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If you’re getting ready to buy a house, you have a lot of decisions to make. The same way that you can explore types of properties, you can (and should) explore different types of mortgages. The two most popular kinds of mortgages are conventional loans and FHA loans. Here, we’ll help you decide which might be better for your needs and situation. Key takeaways
Comparing FHA and conventional loans
Both FHA loans and conventional loans are mortgages originated by and issued through private lenders that allow you to finance the purchase of a home.
Conventional loans are what most people think of when they envision a mortgage. They are available through the majority of mortgage lenders in the U.S. — including banks, credit unions, savings and loan institutions and online mortgage companies — and can come in a range of terms, commonly 15 or 30 years, with a fixed or adjustable interest rate. They are not backed or guaranteed in any way by the government: The lender bears all the risk of the debt.
In contrast, FHA loans are insured by the Federal Housing Administration (FHA) and are geared toward homebuyers who might have difficulty obtaining conventional loan financing, primarily by requiring a lower minimum credit score, a smaller down payment, and other flexible qualification standards.
There are also substantial differences in loan limits, mortgage insurance terms and conditions, and debt-to-income maximum ratios. More on all that below.
Understanding FHA loans
FHA loans are insured by the FHA, a division of the U.S. Department of Housing and Urban Development — meaning, it will compensate the lender in case the borrower defaults. In return, the lender follows FHA’s more lenient underwriting criteria, allowing borrowers with lower credit scores to obtain approval, and requiring smaller down payments (usually between 3.5 and 10 percent of a home’s purchase price.)
Other than that, FHA loans work like most other mortgages, with either a fixed or adjustable interest rate and a loan term for a set number of years. FHA loans come with two term options: 15 years or 30 years. They do require you to pay mortgage insurance premiums (MIP) regardless of your down payment amount.
Understanding conventional loans
Conventional loans don’t have government backing. This means the underwriting criteria for approval are stricter, and you must have a higher credit score (at least 620) to qualify. Also, a 20 percent down payment tends to be the standard, though some lenders will allow smaller amounts. If you do put less than 20 percent down, the lender is likely to charge you private mortgage insurance until you are halfway through your loan term.
Depending on the characteristics of the loan, a conventional mortgage is either conforming or nonconforming. Often, conventional lenders sell these types of mortgages to Fannie Mae or Freddie Mac, the secondary mortgage market-makers, after they’re funded. In order to do this, the loan has to conform to, or meet, Fannie and Freddie standards around loan size, borrower financials, and other factors. If it doesn’t, the mortgage is considered nonconforming.
FHA vs. conventional loan requirements
| FHA loans | Conventional loans | |
|---|---|---|
| Credit score minimum | 580 (with 3.5% down) or 500 (with 10% down) | 620 |
| Debt-to-income (DTI) maximum | 50% | 43% |
| Down payment minimum | 3.5% (with a 580 credit score) or 10% (with a 500 credit score) | 3% for fixed-rate loans or 5% for adjustable-rate loans |
| Loan limits | $498,257 in most areas | $766,550 in most areas |
| Mortgage insurance | Mortgage insurance premiums (MIP) required on loans with less than 20% down; unremovable | Private mortgage insurance (PMI) required on loans with less than 20% down; removable |
| Interest rates | FHA loan rates | Conventional loan rates |
FHA vs. conventional credit score requirements
FHA loan borrowers can qualify with a credit score as low as 500 or 580 depending on their down payment amount: as low as 500 with 10 percent down, or as low as 580 with 3.5 percent down. Conventional loans require a credit score of at least 620. If you have excellent or good credit, a conventional loan is often the better choice.
FHA vs. conventional DTI ratio requirements
Another FHA vs. conventional loan differentiator: the debt-to-income (DTI) ratio maximum. This ratio is the measure of all your debt (the mortgage included) relative to your monthly income. For a conforming conventional loan, the maximum DTI ratio is 43 percent. For an FHA loan, the DTI ratio can go up to 50 percent.
FHA vs. conventional down payment requirements
Depending on the lender and program, some conventional loans require as little as 3 percent or 5 percent for a down payment. However, 20 percent is usually the standard amount; many lenders won’t finance more than 80 percent of the home’s price.
In contrast, small down payments are more the norm with FHA loans. If your credit score is at least 580, you can put down just 3.5 percent for an FHA loan; if your score is below 580 (but not lower than 500), you’ll be required to put down 10 percent. Here’s more on minimum down payment requirements.
FHA vs. conventional loan limits
Depending on your location, choosing between an FHA versus conventional loan might come down to the price of the house you want to buy.
Both types of loans have limits on the amount you can borrow. The conventional conforming loan limit, set by the Federal Housing Finance Agency each year, starts at $766,550 in 2024 and goes up to $1,149,825 in more costly housing markets. A conventional loan can exceed these limits, but at that point, it’d be considered a nonconforming jumbo loan.
The FHA loan limit is also adjusted each year, and there are different limits based on location and property type. In 2024, the FHA loan limit for a single-family home is $498,257 in most markets and goes up to $1,149,825 in higher-cost areas.
FHA vs. conventional mortgage insurance
If you don’t have 20 percent of the home’s purchase price for a down payment, you’ll be required to pay for mortgage insurance whether you’re getting a conventional or FHA loan. Both premiums are typically paid via your monthly mortgage payment.
FHA mortgage insurance includes an upfront premium equal to 1.75 percent of the amount you’re borrowing. Then, you’ll pay an annual premium, which is determined by the size of your down payment, how much you borrowed and the length of the loan (15 years versus 30 years).
Aside from differences in premium structure, conventional loan borrowers don’t have to pay for mortgage insurance forever — it can be canceled halfway through a loan term, or once the borrower achieves 20 percent equity (outright ownership) in the home. You can achieve this simply by following your repayment schedule to pay down the loan balance, making extra payments, or refinancing or getting a new appraisal if your home’s value has risen substantially.
In contrast, FHA mortgage insurance can’t be canceled unless you put at least 10 percent down (if so, it’ll end after 11 years), or you refinance to a different type of loan.
FHA vs. conventional appraisal process
When financing your home through a conventional mortgage, your lender requires a home appraisal. They mandate this estimation of the home’s value to ensure it is worth the amount of money they’re extending to you.
Meanwhile, FHA lenders require a more thorough process relating to appraisals, including assessing value and the condition of the property to ensure it’s HUD- compliant. This can hurt your chances of buying a home, since listing agents might suggest their sellers look elsewhere given the time it takes to do an FHA appraisal. Also, sellers must disclose any significant inspection findings to other prospective buyers.
FHA vs. conventional interest rates
With both types of loans, the lender sets the interest rate, determined primarily by your credit score. FHA loans sometimes have more favorable interest rates than conventional loans — but the difference is often offset by the greater number of fees, including the MIP charges, that they have. In fact, the FHA loan’s annual percentage rate (APR), which includes both the cost of the interest rate and all the fees, might actually be higher than that of a comparable conventional loan.
Should you get an FHA loan or conventional loan?
Which loan is better: FHA or conventional? To a large extent, that depends on you. If your credit score is below 620, a loan backed by the FHA might be your only option. It might also be a better deal if you can’t manage a 20 percent down payment, which — given the current $431,000 median price tag on homes — can be over $85,000.
Generally, a conventional loan is best for those with strong credit and a bigger home buying budget. Ultimately, the decision comes down to the type of home you want, your finances and how much of your funds you want to tie up in real estate.
