FHA vs Conventional Loans
FHA and conventional loans are the two most common mortgage types in America. Each has distinct advantages depending on your credit score, down payment, and financial situation. Choosing the wrong one can cost you thousands in unnecessary fees. Here is how they compare.
FHA Loans — Government-Backed
- Minimum credit score — 580 for 3.5% down payment. 500-579 with 10% down
- Down payment — As low as 3.5%
- Mortgage insurance — Upfront MIP of 1.75% of loan amount PLUS annual MIP of 0.55% for the life of the loan (if you put less than 10% down). This is the biggest downside — you pay mortgage insurance forever unless you refinance to conventional
- DTI limit — Up to 57% in some cases (more flexible than conventional)
- Property requirements — Must meet FHA minimum property standards. Some fixer-uppers will not qualify
- Loan limits — $498,257 in most areas (2025). Higher in expensive counties up to $1,149,825
- Best for — Buyers with lower credit scores (580-699), small down payments, or higher DTI ratios
Conventional Loans — Not Government-Backed
- Minimum credit score — 620 minimum. Best rates at 740+
- Down payment — As low as 3% (Conventional 97) or 5% standard
- PMI — Required if down payment is less than 20%. BUT it can be removed once you reach 20% equity (automatic at 22%). This is a major advantage over FHA
- DTI limit — Generally 45% maximum. Stricter than FHA
- Property flexibility — No government property standards. More flexibility on property condition
- Loan limits — $766,550 in most areas (conforming limit). Jumbo loans available above this
- Best for — Buyers with good credit (700+), 10-20%+ down payment, or who want to avoid lifetime mortgage insurance
Cost Comparison Example
$350,000 home, 5% down ($17,500), 6.5% rate:
- FHA loan — Upfront MIP: $5,819 (rolled into loan). Monthly payment: $2,259 (includes $152/month MIP). MIP never goes away. Total cost over 10 years: $271,080 + $18,240 MIP = $289,320
- Conventional loan — No upfront fee. Monthly payment: $2,251 (includes $140/month PMI). PMI drops off at ~78% LTV (~7 years). Total cost over 10 years: $270,120 + $11,760 PMI = $281,880
- Savings with conventional — $7,440 over 10 years
Quick Decision Guide
- Credit score below 680 → FHA (better rates at lower scores)
- Credit score 680-719 → Compare both (rates are similar, but FHA has lifetime MIP)
- Credit score 720+ → Conventional (better rates, PMI drops off)
- Down payment 3-5% → Either works, but conventional avoids lifetime MIP
- Down payment 10-19% → Conventional (PMI drops off sooner)
- Down payment 20%+ → Conventional (no PMI at all)
Pro tip: Even if you start with an FHA loan due to low credit, plan to refinance to conventional once your credit improves and you have 20% equity. This eliminates the lifetime MIP and saves thousands.