FHA vs. Conventional: Which is Best for You?

FHA and conventional loans are the two most common mortgage options out there, but they aren’t interchangeable. The right loan choice depends on your credit, budget, down payment size, homebuying goals, and other factors.

Here’s what to know about FHA and conventional loans — and when one might be the better option.

What is an FHA loan?

An FHA loan is backed by the Federal Housing Administration (FHA). This simply means the FHA assumes some of the risk on these loans and will repay a lender a portion of its losses if a borrower defaults.

Thanks to this guarantee, lenders can have looser qualifying standards on FHA loans. These loans allow for lower credit scores and higher debt-to-income ratios than other loan options, making them easier to qualify. FHA loans come in 15- and 30-year terms and can have fixed or variable interest rates.

What is a conventional loan?

Conventional loans are private loans, meaning they are not backed by a government entity. They are either conforming or non-conforming, though conforming loans are the most popular choice on the market due to generally offering lower interest rates.

A conforming conventional loan meets the standards set by Freddie Mac and Fannie Mae, including requirements for credit score, debt-to-income ratio, loan-to-value ratio, and down payment. These government-sponsored enterprises buy mortgages from lenders, helping them offer more loans and keep mortgage rates lower.

Conventional loans come in many different term lengths (though 15- and 30-year term mortgages are the most popular) and can have either fixed or variable interest rates. Jumbo loans are also a type of conventional loan. You might want these larger-sized loans if you’re buying an expensive property or in a pricier housing market.

Key Differences Between FHA vs. Conventional Mortgages

FHA and conventional mortgages each come with unique features. Here are the four biggest differences to consider:

The first, and biggest difference between FHA and conventional loans is that FHA loans are government-backed, which allows lenders to loan money to less creditworthy borrowers. For instance, if a property owner defaults on their mortgage, the government will pay a claim to the lender for the unpaid principal balance. Since lenders take on less risk, they are able to offer more mortgages to homebuyers.

Since conventional loans don’t have this backing, they’re harder to qualify for. Lenders set more stringent qualifying requirements to help ensure they only approve borrowers who can make their payments for the long haul.

Despite stricter qualifications, conventional loans are more common and easier to find. To issue an FHA loan, a lender must be approved by the Department of Housing and Urban Development. Not all lenders have this approval, so these loans aren’t as widely available.

Mortgage insurance — which protects the lender if you default on your loan — also differs across these two loan options. While FHA loans require both upfront and monthly mortgage insurance, conventional loans have no upfront mortgage insurance premiums (only monthly ones). FHA mortgage insurance also lasts for the life of the loan in most cases. Conventional mortgage insurance can be canceled once you’ve paid down enough of your loan.

Thanks to this guarantee, lenders can have looser qualifying standards on FHA loans. These loans allow for lower credit scores and higher debt-to-income ratios than other loan options, making them easier to qualify. FHA loans come in 15- and 30-year terms and can have fixed or variable interest rates.

Credit Score

You typically need at least a 620 credit score for a conforming conventional loan. With an FHA loan, you can qualify with a score as low as 500 (as long as you have a 10% down payment) or 580 (if you have at least a 3.5% down payment).

Keep in mind that those are just the minimums set by FHA. Lenders can choose to set stricter credit requirements.

Down Payment

Conventional loans allow for the lowest down payment amount, requiring just a 3% minimum on conforming loans. FHA loans allow for a slightly higher 3.5% down payment, but you need at least a 580 credit score, as noted above. If your score is lower, you need a larger down payment of 10%.

Interest Rates

FHA mortgage rates are lower since the government’s backing alleviates some of the risk lenders take when issuing them. However, just because interest rates are lower does not necessarily make FHA loans cost less. Additional costs such as mortgage insurance can offset the difference in interest rate over time.

Appraisal Process

You likely need to have your home appraised no matter what loan program you use, but the process is much easier with conventional loans. For these appraisals, the lender is looking to assess the property’s value and the quality of the construction of the home. However, rather than noting the extensive repairs that FHA appraisals sometimes do, a conventional appraisal is going to note and require repairs that affect the safety, soundness, or structural integrity of the property.

With FHA loans, the appraiser assesses the home’s value, construction, and condition like a conventional loan. However, the property must meet additional minimum property standards set by the FHA to ensure it is a sound investment and safe for living. FHA appraisals can only be conducted by FHA-approved professionals.

Loan Limits

FHA loan limits are lower than conventional loans, at least in most parts of the country. With an FHA loan, you’re limited to $498,257 in most areas, while conforming conventional loans have limits of up to $766,550.

Here’s a look at how loan limits compare between these loan options. Be aware: these loan limits are adjusted annually based on home prices, so if you buy in 2025, you may see different limits.

Non-conforming conventional loans can be even higher than the above—often in the millions. These are called jumbo loans and can vary quite a bit from one lender to the next.

Mortgage Insurance

Both conventional and FHA loans require mortgage insurance in certain circumstances. For a conventional loan, you typically need to pay for private mortgage insurance (PMI) if your down payment is less than 20%. You can cancel that insurance once you’ve reached an 80% loan-to-value ratio — meaning your mortgage balance is 80% or less than your home’s value. Mortgage insurance on conventional loans is paid monthly as part of your mortgage payment.

With FHA loans, you owe a mortgage insurance premium — called MIP in this case — no matter what your down payment is. First, you pay 1.75% of your loan amount at closing for the upfront mortgage insurance premium (UFMIP), and then monthly, you pay between 0.40% to 1.05% of your loan amount per year — spread across your monthly payments. The exact amount depends on your loan term and down payment size.

In most cases, you pay MIP for the entire time you have an FHA loan. If you make at least a 10% down payment, though, you can cancel insurance after 11 years.

Property Standards

As mentioned above, the FHA has certain property standards that a home must meet before you can buy it. For instance, the home must have functional systems and appliances, and the roof must have at least two years of life left. The appraiser also assesses the foundation, bathrooms, property access, and more.

Conventional loans don’t have minimum property standards; however, most lenders will not issue a conventional loan if the appraiser deems the house in too poor a condition.

FHA vs. Conventional, which is better?

Both FHA and conventional loans can be good mortgage options, but they’re not right for every borrower. For example, if your credit isn’t great, you might want an FHA loan due to its more lenient requirements. If you’re eyeing a fixer-upper property, a conventional loan is likely the better fit.

Here’s a breakdown of when you might want to pick one loan option over the other:

An FHA Loan is Good If You…

• Have bad credit: FHA loans allow for credit scores as low as 500 in some cases.
• Have lots of debt or a lower income: FHA loans have higher DTI maximums than conventional mortgages.
• Want the lowest interest rate: FHA loans tend to have lower rates than those on conventional loans.
• Need a modest loan amount: Most FHA loans are capped at just under $500,000 for 2024.

A Conventional Loan is Good If You…

• Have good credit: You usually need at least a 620 score or higher to qualify.
• Require a higher loan amount: Conventional loan limits are generally higher than those offered on FHA loans.
• Plan to buy a fixer-upper: If you’re eyeing a fixer-upper or a property that needs more work, a conventional loan is likely your best bet since FHA loans have stricter property standards in place. However, there is an FHA 203k loan option specifically tailored to allow up to $35,000 to be financed into mortgage repairs or upgrades.
• Plan to buy an investment property: You can use a conventional loan for any property type and do not need to live in it to qualify. FHA loans have certain occupancy requirements that may make purchasing an investment property more difficult.
• Have little saved for a down payment: If you only have a small amount to put down, a conventional loan can work. These require just a 3% down payment compared to FHA’s 3.5% to 10% (depending on your credit score).
• Want to cancel mortgage insurance: Conventional loans let you cancel mortgage insurance when you have 20% equity in your home, whether through a 20% initial down payment or through payments on the principal balance. With FHA loans, you’re stuck with a MIP for the life of the loan unless you put 10% down at closing.

Can you switch from an FHA to a conventional loan?

If you’re willing to refinance, you can certainly switch loan types — as long as you meet the qualifying requirements of the new loan program. For example, if you have an FHA loan but want to get rid of mortgage insurance, you might refinance into a conventional loan. Just make sure your loan balance is 80% or less of your home’s market value.

Other Loan Options

FHA and conventional mortgages aren’t your only options when buying a home. If you or your spouse is a military member or Veteran, you can also consider a VA loan. These require no down payment and have no set-in-stone credit requirement. You can only get these through VA-approved mortgage lenders.

If you’re willing to buy a home in a more rural part of the country, you can also look to USDA loans. These also require no down payment. You can use our USDA property eligibility tool. to see if a property you’re eyeing qualifies.