FHA vs. Conventional Loans: Which One Fits Your Purchase?

FHA and conventional loans are the two most common ways to finance a home. Both can work well for first-time and repeat buyers, but they are built differently. The right choice depends on your credit, your down payment, the property and how long you plan to keep the loan.

The basic difference

An FHA loan is insured by the Federal Housing Administration. That insurance protects the lender, which allows for more flexible qualifying standards.

A conventional loan is not backed by a government agency. Most conventional loans follow guidelines set by Fannie Mae and Freddie Mac.

Down payment

• FHA: As little as 3.5% down with a credit score of 580 or higher. Borrowers with scores from 500 to 579 generally need at least 10% down.
• Conventional: As little as 3% down through certain programs for qualifying buyers, often first-time buyers. Many borrowers put down 5%, 10% or more.

Both programs can allow down payment funds to come from an acceptable gift, subject to documentation requirements.

Credit

FHA is generally more forgiving. It is designed to help buyers who may have lower scores, a limited credit history or past credit problems that have since been resolved.

Conventional loans typically require a minimum score of around 620, and pricing tends to improve as your score goes up. Borrowers with strong credit often find conventional financing more cost-effective.

Both programs look closely at your debt-to-income ratio. FHA may allow somewhat higher ratios in some cases, depending on the rest of your file.

Mortgage insurance: the biggest difference

This is where the two loans differ most, and it is often the deciding factor.

FHA mortgage insurance premium (MIP). Every FHA loan carries mortgage insurance, regardless of the down payment. There are two parts:

• An upfront premium, currently 1.75% of the base loan amount, which is usually added to the loan rather than paid in cash
• An annual premium, divided into monthly installments and included in your payment

For most FHA borrowers who put down less than 10%, the annual premium lasts for the life of the loan. With 10% or more down, it generally ends after 11 years. In practice, many FHA borrowers remove it by refinancing into a conventional loan once they have built enough equity.

Conventional private mortgage insurance (PMI). Conventional loans require PMI only when you put down less than 20%. In the standard structure, there is no upfront premium. The monthly cost depends heavily on your credit score and down payment.

Most importantly, conventional PMI can come off. For most loans, you can request cancellation once your balance reaches 80% of the home’s original value, if you meet the lender’s requirements, and it generally ends automatically when the balance is scheduled to reach 78%.

Property and occupancy

• FHA loans are for primary residences only. The property must meet FHA minimum property standards, and condos generally need to be in an FHA-approved project or qualify for a single-unit approval.
• Conventional loans can finance primary residences, second homes and investment properties. Condo projects must meet conventional guidelines.

In Miami, where many buyers are looking at condos, building eligibility can make the decision for you.

Loan limits

FHA loan limits are set by county and are generally lower than conventional limits. Conventional loans above the conforming limit are considered jumbo loans, which have their own requirements.

When FHA tends to win

FHA is often the stronger choice if:

• Your credit score is below the range where conventional pricing becomes competitive
• You have a smaller down payment and a moderate credit score
• Your debt-to-income ratio is on the higher side
• You have had past credit events and have re-established your credit since

When conventional tends to win

Conventional is often the stronger choice if:

• You have good to excellent credit
• You can put down 5% or more, or 20% to avoid mortgage insurance entirely
• You want mortgage insurance that can be removed without refinancing
• You are buying a second home or an investment property
• The condo you want is not FHA-approved

Compare the full cost, not just the payment

The monthly payment is only part of the picture. Compare the upfront costs, the mortgage insurance over the years you expect to keep the loan and the flexibility each option gives you later. Limits on seller-paid closing costs also differ between programs, which can matter when you negotiate.

Sometimes the difference between the two is small. Sometimes it adds up to thousands of dollars over time. The only reliable way to know is to price both options using your actual numbers.

Learn more on our FHA loan and conventional loan pages. If you have served in the military, a VA loan may be worth comparing as well. You can model monthly payments with our mortgage calculator.

Get a side-by-side comparison

In a 30-minute goal consultation, we will review your credit, savings and plans, then prepare FHA and conventional scenarios side by side so you can see which one fits. Schedule your consultation.