FHA vs. conventional loan: Which should you choose?

One of the first decisions to make before you start shopping for a home is how you’ll finance the purchase. There’s a good chance you’ll find yourself choosing between an FHA or a conventional loan, which are both popular options.

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FHA loans are insured by the Federal Housing Administration, a subsect of the U.S. Department of Housing and Urban Development (HUD). They are issued by banks, credit unions, and other approved lenders.

Since these mortgages are insured by the government, FHA loan lenders can be more lenient with their credit and down payment requirements. The FHA loan program is designed to make homeownership more accessible to first-time home buyers and to borrowers with limited savings or credit challenges.

Conventional loans typically have stricter eligibility requirements, which means you may need a higher credit score and, in some cases, a larger down payment to qualify.

Conventional mortgage loans can be purchased by Fannie Mae and Freddie Mac, which are both part of the Federal Housing Finance Agency (FHFA). Conforming conventional loans can’t exceed borrowing limits set by the FHFA. Jumbo loans, which are another type of conventional loan, exceed those limits. Conventional loans are available from most mortgage lenders.

Your credit score is an important factor in any loan approval. Most lenders use the FICO scoring model, which ranges from 300 to 850 points. The higher your score, the more trustworthy you are as a borrower from a lender’s point of view.

You generally need a minimum credit score of 620 to be eligible for a conventional mortgage. You can qualify for an FHA home loan with a credit score as low as 500 with a 10% down payment or 580 with a 3.5% down payment.

Your debt-to-income ratio (DTI) compares your gross monthly income with the minimum payment on your recurring debt, such as credit cards, student loans, car loans, and mortgage payments. Lenders evaluate your debt-to-income ratio to make sure you can repay your mortgage loan.

FHA lenders generally prefer a maximum DTI ratio of 43%, but in some cases, they may allow a ratio as high as 57%. Conventional lenders prefer a maximum DTI ratio of 36% to 43%, but sometimes they will go as high as 50%.

When you take out a mortgage to buy a house, your lender will schedule a home appraisal to ensure the property has sufficient value. This way, both you and the lender know the amount you are paying is comparable to the actual home value.

The FHA appraisal process is more demanding than that for a conventional loan. Your property must meet the HUD minimum property requirements, so the appraiser will look for specific safety and construction issues.

You only need to put 3.5% down for FHA loans if your credit score is 580 or higher. If your credit score falls between 500 and 579, you’ll need to come up with a higher down payment of 10%.

Down payment requirements for conventional loans vary from lender to lender. Some may only require a minimum 3% down payment, while other lenders may ask you to put at least 5% down.

Learn more: How to get a mortgage with a 1% down payment

Since FHA loans are backed by the government, they typically have slightly lower mortgage rates than conventional loans.

In both cases, rates vary depending on numerous factors, including your credit score. The lowest mortgage rates are available to borrowers with high credit scores and larger down payments.

Mortgage insurance protects your lender if you default on your loan.

For conventional loans, you’ll need to pay for private mortgage insurance (PMI) if you put less than 20% down. According to the government-sponsored entity Freddie Mac, you can expect to pay between $30 and $70 monthly per $100,000 financed.

For FHA loans, you must pay a mortgage insurance premium (MIP) for the life of the loan, regardless of how much you put down. The only exceptions are if your loan origination date was June 3, 2013, or later, and you made a down payment of at least 10%. In this case, your FHA mortgage insurance is removed after 11 years. You can also remove FHA MIP if your loan origination date was between Jan. 1, 2001, and June 2, 2013, and you’ve reached 22% equity in your home.

MIP consists of two parts: the up-front mortgage premium, which is 1.75% of your base loan amount, and the annual MIP, which depends on various factors

Loan limits cap the amount you can borrow and vary based on the housing costs in each area.

The Federal Housing Finance Agency (FHFA) publishes annual conforming loan limits that apply to all conventional loans.

As of 2025, the conforming loan limit for one-unit single-family homes is $806,500, with higher-cost areas at $1,209,750. If you need to borrow more, you must take out a jumbo loan.

The 2025 FHA loan limit for a one-unit property in a lower-cost area is $524,225, but in select high-cost areas, the ceiling is $1,209,750.

Yes, you can refinance out of an FHA loan and into a conventional one if you meet the eligibility requirements for a conventional mortgage, such as having a credit score of at least 620 and a DTI ratio below 50%.

Refinancing from an FHA loan to a conventional loan is worth considering if you want to remove FHA mortgage insurance and potentially access larger loan amounts.

You can refinance from a conventional loan into an FHA loan with two specific types of refinancing: an FHA cash-out refinance or an FHA 203(k) refinance, two options available to homeowners with any type of loan. But you typically won’t want to do so unless it’s a last resort.

When you convert into an FHA loan, you will need to pay mandatory FHA mortgage insurance charges regardless of how much equity you’ve built up. Even if the rates are lower on FHA loans, it may not make financial sense to refinance into one when you factor in MIP, FHA closing costs, and other expenses.

It depends. A conventional loan might be better if you have good or excellent credit and can manage a 20% down payment, since you’ll likely qualify for an affordable mortgage rate and avoid PMI.

However, if your credit score is between the 500s and the low 600s, a loan backed by the FHA might be your only option.

Even if you have a small down payment, it might be worth choosing a conventional loan so you don’t have to pay for FHA mortgage insurance for the life of the loan. Talk with mortgage lenders to compare overall costs and determine which mortgage makes the most sense mathematically.

One of the biggest downsides of an FHA loan is the up-front and annual mortgage insurance, which can be tricky to get rid of. The up-front mortgage insurance premium costs 1.75% of the original mortgage principal at closing, and the annual MIP varies depending on your mortgage size, term length, and loan-to-value. Another downside to FHA loans is the loan limit. In most parts of the U.S., standard FHA loan limits are lower than conventional loan limits.

One disadvantage of a conventional loan is that the rates may be higher for people with less-than-great credit scores than for other types of mortgages. Conventional loans typically have stricter eligibility requirements than government-backed loans like FHA loans.

To some sellers, a home buyer who qualifies for conventional financing is less risky and more trustworthy than borrowers who qualify for an FHA loan. This is because conventional loans typically require a higher credit score and more money down, which means those who qualify for these loans might be considered more financially responsible and creditworthy. In addition, if a home is in less-than-perfect condition, sellers may be wary of the extra scrutiny of an FHA appraisal.

Laura Grace Tarpley edited this article.