The Differences Between Conventional and FHA Loans

22 April 2025

When buying a home, one of the biggest decisions you’ll face is which type of mortgage to choose. You’ve probably heard about Conventional Loans and FHA Loans, but how do you know which one is right for you?

Each loan type has its own pros and cons, and understanding these differences can save you thousands of dollars over the life of your mortgage. In this guide, we’ll break it all down in a clear, easy-to-understand way so you can make the best choice for your financial situation.

What Are Conventional and FHA Loans?

Before diving into their differences, let’s first understand what these loans actually are.

Conventional Loans

A Conventional Loan is a mortgage that isn’t backed or insured by a government agency like the FHA, VA, or USDA. These loans are typically offered by private lenders such as banks, credit unions, and mortgage companies.

Conventional loans usually have stricter qualifying criteria but offer more flexibility regarding loan limits, down payments, and mortgage insurance.

FHA Loans

An FHA Loan, on the other hand, is backed by the Federal Housing Administration (FHA). This means that the government guarantees the loan to lenders, reducing their risk. FHA loans are designed to help lower-income and first-time homebuyers who may have difficulty qualifying for a conventional loan.

With lower credit score requirements and smaller down payments, FHA loans make homeownership more accessible. However, they also come with additional costs, such as mortgage insurance premiums (MIP).

Now that we’ve got a basic understanding, let's compare them in detail!

1. Credit Score Requirements

One of the biggest differences between Conventional and FHA loans is the credit score needed to qualify.

- Conventional Loans: Generally require a minimum credit score of 620. However, to get the best interest rates, a score of 700 or higher is recommended.
- FHA Loans: More flexible, allowing credit scores as low as 500 with a 10% down payment or 580 with just a 3.5% down payment.

💡 Bottom Line: If you have a lower credit score, an FHA loan may be your best bet. If your score is solid, a conventional loan can save you money in the long run.

2. Down Payment Requirements

The down payment is a crucial factor when choosing a mortgage.

- Conventional Loans: Typically require a minimum 3% down payment, but if you put down 20% or more, you can avoid Private Mortgage Insurance (PMI) altogether.
- FHA Loans: Require a minimum 3.5% down payment, but with a credit score below 580, you’ll need to put down at least 10%.

💡 Bottom Line: If you don’t have much saved for a down payment and your credit score isn’t great, FHA loans are a solid option. But if you can afford a bigger down payment, a conventional loan will save you money on mortgage insurance.

3. Mortgage Insurance: PMI vs. MIP

Mortgage insurance is an extra cost designed to protect the lender in case you default on your loan.

- Conventional Loans: Require Private Mortgage Insurance (PMI) if your down payment is less than 20%. The good news? Once you reach 20% home equity, PMI can be removed.
- FHA Loans: Require Mortgage Insurance Premium (MIP), which includes an upfront fee (1.75% of the loan amount) and an annual fee (0.45% - 1.05%). Unfortunately, MIP stays for the life of the loan unless you refinance into a conventional mortgage.

💡 Bottom Line: Conventional loans are better for avoiding long-term mortgage insurance costs. FHA loans can be costly because MIP sticks around unless you refinance.

4. Loan Limits

Both FHA and conventional loans have limits on how much you can borrow, but they vary.

- Conventional Loans: Loan limits are set by Fannie Mae and Freddie Mac. As of 2024, the limit is $766,550 in most areas, but it can be higher in more expensive regions.
- FHA Loans: The maximum loan amount varies by county and generally falls below conventional loan limits. The limit for most areas in 2024 is $498,257, but it goes up in high-cost areas.

💡 Bottom Line: If you're looking at a more expensive home, conventional loans offer higher loan limits than FHA loans.

5. Property Requirements

FHA loans have stricter property requirements compared to conventional loans.

- Conventional Loans: Allow for homes in various conditions, including fixer-uppers. You have more flexibility on what you can buy.
- FHA Loans: Require the property to meet specific health and safety standards. The home must be livable and in good condition, as part of FHA’s goal is to promote safe housing.

💡 Bottom Line: If you’re planning to buy a fixer-upper or a home that needs repairs, a conventional loan offers more flexibility.

6. Closing Costs

Closing costs can be a surprise expense for many homebuyers.

- Conventional Loans: Closing costs usually range from 2% to 5% of the home’s purchase price.
- FHA Loans: Often have higher closing costs, but the seller can contribute up to 6% toward them (compared to only 3% for conventional loans).

💡 Bottom Line: If you need help with closing costs, FHA loans allow for higher seller contributions. But conventional loans can be cheaper overall.

7. Who Should Get a Conventional Loan?

A conventional loan is ideal if you:

✅ Have a good credit score (620+)
✅ Can afford a larger down payment (at least 5%, ideally 20%)
✅ Want to avoid long-term mortgage insurance costs
✅ Are buying a more expensive home
✅ Want more flexibility on property choices

8. Who Should Get an FHA Loan?

An FHA loan is better if you:

✅ Have a lower credit score (500-620)
✅ Have limited savings and need a lower down payment
✅ Are a first-time homebuyer
✅ Need help with closing costs
✅ Are buying a primary residence only (FHA loans cannot be used for second homes or investment properties)

Final Thoughts: Which Loan is Right for You?

There’s no one-size-fits-all answer when it comes to choosing between a Conventional Loan and an FHA Loan. Your financial situation, credit score, down payment ability, and future homeownership goals all play a role in deciding which loan is best.

If you have a strong credit score and savings for a bigger down payment, a conventional loan is likely the better choice. However, if you are a first-time buyer with a lower credit score and smaller savings, an FHA loan can help you become a homeowner sooner.

At the end of the day, your dream of owning a home is within reach—you just need to choose the best mortgage path to get there!