The core difference
FHA loans are backed by the Federal Housing Administration and designed for buyers with lower credit scores or smaller down payments. Conventional loans are not government-backed — they follow guidelines set by Fannie Mae and Freddie Mac and typically require stronger credit.
Neither is universally better. The right choice depends entirely on your credit score, down payment, and how long you plan to stay in the home.
Side-by-side comparison
| Factor | FHA Loan | Conventional |
|---|---|---|
| Min credit score | 580 (3.5% down) / 500 (10% down) | 620 (most lenders) |
| Min down payment | 3.5% | 3% |
| Mortgage insurance | Life of loan (if < 10% down) | Removable at 20% equity |
| Upfront MIP/fee | 1.75% of loan | None |
| Annual MIP/PMI cost | ~0.55%/yr | ~0.5–1.5%/yr (varies) |
| Loan limit (2025) | $524,225 most counties | $806,500 |
| Property types | Primary residence only | Primary, second home, investment |
| DTI limit | Up to 57% (with exceptions) | Up to 50% (with exceptions) |
| Gift funds | Allowed | Allowed |
| Assumable | Yes | Rarely |
When FHA is the better choice
FHA loans tend to win in these situations:
- Credit score 580–679: Conventional lenders charge significantly higher rates at this range through loan-level price adjustments (LLPAs). FHA rates are more consistent regardless of credit score.
- Limited savings: FHA's 3.5% minimum down payment combined with allowable gift funds makes it the most accessible path to homeownership for many buyers.
- Higher debt load: FHA allows DTI up to 57% in some cases. Conventional loans are stricter, especially for borrowers with student loans or car payments.
- You plan to sell within 5 years: If you're not staying long enough to build 20% equity and remove conventional PMI, the FHA MIP disadvantage matters less.
When conventional is the better choice
Conventional loans pull ahead in these scenarios:
- Credit score 700+: At this range, conventional rates are competitive with FHA — and you avoid the FHA upfront MIP of 1.75%. Over a 30-year loan that's thousands of dollars.
- Down payment of 10–20%: The more you put down, the lower your conventional PMI — and it's removable once you hit 20% equity. FHA MIP typically stays for the life of the loan.
- Buying above FHA loan limits: In high-cost markets where homes exceed $524,225, you'll need a conventional or jumbo loan.
- Investment properties or second homes: FHA only covers primary residences. Conventional loans can be used for investment properties and vacation homes.
- Long-term cost: Because conventional PMI is removable and there's no upfront fee, the total 30-year cost is usually lower for well-qualified buyers.
The mortgage insurance comparison in detail
Mortgage insurance is the biggest financial difference between the two loan types — and it's often misunderstood.
FHA mortgage insurance
- Upfront MIP: 1.75% of loan amount, added to your loan balance
- Annual MIP: 0.55% for most borrowers, paid monthly
- Duration: Life of loan if down payment is less than 10%
- Cannot be removed by building equity — you'd need to refinance
Conventional PMI
- No upfront fee
- Annual cost: 0.5–1.5% depending on credit score and down payment
- Automatically cancelled when loan balance reaches 78% of original value
- Can be requested for removal at 80% LTV
On a $330,000 loan, FHA MIP costs about $151/month and never goes away (without refinancing). Conventional PMI at 0.85% costs about $234/month but disappears once you have 20% equity — roughly year 8 on a 30-year loan with minimum payments.
A real cost comparison
Let's compare both options on a $350,000 home purchase for a buyer with a 640 credit score:
| FHA (3.5% down) | Conventional (5% down) | |
|---|---|---|
| Down payment | $12,250 | $17,500 |
| Upfront MIP/fee | $5,908 (financed) | $0 |
| Loan amount | $343,158 | $332,500 |
| P&I payment (6.8%) | $2,235 | $2,165 |
| Monthly MIP/PMI | $157 | $235 |
| Total monthly (est.) | $2,692 | $2,700 |
| PMI removed at | Never (unless refi) | ~Year 9 |
| 5-year total cost | $161,520 | $162,000 |
| 10-year total cost | $323,040 | $308,400 |
In this example the monthly payments are nearly identical in early years, but conventional pulls significantly ahead long-term once PMI is removed. FHA wins if the buyer can't come up with the extra $5,250 down payment difference.
The bottom line
Choose FHA if: your credit score is below 680, you have minimal savings, or you carry significant existing debt. The lower barrier to entry is worth the long-term MIP cost if it gets you into a home sooner.
Choose conventional if: your credit score is 700+, you can put down 10–20%, or you're buying a higher-priced home above FHA limits. The ability to remove PMI and avoid the upfront MIP fee saves meaningful money over time.
Use our FHA vs conventional calculator to compare the exact monthly payments for your specific situation — including taxes, insurance, and mortgage insurance for both loan types side by side.