When you start shopping for a mortgage, two options dominate the conversation: FHA loans and conventional loans. Both can get you into a home, but they differ significantly in cost structure, qualification requirements, and long-term value. Understanding these differences can save you tens of thousands of dollars over the life of your loan.
FHA Loans at a Glance
FHA loans are insured by the Federal Housing Administration and are designed to make homeownership accessible to borrowers with lower credit scores or smaller down payments.
- Minimum down payment: 3.5% with a credit score of 580+
- Credit score requirement: 500 minimum (10% down required for 500-579)
- Mortgage insurance: Upfront premium of 1.75% of the loan amount plus annual premiums of 0.55% for most borrowers
- Loan limits: Vary by county, typically $498,257 to $1,149,825 in high-cost areas (2026)
- Property requirements: Must meet FHA minimum property standards
Conventional Loans at a Glance
Conventional loans are not government-backed. They follow guidelines set by Fannie Mae and Freddie Mac and tend to reward borrowers with strong credit profiles.
- Minimum down payment: 3% for first-time buyers, 5% otherwise
- Credit score requirement: 620 minimum, best rates at 740+
- Mortgage insurance: PMI required with less than 20% down, but it can be removed once you reach 20% equity
- Loan limits: $766,550 for most areas, up to $1,149,825 in high-cost areas (2026)
- Property requirements: Less strict than FHA
The Real Cost Comparison
Let us look at a concrete example. Suppose you are buying a $350,000 home.
Scenario: 5% Down Payment
FHA Loan: You put down $12,250 (3.5%). Your loan amount is $337,750 plus the 1.75% upfront MIP ($5,911), bringing the financed total to $343,661. Your annual MIP of 0.55% adds about $155/month. Total monthly payment (P&I + MIP): approximately $2,328.
Conventional Loan: You put down $17,500 (5%). Your loan amount is $332,500. PMI at roughly 0.5% adds about $138/month. Total monthly payment (P&I + PMI): approximately $2,244. Once you reach 20% equity, PMI drops off, saving you $138/month going forward.
When FHA Is the Better Choice
- Your credit score is between 580 and 620
- You have limited savings and need the lowest possible down payment
- You have a higher debt-to-income ratio (FHA allows up to 57% in some cases)
- You plan to refinance into a conventional loan once your credit improves or you build equity
When Conventional Is the Better Choice
- Your credit score is 700 or higher
- You can put at least 5% down (ideally 10% to 20%)
- You want to eliminate mortgage insurance eventually
- You are buying a condo or investment property (FHA has stricter condo approval requirements)
- You want more flexibility in property condition
Other Loan Types to Consider
FHA and conventional are not your only options. Depending on your situation, you might also explore:
- VA loans: Zero down payment for eligible veterans and active-duty service members
- USDA loans: Zero down payment for rural and suburban properties in eligible areas
- State and local programs: Many states offer special first-time buyer programs with reduced rates. Check out down payment assistance programs for more options.
How to Decide
Start by checking your credit score and calculating your debt-to-income ratio. If your credit is above 700 and you have some savings, conventional is almost always the better long-term deal. If your credit needs work or your savings are thin, FHA can get you into a home now while you build equity and improve your financial profile.
Use our affordability calculator to see how different loan types affect your buying power, and talk to multiple lenders to compare actual rates and fees for your specific situation.