When it comes to purchasing a home, securing financing is often the most crucial step in the process. For many potential homeowners, one of the first decisions they must make is whether to apply for a Federal Housing Administration (FHA) loan or a conventional loan. Both loan types have their unique advantages and disadvantages, and choosing the right one can be challenging if you’re unfamiliar with their key differences. This article will break down FHA vs. conventional loans, helping you decide which is the best option based on your financial situation, homeownership goals, and long-term plans.
What is an FHA Loan?
An FHA loan is a government-backed mortgage insured by the Federal Housing Administration, a division of the U.S. Department of Housing and Urban Development (HUD). FHA loans are designed to help lower-income and first-time homebuyers achieve homeownership. They come with more flexible requirements than conventional loans, making them a popular choice for people who may not have the ideal credit score, substantial savings, or a large down payment.
What is a Conventional Loan?
Conventional loans are traditional mortgages that are not insured or guaranteed by the federal government. They are offered by private lenders such as banks, credit unions, and mortgage companies. Conventional loans are often favored by borrowers with a strong credit history, stable income, and a larger down payment. They generally have stricter eligibility requirements compared to FHA loans but may offer lower costs for financially stronger buyers.
Key Differences Between FHA and Conventional Loans
1. Down Payment Requirements
- FHA Loans: FHA loans are known for their low down payment requirements. For many FHA loans, the minimum down payment is just 3.5% of the purchase price, which makes them ideal for first-time homebuyers or those who may not have large savings. This lower down payment requirement is one of the main reasons why many people opt for an FHA loan.
- Conventional Loans: Conventional loans typically require a larger down payment compared to FHA loans. While it is possible to find a conventional loan with a down payment as low as 3%, most conventional loans require at least 5% or 10% down. Buyers who put down less than 20% may also have to pay private mortgage insurance (PMI).
2. Credit Score Requirements
- FHA Loans: FHA loans are more forgiving when it comes to credit score. Borrowers with credit scores as low as 580 can qualify for the standard 3.5% down payment. If your credit score is between 500 and 579, you may still be eligible for an FHA loan, but you will need to provide a larger down payment of at least 10%. The government backing of FHA loans makes them a good option for people with less-than-perfect credit.
- Conventional Loans: Conventional loans typically have stricter credit score requirements. To qualify for a conventional loan, you typically need a credit score of 620 or higher. If your score is in the 700s, you’ll have a better chance of securing a favorable interest rate. A higher credit score can also mean that you’ll need to pay less in mortgage insurance or avoid it altogether if you make a 20% down payment.
3. Mortgage Insurance
- FHA Loans: One of the major downsides of FHA loans is that they require both upfront mortgage insurance (UFMIP) and monthly mortgage insurance premiums (MIP). The upfront premium is typically 1.75% of the loan amount, while the monthly MIP can range from 0.45% to 1.05% of the loan balance, depending on the size of your down payment and the length of your loan term. This insurance helps protect the lender in case you default, but it increases the overall cost of the loan.
- Conventional Loans: With conventional loans, you’ll only need to pay for mortgage insurance if your down payment is less than 20%. This is known as private mortgage insurance (PMI), and the cost varies depending on the size of your down payment, credit score, and loan amount. PMI can typically be removed once you’ve built up 20% equity in your home, which can result in significant savings over time.
4. Loan Limits
- FHA Loans: FHA loan limits are determined by the county in which the home is located and are based on the median home price in that area. In 2025, the FHA loan limit for a single-family home ranges from $472,030 in most areas to $1,000,000 in high-cost areas such as parts of California and New York. Because of these limits, FHA loans are generally best suited for homes priced within the median home range.
- Conventional Loans: Conventional loans have higher loan limits compared to FHA loans. For most areas in 2025, the conventional loan limit is $726,200, though this can be higher in areas with expensive real estate. Some high-cost areas may have conventional loan limits that go above $1,000,000, offering more flexibility for buyers looking at higher-priced homes.
5. Eligibility Requirements
- FHA Loans: FHA loans are available to most homebuyers, including first-time homebuyers and those who have had past financial issues, such as bankruptcies or foreclosures. While they are more flexible in terms of credit history and down payment, you must meet other basic requirements, such as having a steady income, proof of employment, and the ability to repay the loan.
- Conventional Loans: Conventional loans tend to be more stringent in terms of eligibility. Lenders look for borrowers with strong credit scores, stable income, and a low debt-to-income ratio (DTI). Unlike FHA loans, there is no federal insurance backing conventional loans, so lenders rely more heavily on the borrower’s financial profile to determine whether they qualify.
6. Interest Rates
- FHA Loans: FHA loans typically have lower interest rates than conventional loans, especially for buyers with lower credit scores. However, the additional cost of mortgage insurance can offset this advantage, making the overall cost of the loan higher than that of a conventional loan, even with a lower interest rate.
- Conventional Loans: Interest rates on conventional loans can vary significantly based on the borrower’s credit score, down payment, and loan type (fixed-rate or adjustable-rate mortgage). Borrowers with higher credit scores and larger down payments often receive more competitive rates compared to FHA loans, especially when PMI costs are factored in.
Pros and Cons of FHA Loans
Pros:
- Lower down payment requirements (as low as 3.5%).
- More lenient credit score requirements, making it easier for buyers with poor credit to qualify.
- FHA loans are a good option for first-time homebuyers.
- Available to borrowers who have filed for bankruptcy or foreclosure in the past.
Cons:
- Upfront mortgage insurance (UFMIP) and ongoing monthly mortgage insurance premiums (MIP) increase the overall cost of the loan.
- Loan limits may not be sufficient for more expensive homes.
- Mortgage insurance premiums cannot be canceled unless the loan is refinanced.
Pros and Cons of Conventional Loans
Pros:
- Lower overall mortgage insurance costs (or none if you put down 20%).
- Higher loan limits, which make them suitable for higher-priced homes.
- No mortgage insurance after 20% equity is achieved.
- Typically lower interest rates for borrowers with strong credit scores and financial stability.
Cons:
- Higher down payment requirements, typically 5% or more.
- Stricter credit score and debt-to-income ratio requirements.
- PMI required for down payments of less than 20%.
Which Loan Is Right for You?
Choosing between an FHA loan and a conventional loan largely depends on your personal financial situation and the type of home you plan to purchase.
- If you have a low credit score or limited savings: FHA loans may be the better choice because of their lower down payment requirements and more lenient credit score standards.
- If you have a good credit score, a larger down payment, and are buying a more expensive home: Conventional loans may offer better terms, such as lower interest rates and the ability to avoid mortgage insurance.
- If you are a first-time homebuyer with minimal savings: An FHA loan could help you get into homeownership with a smaller down payment and less stringent eligibility requirements.
Ultimately, the best choice for you depends on your financial health, how much you can afford to put down, and your long-term goals. Consulting with a mortgage broker or lender can also help you better understand the available options and make an informed decision.
Conclusion
In the battle of FHA vs. conventional loans, there’s no one-size-fits-all answer. FHA loans may be ideal for those with lower credit scores and smaller savings, while conventional loans tend to favor buyers who can afford larger down payments and have strong credit histories. Carefully assess your financial standing, future plans, and the pros and cons of each loan type to ensure that you choose the option that’s right for you and your homeownership journey.
