FHA Loans vs Conventional Loans: A Complete Comparison
For most first-time homebuyers and those with less-than-perfect credit, the choice often comes down to FHA loans backed by the Federal Housing Administration or conventional loans following guidelines set by Fannie Mae and Freddie Mac. Understanding the differences between these programs can help you choose the one that saves the most money.
Down Payment Requirements
FHA loans allow down payments as low as 3.5% for borrowers with credit scores of 580 or higher. Borrowers with scores between 500 and 579 must put down at least 10%. Conventional loans now offer 3% down payment options through programs like Fannie Mae HomeReady and Freddie Mac Home Possible, though these require meeting income limits. Standard conventional loans typically require 5% down, and putting down 20% eliminates private mortgage insurance entirely.
Credit Score Requirements
FHA loans accept scores as low as 500. Most FHA lenders require 580 or higher for the 3.5% down payment option. Conventional loans typically require a minimum of 620, with the best rates requiring 740 or higher. The rate difference between a 620 score and a 760 score on a conventional loan can be 1.5% or more over the life of the loan.
Mortgage Insurance: The Critical Difference
FHA loans require an upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount plus an annual mortgage insurance premium (MIP) ranging from 0.45% to 1.05%. FHA MIP is required for the full loan term if you put down less than 10%, and for 11 years if you put down 10% or more. Conventional PMI is cancelable — once you reach 20% equity, you can request cancellation, and lenders must automatically cancel it at 22%.
Making the Right Choice
FHA is often better for borrowers with credit scores below 680, higher debt-to-income ratios, or who need flexible income documentation. Conventional is typically superior for borrowers with good credit who can reach 20% equity within a reasonable timeframe and want to avoid lifelong mortgage insurance.
Explore our mortgage guides for more information, or speak with a loan officer to run a side-by-side comparison using current rates.