The core difference: down payment, insurance, and who backs the loan

A conventional loan is a mortgage that a bank or lender makes with their own money, and they keep the risk if you stop paying. An FHA loan is backed by the Federal Housing Administration, which means the government insures the lender against loss if you default. This one structural difference creates a chain of consequences: FHA loans let you put down as little as 3.5 percent, while conventional loans typically require 5 to 20 percent down. FHA loans charge mortgage insurance no matter what your down payment is. Conventional loans only charge mortgage insurance if you put down less than 20 percent, and that insurance goes away once you build enough equity.

Neither is objectively "better." Conventional loans cost less over time if you can afford a larger down payment and have strong credit. FHA loans get you into a home faster with less cash upfront, but you pay insurance for the life of the loan. The right choice depends on how much you have saved, your credit score, the home price, and how long you plan to stay.

Key Takeaways

  • FHA loans require a minimum 3.5 percent down payment and accept credit scores as low as 580, while conventional loans typically need 5 to 20 percent down and stronger credit.
  • FHA loans charge mortgage insurance for the entire loan term regardless of down payment; conventional loans charge it only if you put down less than 20 percent, and it stops once you reach 20 percent equity.
  • FHA loans have lower upfront costs but higher lifetime costs due to insurance; conventional loans cost more to start but less overall if you can afford the larger down payment.
  • FHA loans have stricter property requirements and appraisal standards, which can slow closing or disqualify certain homes; conventional loans have fewer restrictions.
  • Your choice depends on your savings, credit score, and how long you plan to own the home, not on which loan is universally "better."

Down payment and credit score requirements

FHA loans are designed for borrowers with limited savings or credit history. The minimum down payment is 3.5 percent of the purchase price. If you are buying a $200,000 home, you need $7,000 down. FHA also accepts credit scores as low as 580, though some lenders set their own floor at 600 or 620. If your score is between 500 and 579, a few lenders will work with you, but the interest rate will be higher.

Conventional loans typically require 5 to 20 percent down, depending on the lender and your credit profile. A 5 percent down payment is possible with a credit score around 620 to 640, but you will pay a higher interest rate and mandatory mortgage insurance. At 10 percent down, you can usually may have access to with a score in the 640 to 680 range. At 20 percent down, you avoid mortgage insurance entirely and lock in the best rates, but you need a score of 700 or higher and significantly more cash saved.

If you have less than $10,000 saved and your credit is below 650, FHA is usually your only realistic path. If you have $30,000 or more saved and a score above 700, conventional will cost you less over the life of the loan.

Mortgage insurance: how long you pay and what it costs

This is where the lifetime cost difference becomes clear. FHA mortgage insurance has two parts: an upfront premium (1.75 percent of the loan amount, rolled into your monthly payment) and an annual premium (0.55 to 0.8 percent of the loan balance per year, also rolled in). On a $200,000 loan, the upfront premium is $3,500. The annual premium is roughly $1,100 to $1,600 per year. You pay both for the entire 30-year loan term, even after you own 50 percent of the home.

Conventional mortgage insurance (called PMI) is charged only if you put down less than 20 percent. The cost ranges from 0.3 to 1.5 percent of the loan amount per year, depending on your down payment and credit score. The key difference: PMI stops automatically once you reach 20 percent equity in the home, or you can request removal once you hit that mark. On a $200,000 home with 10 percent down, PMI might cost $100 to $300 per month, but it disappears in 8 to 12 years as you pay down the principal.

Over 30 years, FHA insurance typically costs $30,000 to $50,000 more than conventional PMI, even accounting for the lower down payment. The break-even point is usually around year 10 to 12. If you plan to stay in the home longer than that, or if you can refinance to remove PMI sooner, conventional becomes the cheaper choice.

Interest rates and closing costs

Interest rates on FHA and conventional loans are set by the market and your credit score, not by the loan type itself. However, FHA borrowers with lower credit scores often see rates 0.25 to 0.5 percent higher than conventional borrowers with excellent credit. If you have a 620 credit score, you might see 6.5 percent on an FHA loan and 7.0 percent on a conventional loan. If you have a 750 score, both might be 5.8 percent.

Closing costs (appraisal, title search, origination fee, attorney fees) are similar between the two, typically 2 to 5 percent of the loan amount. FHA does not charge more in closing costs, but the upfront mortgage insurance premium adds to your total out-of-pocket expense at closing.

Property requirements and appraisal standards

FHA loans come with stricter property rules. The home must meet minimum safety and livability standards set by the FHA. The appraisal is more detailed and can flag issues that a conventional appraisal would overlook: peeling paint, missing handrails, outdated electrical systems, or a roof with less than two years of life remaining. If the appraiser finds problems, the seller must fix them before closing, or the deal falls through.

Conventional loans have no federal property standards. The lender's appraiser checks that the home is worth the purchase price, but cosmetic issues or aging systems do not automatically kill the deal. This flexibility makes conventional loans faster to close and better for buying older homes or homes needing work.

FHA also limits the loan amount to a percentage of the home's appraised value, which can be a problem in hot markets where homes sell above appraisal. Conventional loans are more flexible here.

Debt-to-income limits and borrowing power

Both loan types use your debt-to-income ratio (DTI) to decide how much you can borrow. This is your total monthly debt payments divided by your gross monthly income. FHA allows a DTI up to 50 percent in some cases, though most lenders cap it at 43 percent. Conventional loans typically max out at 43 to 50 percent as well, depending on your credit and down payment.

The difference is in how they count debt. FHA includes the mortgage payment, property taxes, insurance, HOA fees, car loans, credit cards, student loans, and child support. Conventional lenders use the same list but may be stricter about what counts as "debt" and may require lower DTI for borrowers with lower credit scores or smaller down payments.

If you have significant student loan debt or multiple credit cards, FHA's slightly higher allowance might let you borrow more. If you have clean credit and minimal other debt, both will give you similar borrowing power.

Refinancing and future flexibility

FHA loans can be refinanced into conventional loans once you have built equity and your credit has improved. This is called an FHA-to-conventional refinance. If you started with 3.5 percent down on an FHA loan and paid for five years, you might now have 15 percent equity. You can refinance into a conventional loan, drop the FHA mortgage insurance, and potentially lower your rate. This is a common strategy for borrowers who used FHA as a stepping stone.

Conventional loans can also be refinanced into FHA loans if rates drop or your situation changes, though this is less common because you would be adding FHA insurance to a loan that might not have it.

When to choose FHA vs. conventional

Choose FHA if: You have less than $15,000 saved, your credit score is below 650, or you need to buy within the next few months and do not have time to save more. FHA gets you into a home faster with less upfront cash. The higher lifetime cost is worth it if homeownership now is more important than minimizing total interest paid.

Choose conventional if: You have $30,000 or more saved, your credit score is 680 or higher, and you plan to stay in the home for at least 10 years. Conventional will cost you less over time. It also gives you more flexibility on property type and condition, and faster closing timelines.

Choose conventional if you are in between: You have $15,000 to $30,000 saved and a credit score between 650 and 680. Run the numbers with a lender. Sometimes a 10 percent conventional down payment with PMI costs less monthly than an FHA loan with insurance, especially if you plan to refinance in five to seven years.

Frequently Asked Questions

Can I switch from an FHA loan to a conventional loan later?

Yes. Once you have built equity (usually 15 to 20 percent) and your credit has improved, you can refinance into a conventional loan and drop the FHA mortgage insurance. This typically takes 5 to 10 years of payments. Refinancing costs money (closing costs again), so calculate whether the savings in insurance justify the upfront cost.

Do FHA loans take longer to close?

Not necessarily. Both take 30 to 45 days on average. FHA appraisals are more thorough and can uncover issues that delay closing, but the loan approval process itself is not slower. Conventional loans may close slightly faster if the property is newer or in good condition.

What if I have a credit score of 600 but want a conventional loan?

Most conventional lenders will not work with you at 600. You would need to wait and build your score to 640 or higher, or choose an FHA loan. Some credit unions offer conventional loans to members with scores as low as 620, so check your local options before assuming FHA is your only choice.

Can I put down 20 percent on an FHA loan to avoid insurance?

No. FHA charges mortgage insurance regardless of down payment. Even if you put down 30 or 40 percent, you still pay the upfront and annual premiums. This is why FHA is not a good choice if you have substantial savings — you lose the main advantage of conventional loans (no insurance at 20 percent down).

Which loan is better for buying a fixer-upper?

Conventional. FHA appraisals will flag needed repairs and require the seller to fix them before closing. If you are buying a home that needs work, the FHA appraisal process can be a dealbreaker. Conventional lenders care only that the home is worth the price, not that it is in perfect condition.