FHA vs conventional loans comparison

If you're in the market to buy a home, you've probably come across the terms FHA loan and conventional loan. These are two of the most common types of mortgages available today. But how do you know which one is right for you?

bbygirl

Jun 27, 2025 - 12:39

In this guide, we’ll break down the key differences between FHA and conventional loans, covering everything from credit score requirements to down payments, pros and cons, and which type of borrower each loan best suits.

What Is an FHA Loan?

An FHA loan is a mortgage insured by the Federal Housing Administration. It’s designed to help lower-income or first-time buyers get access to financing, even if they don’t have perfect credit or a large down payment.

Key Features:

Backed by the government (FHA)
Lower credit score requirements
Minimum 3.5% down payment
Mortgage insurance is required (both upfront and annual)

What Is a Conventional Loan?

A conventional loan is not backed by the government. Instead, it's offered and funded by private lenders and follows the guidelines of Fannie Mae and Freddie Mac, two government-sponsored enterprises.

Key Features:

Not government-insured
Generally requires higher credit scores
Minimum 3% to 5% down payment (can be more)
Private mortgage insurance (PMI) may be required if down payment < 20%

FHA vs. Conventional Loans: Side-by-Side Comparison

Feature	FHA Loan	Conventional Loan
Credit Score	580+ (3.5% down)	620+
Down Payment	As low as 3.5%	As low as 3%
Mortgage Insurance	Required (MIP for life if <10% down)	Required if <20% down (PMI)
Loan Limits	Set by FHA regionally	Higher limits in most areas
Debt-to-Income Ratio (DTI)	Up to 57% allowed in some cases	Typically capped at 43-50%
Property Type	Primary residences only	Primary, second homes, investment
Appraisal Requirements	Stricter FHA appraisal needed	Standard appraisal

Pros and Cons of FHA Loans

✅ Pros:

Easier approval for buyers with low credit
Smaller down payment
Ideal for first-time homebuyers

❌ Cons:

Must pay upfront and annual mortgage insurance
Loan limits are lower
Property must meet strict standards

Pros and Cons of Conventional Loans

✅ Pros:

No mortgage insurance if you put 20% down
Higher loan limits
More flexibility with property types

❌ Cons:

Higher credit score needed
Stricter debt-to-income requirements
May need a larger down payment

Which Loan Is Right for You?

Choose FHA if:
- Your credit score is below 640
- You have limited savings for a down payment
- You’re buying your first home
Choose Conventional if:
- You have a strong credit history
- You want to avoid long-term mortgage insurance
- You’re purchasing a second home or investment property

Final Thoughts

Both FHA and conventional loans have their place in the mortgage market, and the best choice depends on your unique financial situation and long-term goals. Consider talking to a mortgage lender or broker to review your options in detail.