When you’re looking to buy a house, deciding between a Federal Housing Administration (FHA) vs conventional loan can feel overwhelming. Both options have unique benefits and drawbacks, and the right choice depends on your individual (and financial) situation.
FHA loans often appeal to first-time homebuyers because of their lower credit and down payment requirements, while conventional loans might be a better fit for buyers with stronger credit profiles.
So, if you’re debating FHA loan vs conventional when planning how to buy a house, how do you decide which one is right for you? Let’s break down the difference between a conventional loan vs FHA loans to help you make the best decision for your financial future.
MoneyLion can help you explore loan options tailored to your needs. Whether you’re considering an FHA or conventional loan, our service connects you with personalized offers for up to $100,000 from trusted lenders. Compare rates, terms, and fees side by side to make a confident choice.
What is an FHA loan?
An FHA loan is a government-backed mortgage issued by approved lenders and insured by the Federal Housing Administration. These loans are designed for borrowers with lower credit scores or limited savings for a down payment. FHA loans typically require a down payment of just 3.5%, making them a popular option for first-time homebuyers. Below is more info on the FHA loan, plus pros and cons of FHA loan vs conventional loans to help you decide what works best for you, and if the benefits of FHA loans vs conventional ones outweigh the negatives.
When does it make sense to get an FHA loan?
FHA loans are ideal for buyers who:
- Have a lower credit score and may not qualify for conventional loans.
- Don’t have enough savings for a large down payment.
- Need more lenient debt-to-income (DTI) requirements.
Pros and cons of FHA loans
Here are some of the benefits of FHA loans:
- Lower credit score requirements
- Smaller down payments
- Lenient debt-to-income ratio
And here are some of the potential downsides:
- Mandatory mortgage insurance premiums
- Lower loan limits
- Strict property standards
While FHA loans open doors for many borrowers, they aren’t the only option. Let’s look at how conventional loans compare.
What is a conventional mortgage loan?
A conventional loan is a mortgage not insured or backed by the government, which means lenders take on more risk and, in turn, have stricter requirements for borrowers. These loans are incredibly versatile, but qualifying for one often requires meeting higher standards than government-backed options like FHA loans.
Conventional loans fall into two main categories:
- Conforming Loans: These adhere to guidelines set by Fannie Mae and Freddie Mac, the government-sponsored entities that purchase mortgages from lenders. These guidelines include strict loan limits, which are set annually and vary by location. For 2025, the baseline conforming loan limit is $806,500 for most areas, but it can go higher in pricier housing markets. Borrowers must meet credit score requirements (typically a minimum of 620), as well as limits on their debt-to-income ratio (usually no higher than 50%).
- Nonconforming Loans (Jumbo Loans): These loans exceed Fannie Mae and Freddie Mac’s loan limits or cater to unique property types, such as luxury homes or multi-million-dollar properties. Because they’re riskier for lenders, jumbo loans come with even stricter qualifications. Borrowers often need a credit score of 700 or higher, a larger down payment (usually 10–20%), and significant cash reserves to prove they can cover the loan.
When does it make sense to get a conventional home loan?
Conventional loans are a strong choice in these scenarios:
- You have a good credit score. A minimum credit score for a conventional loan is generally 620.
- You can make a larger down payment. A 5% minimum is typical, but 20% eliminates mortgage insurance.
- You’re buying a higher-value home. One difference between conventional and FHA loans is that conventional loans often cover amounts that exceed FHA loan limits.
Pros and cons of conventional loans
Here are some of the pros of conventional loans:
- No mortgage insurance with a 20% down payment.
- Higher loan limits.
- Fewer restrictions on property condition.
Some of the potential cons:
- Stricter credit score requirements
- Larger down payments
- More stringent debt-to-income limits
What are the main differences between FHA and conventional loans?
Understanding the difference between FHA and conventional mortgage loans can help you make the right choice.
Down payment requirements
- FHA loans: Require a 3.5% down payment with a credit score of 580 or higher.
- Conventional loans: Require a minimum of 5%, but 20% eliminates mortgage insurance.
Credit scores
- FHA loans: Allow credit scores as low as 500 with a larger down payment.
- Conventional loans: Conventional loan qualifications are generally tougher. The minimum credit score for conventional loans is typically 620.
Learn more about what credit score mortgage lenders use.
Debt-to-income ratios
- FHA loans: Allow DTIs up to 57%.
- Conventional loans: Stricter, often maxing out at 43–50%.
Loan limits
- FHA loans: Loan limits vary by county but are generally lower.
- Conventional loans: Higher loan limits, especially for jumbo loans.
Mortgage rates
- FHA loans: Wondering about FHA vs conventional loan interest rates? FHAs tend to have slightly lower rates but come with mandatory insurance.
- Conventional loans: Rates depend on your credit score but may save you money long-term.
Here are ways to potentially get a lower rate on your insurance.
Property types
When it comes to property types, FHA loans are more restrictive. They can only be used for primary residences, meaning you must live in the home you’re buying. On the other hand, conventional loans are much more flexible — they can be used for primary residences, vacation homes, or even investment properties. If you’re dreaming of a rental empire, conventional loans are your ticket.
Property standards
FHA loans have strict property standards to ensure safety, security, and livability. The home must meet the Federal Housing Administration’s guidelines, which can lead to more detailed appraisals and possible repair requirements. Conventional loans, however, are less picky. They don’t have the same stringent standards, making them a better choice for properties in need of a little TLC.
Mortgage insurance
FHA loans require mortgage insurance regardless of your down payment. This includes both an upfront premium (1.75% of the loan amount) and an annual premium, which lasts the life of the loan unless you refinance. With conventional loans, mortgage insurance (PMI) is only required if your down payment is less than 20%, and it can be canceled once you reach 20% equity. This makes conventional loans potentially cheaper in the long run.
Appraisal processes
For FHA loans, appraisals are more than just determining value — they also ensure the home meets HUD’s strict property standards. The process can uncover issues that need to be resolved before the loan is approved. Conventional loans, on the other hand, focus solely on property value, and the appraisal process is typically quicker and less detailed.
Refinancing
Many borrowers refinance from FHA to conventional to eliminate mortgage insurance or secure better rates. FHA loans can also be refinanced using FHA Streamline Refinancing, which makes the process a lot simpler. Conventional loans offer even more refinancing flexibility, often allowing borrowers to cash out equity or reduce their interest rates with competitive terms.
Learn more about the pros and cons of refinancing a home loan and when to refinance a mortgage.
Which is better: FHA or conventional loan?
Deciding between an FHA vs conventional loan depends on your financial situation. FHA loans are great for buyers with lower credit scores or smaller down payments. On the other hand, the benefits of FHA loans vs conventional include more accessibility, while conventional loans are ideal for borrowers with stronger credit profiles or plans to invest in property.
FAQs
Are FHA loans harder to get than conventional loans?
Not at all. FHA loans have more lenient credit and income requirements, making them easier for many borrowers to qualify for.
Are FHA loan rates lower than conventional loans?
FHA loans often have slightly lower base rates, but mandatory mortgage insurance can make them more expensive overall.
Why do sellers prefer conventional loans over FHA loans?
Sellers often prefer conventional loans because they come with fewer property condition requirements and generally quicker closing timelines.
What are the benefits of an FHA loan?
FHA loans allow for lower credit scores, smaller down payments, and higher debt-to-income ratios, making homeownership more accessible.
How much down payment do you need for an FHA loan?
With an FHA loan, you can make a down payment of as little as 3.5% if your credit score is 580 or higher, or 10% for scores between 500–579.
