FHA vs Conventional Loan: Which Mortgage Is Better?
An FHA loan is better for lower credit scores and small down payments, while a conventional loan is better for strong-credit buyers who want to drop mortgage insurance. FHA loans are government-insured through HUD and accept credit scores as low as 580 with 3.5% down.
Conventional loans follow Fannie Mae and Freddie Mac rules, usually need a 620 score, and let you cancel mortgage insurance once you build 20% equity. This guide compares both loans on cost, credit, and long-term value for 2025 and 2026 buyers.
FHA Loan vs Conventional Loan: Side-by-Side
| FHA Loan | Conventional Loan | |
|---|---|---|
| Minimum down payment | 3.5% with a 580+ credit score (10% for scores 500-579) | As low as 3% on some programs; 5% is common |
| Minimum credit score | 580 for 3.5% down; 500 with 10% down | Typically 620 or higher |
| Mortgage insurance | Upfront MIP of 1.75% plus an annual MIP (about 0.55% for most loans) | PMI required only if you put down less than 20% |
| Insurance cancellation | MIP lasts the life of the loan if you put less than 10% down | PMI is cancellable at 80% LTV and auto-ends at 78% LTV |
| 2025 loan limits | $524,225 base; up to $1,209,750 in high-cost areas | $806,500 baseline conforming limit; up to $1,209,750 in high-cost areas |
| Debt-to-income flexibility | More lenient; higher DTI often allowed | Stricter; strong credit and lower DTI preferred |
| Best-fit borrower | Buyers with lower credit or limited savings | Buyers with strong credit who want to drop insurance later |
Which should you choose?
Choose an FHA loan if your credit score is under 620 or your down payment savings are thin. Choose a conventional loan if your credit is strong, because you can cancel PMI and stop paying it once you reach 20% equity.
The hidden cost driver is mortgage insurance duration, not the interest rate. On a low-down-payment FHA loan, MIP never goes away, so a conventional loan often costs less over time for a qualified buyer.
What Is the Main Difference Between FHA and Conventional Loans?
The main difference is that FHA loans are government-insured, while conventional loans are not. The Federal Housing Administration, part of HUD, insures FHA loans so lenders can accept weaker credit.
Conventional loans carry no government backing. They follow guidelines set by Fannie Mae and Freddie Mac instead.
This single fact drives every other difference. It explains the credit rules, the insurance rules, and who each loan serves best. Use our mortgage calculator to compare monthly payments before you apply.
FHA vs Conventional Loan Down Payment and Credit Score
FHA loans allow a 3.5% down payment with a credit score of 580 or higher. Buyers with scores between 500 and 579 can still qualify, but they must put down 10%.
Conventional loans start as low as 3% down on some programs. Most lenders want a credit score of at least 620.
A strong credit score usually earns a better conventional rate. If your score is below 620, FHA is often your only path. Check your full picture with a net worth tracker before committing.
Mortgage Insurance: The Biggest Long-Term Cost Difference
The biggest long-term difference is that FHA mortgage insurance often lasts the life of the loan. FHA charges an upfront MIP of 1.75% plus an annual premium, roughly 0.55% for most loans.
If you put down less than 10%, that annual MIP never cancels. You pay it until you refinance or sell.
Conventional PMI works differently. It is cancellable once you reach 80% loan-to-value, and it auto-terminates at 78% under the Homeowners Protection Act. This gap can save a conventional borrower thousands over the years. Map the payoff timeline with a budget planner.
Loan Limits and Which Loan Fits Your Situation
Conventional loans allow larger balances than FHA loans in most areas. For 2025, the baseline conforming limit is $806,500, rising to $1,209,750 in high-cost markets.
The FHA base limit is lower at $524,225, though it also reaches $1,209,750 in high-cost areas.
A non-obvious decision rule helps here. If you plan to reach 20% equity within a few years, conventional often wins because you can shed PMI. If you need to buy now with limited credit or cash, FHA gets you in the door faster. Compare it with a VA loan vs conventional loan if you have served.
Frequently asked questions
Is an FHA loan or conventional loan better?
It depends on your credit and down payment. FHA is better for scores under 620 or small down payments. Conventional is better for strong-credit buyers who want to cancel mortgage insurance later.
Can you cancel mortgage insurance on an FHA loan?
Usually no if you put down less than 10%. On most FHA loans, MIP lasts the life of the loan. To remove it, most borrowers refinance into a conventional loan after building 20% equity.
What credit score do you need for a conventional loan in 2025?
Most lenders require a credit score of at least 620 for a conventional loan. A higher score often earns a lower interest rate and a smaller mortgage insurance premium.
How much down payment do you need for an FHA loan?
You need 3.5% down with a credit score of 580 or higher. If your score falls between 500 and 579, you must put down at least 10% to qualify.
What is the 2025 conforming loan limit for conventional loans?
The 2025 baseline conforming loan limit is $806,500 for a one-unit home. In high-cost areas, the limit rises to $1,209,750, which is 150% of the baseline.
Does an FHA loan cost more than a conventional loan?
It often costs more over time because of lasting mortgage insurance. FHA MIP does not cancel on low-down-payment loans, while conventional PMI ends at 78% loan-to-value.
Free calculators to help you decide
Sources
We prioritize primary sources for rules, formulas, rates, limits, and definitions. See our calculator methodology and editorial policy.