FHA loan vs conventional loan: Which is right for you?

Updated July 2026 · 10-minute read · Reviewed by a licensed loan officer

Choosing between an FHA loan and a conventional loan is one of the first, and most important, decisions you'll make when buying a home. The right choice depends on your credit score, down payment, and how long you plan to stay in the house. Here's the complete breakdown.

Quick comparison: FHA vs conventional

When an FHA loan makes sense

An FHA loan is insured by the Federal Housing Administration. It's designed to help borrowers with lower credit scores or smaller down payments qualify for a mortgage.

✅ Choose FHA if:

• Your credit score is below 680. FHA loans accept scores as low as 580 with 3.5% down. Some lenders even approve 500-579 with 10% down.
• You have limited savings for a down payment. 3.5% down is the minimum, and gift funds from family are allowed.
• Your debt-to-income ratio is high. FHA allows DTI up to 43% (sometimes 50% with compensating factors), while conventional typically caps at 45%.
• You're buying a fixer-upper. FHA 203(k) loans bundle purchase and renovation costs into one mortgage.
• You want an assumable mortgage. FHA loans can be transferred to a qualified buyer when you sell, a huge advantage when rates are high.

❌ Avoid FHA if:

• You plan to stay less than 5 years. FHA mortgage insurance lasts the entire loan if your down payment is under 10%. You can't cancel it.
• You're buying a luxury home. FHA loan limits cap at $806,500 in most areas (2026). High-cost areas go up to $1,209,750.
• The property needs major repairs. FHA appraisers flag safety issues (peeling paint, handrails, roof condition) that must be fixed before closing.
• You have excellent credit (740+). You'll get better rates with conventional, and PMI cancels automatically at 20% equity.

When a conventional loan makes sense

Conventional loans are not backed by a government agency. They follow guidelines set by Fannie Mae and Freddie Mac (called "conforming" loans) or are issued by private lenders without those limits ("jumbo" loans).

✅ Choose conventional if:

• Your credit score is 680 or higher. You'll qualify for the best rates, often 0.25-0.5% lower than FHA.
• You can put down 20% or more. No mortgage insurance at all, this saves you hundreds per month.
• You plan to build equity quickly. PMI cancels automatically at 78% LTV, or you can request removal at 80%.
• You're buying a second home or investment property. Conventional loans allow these; FHA does not.
• You want flexibility on the property. Conventional appraisals are less strict about minor repairs.

❌ Avoid conventional if:

• Your credit score is below 620. Most conventional lenders won't approve you, or they'll charge significantly higher rates.
• You can only afford 3-5% down. You'll pay PMI for years, which might cost more than FHA's mortgage insurance over the same period.
• You have a high DTI ratio (45%+). Conventional loans are stricter about debt-to-income, though some programs allow up to 50% with strong compensating factors.

The mortgage insurance trap: FHA vs conventional

This is where most borrowers get tripped up. Let's compare the real cost:

FHA mortgage insurance (MIP)

• Upfront MIP: 1.75% of the loan amount (can be financed into the loan)
• Annual MIP: 0.15%-0.75% of the loan balance, paid monthly
• Duration: If you put down less than 10%, MIP lasts the entire 30-year loan. No cancellation.
• Exception: With 10%+ down, MIP cancels after 11 years.

Conventional PMI

• Upfront: None (typically)
• Monthly PMI: 0.15%-2% of the loan amount, depending on credit and down payment
• Duration: Cancels automatically at 78% LTV (based on original amortization). You can request removal at 80% with an appraisal.

Real-world example

Let's say you buy a $400,000 home with 5% down ($20,000):

• FHA loan: $380,000 loan. Upfront MIP = $6,650. Annual MIP = 0.55% = $2,090/year = $174/month. Over 30 years, you pay $62,640 in MIP (plus the upfront).
• Conventional loan: $380,000 loan. PMI = 0.7% = $2,660/year = $222/month. But PMI cancels after ~7 years when you hit 78% LTV. Total PMI paid = ~$18,600.

Result: Conventional saves you $44,000+ over the life of the loan, if you can qualify.

How to decide: A step-by-step framework

1. Check your credit score. Below 620? FHA is probably your best option. Above 740? Conventional will save you money.
2. Calculate your down payment. Less than 10%? FHA's lifetime MIP might be expensive. Can you reach 20%? Conventional with no PMI is ideal.
3. Estimate how long you'll stay. Less than 5 years? FHA's upfront MIP might not be worth it. Planning to stay 10+ years? Conventional's PMI cancellation is a huge advantage.
4. Run the numbers. Use our mortgage calculator to compare monthly payments with both loan types. Factor in the mortgage insurance costs.
5. Get quotes from lenders. Ask for Loan Estimates from at least three lenders for both FHA and conventional. Compare the APR (which includes fees and insurance), not just the interest rate.

Frequently asked questions

Bottom line

Choose FHA if: your credit score is below 680, you have less than 10% for a down payment, or you need a more flexible DTI ratio. FHA is a great tool to get into a home sooner, but the lifetime mortgage insurance is expensive if you don't build equity quickly.

Choose conventional if: your credit score is 680+, you can put down at least 5% (ideally 20%), and you plan to stay in the home long enough to build equity. Conventional loans are cheaper over the long run, especially if you can avoid PMI entirely.

Not sure which is right for you? Use our mortgage calculator to compare monthly payments, then get Loan Estimates from three lenders for both loan types. The numbers will tell you which saves you more.