If you are shopping for a mortgage, you have probably heard about FHA and conventional loans. They are the two most common mortgage types in America, and together they account for about 85% of all home purchases. But they work very differently, and choosing the wrong one could cost you thousands of dollars over the life of your loan.
This is not a situation where one is always better than the other. The right choice depends on your credit score, your savings, how long you plan to stay in the home, and a few other factors that most online calculators ignore. Let me break it all down.
The Basics: How Each Loan Works
FHA loans are insured by the Federal Housing Administration. The government does not lend you the money directly — private lenders do — but because the government guarantees a portion of the loan, lenders can offer more flexible qualifying requirements. Lower credit scores, smaller down payments, and higher debt-to-income ratios are all acceptable with FHA.
Conventional loans are not backed by any government agency. They follow guidelines set by Fannie Mae and Freddie Mac and are sold on the secondary mortgage market. Because there is no government guarantee, qualifying is stricter, but the terms are often better for borrowers with good credit.
Credit Score Requirements
This is where the rubber meets the road for most borrowers.
FHA: Minimum 580 credit score for 3.5% down payment. If your score is between 500 and 579, you can still qualify but need 10% down. Some lenders set their own minimums higher — 620 is common — but the FHA guidelines allow 580.
Conventional: Most lenders require a minimum 620 score, but you will not get competitive rates until you hit 680 or above. The best rates are reserved for 740+ borrowers.
Here is a real-world example. If your credit score is 650, an FHA loan might offer you 6.75% while a conventional loan quotes 7.25% or higher. On a $300,000 loan, that half-percent difference means about $100 more per month — $36,000 over 30 years.
But if your score is 740, the conventional rate drops to maybe 6.25% while FHA is still around 6.5%. Plus you avoid the FHA mortgage insurance premium that never goes away. At higher credit scores, conventional wins almost every time.
Down Payment Comparison
FHA: 3.5% minimum with 580+ credit. On a $400,000 home, that is $14,000.
Conventional: As low as 3% for first-time buyers through Fannie Mae HomeReady or Freddie Mac Home Possible programs. On the same $400,000 home, that is $12,000. Standard conventional loans require 5% down ($20,000).
Many people assume FHA has the lowest down payment, but conventional 3% programs actually beat it. The catch is that those 3% conventional programs have income limits — typically 80% of the area median income. If you earn too much, you will need at least 5% down on a conventional loan.
FHA also allows 100% of your down payment to come from a gift (from family, employer, or approved down payment assistance program). Conventional loans allow gifts too, but some programs require that at least 5% of the purchase price come from your own funds if you are putting less than 20% down.
Mortgage Insurance: The Hidden Cost
This is the biggest difference between the two programs, and it is the factor most borrowers overlook.
FHA Mortgage Insurance: You pay two types. First, an upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount — on a $300,000 loan, that is $5,250 rolled into your balance. Second, an annual premium of 0.55% split into monthly payments — about $137 per month on that same loan. And here is the kicker: if you put less than 10% down, FHA mortgage insurance stays on the loan for its ENTIRE life. You cannot get rid of it without refinancing into a conventional loan.
Conventional PMI: Private mortgage insurance on conventional loans typically costs between 0.3% and 1.5% of the loan amount per year, depending on your credit score and down payment. On a $300,000 loan with 5% down and a 720 score, you might pay $112 per month. But the big advantage is that PMI automatically drops off once you reach 20% equity. You can also request removal at 80% loan-to-value.
This matters more than most people realize. If you plan to stay in the home for 10+ years, conventional PMI that drops off will save you tens of thousands compared to permanent FHA mortgage insurance.
Loan Limits for 2025
FHA: $524,225 in most counties, up to $1,209,750 in high-cost areas like parts of California and Hawaii.
Conventional: $766,550 in most areas, up to $1,149,825 in high-cost areas. Anything above these limits is a jumbo loan, which has its own set of requirements.
If you are buying in a mid-range market, both programs cover you. But in expensive metros, FHA limits can be a real constraint. Check the limits for your specific county before deciding.
Property Requirements and Appraisals
FHA appraisals are stricter than conventional ones. The FHA appraiser is not just checking the value — they are also inspecting for health and safety issues. Peeling paint on a pre-1978 home? That needs to be fixed before closing. Broken handrails, exposed wiring, or a roof with less than 2 years of remaining life? All potential deal-breakers.
Conventional appraisals focus primarily on market value. While the appraiser will note obvious defects, the requirements are less rigid. This matters if you are buying an older home or a property that needs some cosmetic work.
FHA also does not allow certain property types. Non-warrantable condos, mixed-use properties with more than 25% commercial space, and some manufactured homes do not qualify.
When to Choose FHA
Go FHA if:
- Your credit score is below 680
- You have limited savings for a down payment
- You have a higher debt-to-income ratio (FHA allows up to 57% in some cases)
- You had a bankruptcy or foreclosure within the last 2-3 years
- You plan to refinance into a conventional loan once your credit improves or you build equity
When to Choose Conventional
Go conventional if:
- Your credit score is 700 or above
- You can put at least 5% down (or qualify for a 3% first-time buyer program)
- You want mortgage insurance that drops off at 20% equity
- You are buying a condo or property that might not meet FHA standards
- You are buying in a high-cost area where FHA limits are too low
A Side-by-Side Comparison
Here is a quick reference for a $350,000 purchase with 5% down and a 700 credit score:
| Feature | FHA | Conventional |
|---|---|---|
| Down Payment | $12,250 (3.5%) | $17,500 (5%) |
| Interest Rate | ~6.5% | ~6.75% |
| Monthly P&I | $2,135 | $2,155 |
| Monthly MI/PMI | $155 | $125 |
| Upfront MIP | $5,906 | $0 |
| MI Duration | Life of loan | Until 20% equity |
The monthly payment difference is small early on, but over time the conventional loan pulls ahead because PMI drops off. By year 8-10, you could be saving $125 per month compared to the FHA borrower who is still paying mortgage insurance.
Not sure which program fits your situation? Call Marcus Naulin at (805) 330-3066 to talk through your options. With 25+ years of experience, Marcus can run the numbers on both scenarios and show you exactly what each one costs over the life of the loan. You can also apply online to get the process started.
Frequently Asked Questions
Neither is universally better — it depends on your credit score, down payment, and financial profile. FHA loans are more forgiving on credit, while conventional loans often cost less over time if your credit is strong.
You can qualify for an FHA loan with a 580 credit score and 3.5% down. Scores between 500-579 require 10% down. Conventional loans typically need a 620 minimum, though better rates start around 740.
FHA rates are often comparable or slightly lower than conventional rates. However, FHA loans require mortgage insurance for the life of the loan in most cases, which adds to your total monthly cost.
Yes, and many borrowers do exactly that once they build equity and improve their credit score. Refinancing to conventional removes the FHA mortgage insurance premium, which can save you hundreds per month.
FHA loans charge an upfront premium of 1.75% of the loan amount plus a monthly premium of 0.55% annually. This applies regardless of your down payment. On conventional loans, PMI drops off at 20% equity.
No. FHA loans are strictly for primary residences. You must live in the property within 60 days of closing. For investment properties, you need a conventional loan, DSCR loan, or other investor-focused product.
Closing costs are similar for both loan types. FHA loans cap certain lender fees, which can help. But the upfront mortgage insurance premium on FHA adds to the initial cost. Compare loan estimates side by side.
Not necessarily. Some conventional programs allow as little as 3% down for first-time buyers. The 20% down payment myth persists, but it is not a requirement — it just helps you avoid PMI.
Yes, but there are waiting periods. Chapter 7 bankruptcy requires a 2-year wait. Chapter 13 may allow you to apply after 1 year of on-time payments with court approval. Conventional loans typically require a 4-year wait.
FHA is generally easier to qualify for with minimal down payment and lower credit scores. But if you have a 700+ credit score, a conventional loan with 3-5% down may actually cost less because you can eventually drop PMI.
Marcus reviews your full financial picture — credit, income, savings, and goals — then runs the numbers on both options. Sometimes the right choice is not obvious until you compare total costs over 5, 10, or 30 years.
