-time buyers, those with limited savings, or borrowers recovering from credit challenges.
What Is a Conventional Loan?
A conventional loan is any mortgage not backed by a government agency. Most conventional loans are "conforming" — they meet the size and underwriting standards set by Fannie Mae and Freddie Mac, which allows lenders to sell them on the secondary market. Conventional loans require a minimum 620 credit score, though borrowers below 700 will face higher rates and fees. Down payments can be as low as 3%–5% with PMI, or 20%+ to avoid PMI entirely. Conventional loans offer more flexibility in property types and do not require upfront mortgage insurance.
The Key Difference: Mortgage Insurance
This is where the FHA vs. conventional comparison becomes critical. FHA loans require two forms of mortgage insurance: an upfront MIP (Mortgage Insurance Premium) of 1.75% of the loan amount — on a $300,000 loan that is $5,250 added to your balance at closing — and an annual MIP of 0.15%–0.75% of the loan (depending on loan term, loan amount, and LTV), paid monthly, and for most borrowers for the life of the loan. Conventional PMI, by contrast, can be canceled at 20% equity (and is removed automatically at 22%) and typically costs roughly 0.4%–0.8% annually for many borrowers, and more with lower credit scores or smaller down payments. The permanent nature of FHA MIP means that for borrowers who qualify for both, conventional loans with PMI are usually the better long-term choice once they reach the 20% equity threshold.
Credit Score Comparison: Where FHA Wins
FHA loans are often the lower-cost option for borrowers with credit scores below 680. With a score between 620 and 659, the additional pricing adjustments (called LLPAs) on a conventional loan can push your effective rate higher than an FHA loan at the same base rate. Below 620, conventional loans are largely unavailable. If your score is 680+ and you have a 20% down payment, a conventional loan is often cheaper over time. In the 620–679 range with less than 20% down, run both scenarios through a mortgage calculator and compare total 5- and 10-year costs.
Down Payment Comparison
FHA requires 3.5% down with a 580+ score. Conventional loans allow as little as 3% down through programs like Fannie Mae's HomeReady and Freddie Mac's Home Possible, which are designed for low-to-moderate income buyers and include homebuyer education requirements. The critical difference: FHA's MIP is permanent regardless of down payment (unless you put 10%+ down, in which case MIP falls off after 11 years), while conventional PMI drops off automatically. For buyers with limited down payment funds, conventional 3% programs with cancelable PMI are worth comparing directly against FHA.
Property Requirements: FHA Is More Restrictive
FHA has minimum property standards — the home must be safe, sound, and secure. Homes with major structural issues, peeling lead paint (in pre-1978 homes), non-working HVAC, water intrusion, or inadequate egress will typically fail an FHA appraisal. This can be a problem in competitive markets where sellers may prefer conventional buyers who pose less appraisal risk. Fixer-uppers or homes needing significant work are often not eligible for standard FHA financing (though the FHA 203(k) renovation loan exists for that purpose). Conventional appraisals are less rigorous, making conventional loans preferable for homes in less-than-perfect condition.
Which One Should You Choose?
Choose FHA if: your credit score is below 680, you cannot make a 20% down payment and have borderline credit, or you have had significant credit events (bankruptcy, foreclosure) in the past 2–3 years. Choose conventional if: your credit score is 680+, you can make 20% down, you want the flexibility to remove mortgage insurance, or you are buying an investment property or vacation home (FHA requires owner occupancy). When in doubt, get quotes for both from a lender and compare total monthly costs plus cumulative costs at the 5, 10, and full loan term. The numbers will tell you which is the better deal for your specific situation.
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