What Is The Difference Between FHA And Conventional Home Loans?

Which loan is better, conventional or FHA? It depends on your income, credit score, employment & assets, and other differences between the two mortgage loans. Did you know you that you can borrow more money with a conventional mortgage? And that the FHA loan requires a minimum credit score of 500?

I know that this mortgage stuff is confusing. But, you should be congratulated for taking a few minutes to determine which mortgage loan is best for you. After all, you will probably make a monthly payment for the next 30-years. Here is a comparison of the FHA and conventional home loans.

1. Down payment requirements

FHA: The minimum down payment for an FHA home loan is 3.5%. There is no first-time home buyer requirement for an FHA loan.

Conventional: The down minimum payment is 5%; however, Fannie Mae (conventional loan) offers two 3% down payment programs. The Conventional 97% program is limited to at least one first-time home buyer on the loan application. The HomeReady program does not have a first-time home buyer requirement, but, the household income must be at or less than 80% of the county median income.

2. Loan limits for FHA and conventional mortgages

Both Federal Housing Administration (FHA) and typical “conventional” loans (those conforming to Federal National Mortgage Association / Federal Home Loan Mortgage Corporation guidelines) have maximum loan amounts that vary depending on where you live.

• For most U.S. counties in 2025, the FHA maximum for a one-unit home is $524,225 (up from ~$498,000 in 2024). 
• For higher-cost areas, the FHA ceiling may go up to $1,209,750 for a one-unit property. 
• For “conforming” conventional loans, the base limit in most areas is about $806,500 for 2025. 

What does this mean for you? If you’re buying in an area where home prices are high, a conventional loan may allow a larger loan amount than an FHA loan. If your purchase price is near or above the FHA limit, the only option may be a conventional (or even a jumbo) loan.

3. Seller paid closing costs (seller assist)

FHA: The FHA permits the seller to pay up to 6% of the sales price toward the home buyer's closing and prepaid costs. Read more about the seller paid closing costs.

Conventional: The generic conventional loan with a 5% down payment limits the home seller to 3% of the sales price for the seller paid closing and prepaid costs. With a down payment of 10% to 20%, the seller is permitted to pay up to 6% toward the buyer's costs.

4. Credit score prerequisites

One of the biggest differences between FHA and conventional loans is how strong your credit profile must be and how much wiggle room the lender has.

• FHA loans: The FHA minimum credit score is often around a 580 FICO (or equivalent) to qualify for the 3.5% down payment option. Some lenders may accept a score as low as 500 if you put 10% down. 
• Conventional loans: Minimum credit scores are typically 620 or higher, though to get the best rates many borrowers need 680-700+

Beyond the score: Your debt-to-income (DTI) ratio, payment history, recent bankruptcies or foreclosures, and credit mix also matter. For example, FHA programs may allow a higher DTI (up to ~50-55% in some cases) while conventional lenders tend to want a lower DTI. 

What this means for you:

• If your credit is solid (620+), you’re likely in a good position for conventional.
• If your credit is below that, or you have a shorter credit history, an FHA loan might give you more flexibility.
• Even with an FHA loan, you’ll want to shop lenders — many impose “overlays” and require higher scores than the program minimum.

5. Upfront mortgage insurance

FHA: The FHA loans require a mortgage insurance premium that is paid in full at settlement. The "upfront" mortgage insurance premium percentage changes periodically. The upfront mortgage insurance premium is currently 1.75 percent on the base loan amount. On a loan amount of $100,000, the additional cost is approximately $1,750. The upfront mortgage insurance premium can be paid in full at settlement or can be financed in the loan ($100,000 + $1,750 = $101,750).

Conventional loan: Conventional loans do not require upfront mortgage insurance.

6. Monthly mortgage insurance

Mortgage insurance is one of the long-term cost differences between FHA and conventional loans, and one of the most important when you’re comparing total cost.

FHA loans

• Every FHA purchase loan requires a mortgage insurance premium (MIP) regardless of down payment size (if originated after June 3, 2013). 
• That means even if you put 20% down (or more) you’ll still pay the monthly MIP for 11 years or until you refinance out.
• If you put down more than 10%, you'll pay MIP for 11 years. If you put down less than 10%, you'll pay MIP for the lifetime of the loan.

Conventional loans

• Conventional mortgages require private mortgage insurance (PMI) only if your down payment (or equity for refinance) is less than 20%. 
• Once you reach ~80% loan-to-value (LTV), you can ask the lender to cancel PMI; some lenders remove it automatically at ~78% LTV.

Why it matters: A conventional loan might look more expensive up front (slightly higher interest or larger down payment) but may cost less over time if you can remove PMI. Conversely, an FHA loan may get you in sooner but carry higher monthly cost due to insurance lasting longer. 

Quick check for you:

• Estimate your monthly payment including insurance for both options.
• Consider how long you plan to stay in the home — if short term, the monthly insurance cost might dominate your decision.
• Ask your lender to quote the APR (which includes insurance cost) not just the interest rate.

7. Co-signer and Co-borrower

FHA: The FHA permits a co-signer to join the borrower on the mortgage application. Bringing on a cosigner or co-borrower can strengthen the application and possibly increase the loan amount and sales price.

Conventional loan: Conventional loans are more restrictive with co-signed loans. Down Payment and Qualifying Ratio Requirements for Manually Underwritten Loans

8. Loan amortization

Both loans can be fixed or adjustable.

9. Occupancy types

FHA: Owner occupied 1 to 4 units.

Conventional loan: Principal residence properties (1-4 units), second home properties, investment properties.

10. Interest rates

It can be tempting to assume “FHA always has better interest rate,” but the real story is more nuanced. The rate difference is often small, and when you include insurance and other costs, conventional may come out ahead.

What the data show:

• Some lenders may offer slightly lower interest rates for FHA loans because of the federal government insurance backing, which reduces lender risk. 
• But the overall cost — interest + insurance + fees + loan term — is what matters. A conventional loan with a tiny bit higher rate but no long-term insurance may save more.

What to do:

• Compare APR for FHA vs conventional for your scenario (interest + PMI/MIP + fees).
• Ask: If I go FHA, what is the monthly payment difference vs conventional? What happens if I keep the loan long term?
• Think about your timeline: If you expect to move or refinance in 3-5 years, FHA might make sense. If you plan to stay 10+ years, conventional may save more after insurance cancellation.

Bottom line: Don’t pick a loan just because “the rate is lower.” Dig into total cost and how long you’ll own.

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