Conventional Loan vs. FHA Loan

You’ve scoured the internet and attended countless showings, and you’ve finally found your dream home. Now, it’s time to choose a mortgage loan.

The decision often comes down to one critical question: Which loan will cost you less money?

Two of the most common mortgage loans are conventional and FHA loans. Conventional loans require a higher credit score but come with lower costs. FHA loans are backed by the federal government, so their criteria are less strict. But because you’ll have to pay mortgage insurance for the life of the loan, an FHA loan can cost more over time.

While it can be tempting to take the loan that offers you the lowest monthly payment, it’s important to think about the long-term implications. Let’s compare a conventional loan vs. an FHA loan to see which one may be right for you.

What is a conventional loan?

When you think of a mortgage loan, you’re likely thinking of a conventional loan. You can get one through most major lenders in the U.S., including banks, credit unions, and even online mortgage companies.

You’ll need a credit score of 620 or higher to qualify.[1] If you can make a down payment of at least 20%, you can avoid paying private mortgage insurance (PMI), which is extra money added to your monthly payments.

“This is one of the main reasons people like conventional loans. They can save money over time,” said Elena Novak, who leads real estate research and analysis at PropertyChecker.com.

There are downsides to consider, though. Those with a lower credit score won’t qualify, and conventional loans also have stricter rules about your income. If you don’t have a lot of money saved or if you have other debts, it might be harder to qualify for a conventional loan vs. an FHA loan.

What is an FHA loan?

An FHA loan is backed by the Federal Housing Administration (FHA), part of the U.S. Department of Housing and Urban Development (HUD). Because the government will compensate lenders if borrowers default on their loans, lenders can take greater risks.

“FHA's the go-to when someone's credit's been dinged, or they just don't have much saved up for a down payment,” said Josh Katz, a certified public accountant (CPA) and founder of Universal Tax Professionals.

You can qualify with a credit score as low as 580. "That's huge for people recovering from medical debt or a divorce or whatever knocked their credit around," he says.

Your down payment can be as low as 3.5% with an FHA loan, but you’ll have to pay a monthly mortgage insurance premium for the life of the loan. FHA loans also have stricter rules about the condition of the house. Homes with damage or needing repairs may not qualify.

Conventional loan vs. FHA loan

In a conventional loan vs. FHA loan comparison, there are numerous factors to consider. Let’s explore how the two loans stack up now and how they could affect your future finances.

Minimum credit score

• Conventional loan: 620
• FHA loan: 580 (with 3.5% down); as low as 500 (with 10% down)

Based on credit score, an FHA loan is usually easier to qualify for. If both your credit score and savings are low, then this could be a good option.

A conventional loan tends to be better for those with high credit scores, as you’ll likely qualify for the lowest available interest rates. The lower your interest rate, the less you’ll pay over the life of your loan. You can always refinance your mortgage with a conventional loan if your credit score improves.

“If your credit’s borderline now but you’re actively fixing it, sometimes waiting six months for a conventional loan beats jumping into an FHA,” Katz said.

Debt-to-income ratio 

• Conventional loan: 45% usually, but some may allow 50%
• FHA loan: 43% usually, but some may allow 50% or more

The debt-to-income (DTI) ratio measures your debt relative to your monthly income. To find yours, add up all your monthly bills and divide the total by your monthly income before taxes. A high DTI ratio may make it difficult to pay your bills.

Conventional loans typically set the maximum DTI ratio at 45%, though some lenders will cap it at 50%. The DTI ratio for FHA loans is similar — 43% in most cases, but it could be 50% or higher if you have, say, a large balance in your savings account.

Minimum down payment 

• Conventional loan: 3% for fixed-rate loans, 5% for adjustable-rate loans
• FHA loan: 3.5% with a 580 credit score, 10% with a 500 credit score

Generally, the higher your down payment, the lower your monthly mortgage payment. But not everyone can afford to put a lot of money down, especially with today’s high home prices.

Say you’re buying a $500,000 house. Minimum down payment options would be:

• Conventional loan: $15,000 at 3% and $25,000 at 5%
• FHA loan: $17,500 at 3.5% and $50,000 at 10%

 Both loan types require fairly low minimum down payments, though you’ll need a higher down payment for an FHA loan if your credit score is low. If you can afford to put 20% down for a conventional loan, you’ll avoid the extra burden of PMI.

“PMI is an extra cost added to your monthly payments, and it can be a surprise for some people,” Novak said. “But if you have good credit and can afford a bigger down payment, a conventional loan might save you money over time.”

Mortgage insurance 

• Conventional loan: Down payments of less than 20% will require private mortgage insurance (PMI), but it’s removable
• FHA loan: Mortgage insurance premiums (MIPs) are required for the loan’s lifetime, but they’re removable if you put at least 10% down

Both loans require monthly mortgage insurance payments if you put less than 20% down. With a conventional loan, once you have 20% equity in your home, the PMI is canceled. This reduces your overall payment, saving you money over time.

“I’ve seen people save themselves $30,000 or $40,000 over a 15-year period just by understanding that one difference,” Katz said.

An FHA loan requires an upfront mortgage insurance payment — currently 1.75% of the loan amount. If your down payment is at least 10%, your MIP will be removed after 11 years. Otherwise, you’ll have to pay it for the loan’s lifetime. The amount is determined by the down payment, the loan amount, and the loan term (15 years vs. 30 years).

Interest rates and fees

• Conventional loan: Typically higher interest rates but lower fees
• FHA loan: Typically lower interest rates but higher fees 

Your lender will set the interest rate based primarily on your credit score. View current rates to estimate your payment.

An FHA loan tends to have lower interest rates, but fees — including MIP charges — can offset the difference. You’ll pay these fees at closing, and they can range from 2% to 6% of the home’s purchase price. On a $350,000 house, that could be $7,000 to $21,000.

Fees on a conventional loan are usually slightly lower, ranging from 2% to 5% of the loan amount, or up to about $17,500 on a $350,000 home. Interest rates tend to be slightly higher than those on FHA loans, which usually results in higher monthly payments. But not having to pay PMI for the life of the loan can reduce the payment overall.

“Your interest rate matters way more than people think,” Katz said. “We’re talking about tens of thousands of dollars over the loan term.”

Loan limits 

• Conventional loan: $832,750 in most places
• FHA loan: $541,287 in most places 

Both loan types limit how much you can borrow, and the limits vary by location. FHA loan limits tend to be lower, which can be restrictive depending on where you live.

For 2026, in most neighborhoods, the FHA loan limit is $541,287, while the conventional loan limit is $832,750. In more expensive areas, the limit for both loans is $1,249,125.[2][3]

If home prices are high in your county, a conventional loan may be your only option. Your lender can check your area’s exact limit, or you can search for your county on the U.S. Federal Housing Finance Agency’s map.

Seller-paid closing costs

• Conventional loan: 3–9% depending on your down payment
• FHA loan: up to 6% 

In many transactions, you can negotiate for the home seller to pay your closing costs. But your loan type dictates how much they can pay.

A conventional loan uses a tiered system based on your down payment:

• Less than 10% down = 3% of the purchase price in seller-assist closing costs
• 10%–25% down = 6% of the purchase price
• More than 25% down = 9% of the purchase price

Generally, the higher your down payment, the more you’ll receive in a seller concession. For instance, if you buy a $350,000 home with 5% down, the seller can contribute up to $10,500 (3%). With 20% down, their contribution rises to $21,000 (6%). If you put down more than 25%, you could get as much as $31,500 (9%).

An FHA loan permits the seller to pay up to 6% of the sale price toward your closing costs.[4] On a $350,000 home purchase, that’s about $21,000. Because the concession amount isn’t tied to your down payment, this option is popular with buyers with limited savings.

Appraisals

• Conventional loan: Focuses primarily on the home’s value and condition
• FHA loan: Stricter, focusing on the property’s safety and security

Both loans require appraisals, though a conventional loan appraisal is less stringent. An appraiser will check the home’s overall condition, verify the size and number of rooms, check the quality of its lighting and plumbing, and assess any damage, such as to the property’s roof or foundation.

An appraisal for an FHA loan is stricter because the government must be able to protect its investment. The goal of this appraisal is to ensure the house is safe for the buyers to inhabit.[5]

“FHA loans have stricter rules about the condition of the house,” Novak said. “If the house has damage or needs repairs, it might not qualify for an FHA loan.”

Co-signer or co-borrower

• Conventional loan: More restrictive with co-signer loans
• FHA loan: A co-signer is permitted

For a conventional loan, the primary occupant must make the first 5% of the down payment out of their own funds, and you can’t borrow more than 90% of the loan’s value. The co-signer should have a good credit score (~620), and both the borrower and the co-borrower will need a DTI of less than 43%.

FHA loans are typically more flexible for co-signer requirements. They’ll need a minimum credit score of 580 (with 3.5% down) and a DTI of 43% or less. Also, the co-signer doesn’t have to be a family member — close friends or employers are eligible if you can provide proof of a long-term relationship.

Occupancy types

• Conventional loan: Primary residences, second homes, and investment properties
• FHA loan: Primary residences only

“For my clients buying investment properties or second homes, conventional's often the only real option anyway since FHA's pretty much limited to primary residences,” Katz said.

An FHA loan limits you to a primary residence with one to four units. You must live in the home as your primary residence for one year.[6]

However, conventional loan occupancy types can include a primary residence, secondary residence, or investment property. You must be able to live in the second home year round, and it must be under your exclusive control (i.e., not a timeshare or rental property).[7]

Which loan type is right for you?

Bottom line: 

• Go with a conventional loan if you: Have a credit score of 620 or higher, can afford a larger down payment, plan to stay in the home long-term, or want to buy an investment property
• Go with an FHA loan if you: Have a lower credit score and limited savings for a down payment, need to save your cash reserves for emergencies, or need to apply with a co-signer

So, a conventional loan vs. an FHA loan — which one should you choose? Katz recommends running the numbers both ways and considering your specific situation.

For instance, think about how long you’ll stay in the house. If you plan to move in five years, an FHA loan may make more sense even with the monthly mortgage insurance because you won’t be making the payment long enough for it to have a long-term impact. But if this is your forever home and your credit is good, you’ll likely save more money with a conventional loan.

Another factor to consider is your overall financial picture. A 20% down payment won’t do you much good if you have to wipe out your emergency fund to afford it.

“I’d rather see someone do FHA with 3.5% down and keep six months of expenses in the bank,” Katz said. “You can always refinance later when you’re more stable.”

Compare FHA vs. conventional loans with Best Interest today. Answer a few questions and we’ll connect you with a dedicated loan officer in minutes to guide you through available loan options and rates—no social or date of birth required. 

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