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Choosing between a conventional loan and an FHA loan can be confusing. Both are popular options, and each has its own rules, benefits, and trade-offs.
You might have heard that conventional loans are better if you have a strong credit score, while FHA loans are more flexible with down payments. But how do these differences affect your budget and your plans to buy a home?
In this post, we’ll explain the main differences between conventional and FHA loans in simple terms. By the end, you’ll know which loan could be a better fit for your needs and goals.
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Understanding the Basics
What is a Conventional Loan?
A conventional loan is a home loan offered by private lenders, like banks or credit unions. The government does not insure it. To qualify, you usually need a credit score of at least 620.
Loan terms typically range from 8 to 30 years, with 15- and 30-year options being common.
Some conventional mortgages require as little as a 3% down payment for fixed-rate mortgages or 5% for adjustable-rate mortgages (ARMs). These loans are available for primary, vacation, or investment properties.
Most follow conforming loan limits set by Fannie Mae and Freddie Mac. For example, in most areas in 2025, this limit is $806,500, but it can reach $1,209,750 in high-cost areas. Loans exceeding these amounts are called jumbo loans and are subject to stricter requirements.
What Is an FHA Loan?
The Federal Housing Administration backs an FHA loan. It helps buyers with limited savings or lower credit scores qualify for a mortgage. You only need a credit score of 580 to put down 3.5%.
If your score is between 500 and 579, you must put down at least 10%.
These loans are for primary residences, not vacation homes or investments. They set limits based on where you live—$524,225 in low-cost areas and $1,209,750 in high-cost ones starting in 2025.
Mortgage insurance is mandatory, no matter how much you pay upfront. This protects lenders if borrowers stop paying their loans.
Conventional vs. FHA: Key Differences
These two loan types differ in several important ways, from credit score needs to down payments. Understanding these differences can help you choose the best option for your financial goals.
Credit Score Requirements
For a conventional loan, most lenders ask for a credit score of at least 620. Fannie Mae and Freddie Mac will eliminate this minimum requirement on November 16, 2025, but approval will still depend on your broader financial profile.
FHA loans offer more flexibility; you need a score of at least 580 to make a 3.5% down payment. If your score is between 500 and 579, you’ll need to make a larger down payment of at least 10%.
Your credit score falls between 350 and 850. Higher scores expand your loan options. Lenders often use FICO Scores based on data from Experian, Equifax, or TransUnion. For joint applicants, the lower median is typically used, except for specific Fannie Mae programs that average both medians instead.
Payment history and the amount owed significantly impact scoring calculations, too!
Down Payment Requirements
You need at least 3% down for many conventional loans. For fixed-rate options, this equals $12,000 on a $400,000 home. If you choose an adjustable-rate mortgage (ARM), lenders often require a 5% down payment.
Putting 20% down helps you skip private mortgage insurance (PMI).
FHA loans require a minimum of 3.5% with a credit score of 580 or higher. This means $14,000 for that same $400,000 house. Scores between 500 and 579 will need at least 10% ($40,000).
These lower barriers help buyers with past debts or weaker credit histories qualify more easily.
Debt-to-Income (DTI) Ratio Limits
FHA loans generally allow a higher DTI ratio. Most borrowers need a DTI of 43% to qualify, but it can go up to 57% with strong compensating factors, such as excellent credit or significant savings.
This flexibility helps if other parts of your financial profile are weaker.
Conventional loans usually require a maximum DTI ratio of 45%. Some lenders may stretch this limit to 50%, but only in specific cases, such as high income or a good credit history. If you have large student loan or credit card debt, these stricter limits might make qualifying more difficult.
Loan Limits and Eligibility
Conventional loan limits in 2025 rose to $806,500 in most areas. In high-cost areas, the limit increases to $1,209,750. These loans must meet Fannie Mae and Freddie Mac standards to qualify as conforming loans.
FHA loan limits are lower. Low-cost counties have a cap of $524,225, while high-cost regions match the exact top figure of $1,209,750. FHA loans can only be used for your primary home.
Vacation houses or investment properties don’t qualify unless you’re living in a multi-unit building you own.
Mortgage Insurance: PMI vs. MIP
Private Mortgage Insurance (PMI) applies to loans with a down payment of less than 20%. You can cancel PMI once you reach 20% home equity. It comes in different types: monthly payments, upfront premiums, split premiums, or lender-paid options through higher interest rates.
Mortgage Insurance Premium (MIP) is required for FHA loans. The upfront MIP is 1.75% of the loan amount. Monthly MIP costs range from 0.15% to 0.75%, based on your loan terms and down payment size.
Unlike PMI, MIP often lasts for the entire loan term unless you put down at least 10%; then it drops off after 11 years.
Interest Rates and Terms
Interest rates depend on your credit score, loan type, and the size of your down payment. FHA loans typically offer lower interest rates because the Federal Housing Administration supports them.
Your financial profile and credit history have a greater influence on conventional loans. A higher credit score can help you secure more favorable terms with traditional lending.
Fixed-rate mortgages provide stable payments throughout the loan term, while adjustable-rate mortgages (ARMs) begin with a lower rate but may change over time. Discount points allow you to pay upfront to lower monthly payments and total costs.
Use a mortgage calculator to estimate how various rates will impact your budget.
Property Standards and Appraisal Differences
FHA loans have stricter property standards. The home must meet HUD’s (Housing and Urban Development) requirements. An FHA appraisal checks for a solid foundation, a working roof, no exposed wires, and safe utilities.
Heating systems must work, and home access should be secure.
Conventional appraisals focus more on market value than condition. They are usually less strict than the FHA ones. Sometimes, lenders allow hybrid appraisals or even waive them if your financial profile is strong enough.
Cost Comparison: Which Loan Is Cheaper?
Comparing costs like mortgage rates, insurance premiums, and loan terms can reveal which option saves you more money—keep reading to find out!
Upfront and Ongoing Mortgage Insurance Costs
FHA loans require an upfront mortgage insurance premium (MIP) of 1.75% of the base loan amount. This fee is usually added to your total loan balance at closing. Monthly MIP costs range from 0.15% to 0.75%, depending on your down payment and term.
Conventional loans need private mortgage insurance (PMI) if your down payment is less than 20%. Unlike FHA, PMI offers more options, including monthly payments, single premiums, and lender-paid plans.
You can cancel PMI once you reach 20% equity, reducing long-term costs significantly compared to FHA loans.
Long-Term Interest and Loan Terms
Conventional loans usually offer greater flexibility in loan terms. You can choose repayment terms of 8 to 30 years, with 15- and 30-year plans being the most popular. These shorter or longer timelines let you decide how quickly you want to pay off your mortgage.
FHA loans often have slightly lower starting interest rates than conventional loans. As of August 2025, the average rate for a 30-year FHA mortgage is about 6.67%, while a similar traditional loan averages at 6.60%.
But FHA loans require mandatory Mortgage Insurance Premiums (MIP), which can increase your total costs over time if you don’t refinance later.
Total Loan Cost Over Time
The total cost of a loan depends on factors like interest, insurance, and the loan term. FHA loans often cost more over time because mortgage insurance (MIP) lasts for the life of the loan unless you make at least a 10% down payment.
Even with this higher down payment, MIP still sticks around for 11 years.
For borrowers with good credit and large down payments, conventional loans tend to be cheaper in the long run. Private mortgage insurance (PMI) can be removed once your home equity reaches 20%, reducing monthly costs later.
Use a mortgage calculator to compare the two options based on your loan amount and financial profile.
Pros and Cons of Conventional Loans
Conventional loans can offer flexibility but may require a strong financial profile to qualify. They often suit buyers with good credit and stable incomes… but there are trade-offs to consider!
Pros of Conventional Loans
You can cancel private mortgage insurance (PMI) once you have 20% equity in your home. This helps reduce long-term costs. FHA loans, on the other hand, require mortgage insurance for the life of the loan.
Conventional loans offer flexibility in property types. You can use them to buy a primary home, vacation house, or even an investment property. Some fixed-rate options also allow down payments as low as 3%.
Repayment terms range from 8 to 30 years, giving you more control over your loan’s duration and monthly payments.
Cons of Conventional Loans
Conventional loans have stricter approval rules. You often need a credit score of at least 620, though some lenders may require a higher score. A higher debt-to-income ratio can also make it harder to qualify for a conventional loan than for an FHA loan.
If your down payment is below 20%, you’ll need private mortgage insurance (PMI). This adds to your monthly costs and doesn’t go away until you reach 20% home equity. Approval takes longer because of stricter underwriting standards, making the process less flexible for many borrowers.
Pros and Cons of FHA Loans
FHA loans have flexible credit requirements, making them a choice for many buyers. But there are extra costs, like mortgage insurance, to consider….
Pros of FHA Loans
You can qualify with a lower credit score. A score of 580 allows you to make just a 3.5% down payment, while scores between 500 and 579 require only a 10% down payment. This makes it easier for many buyers with less-than-perfect credit to get approved.
Gift funds are allowed for your down payment, too, with no restrictions on the source. FHA streamline refinancing offers faster options by skipping income, credit, or appraisal checks in some cases.
These loans also help borrowers with limited savings or tighter budgets secure homeownership.
Cons of FHA Loans
FHA loans require mortgage insurance, no matter how much you put down. The upfront MIP is 1.75% of the loan amount, and the monthly MIP ranges from 0.15% to 0.75%. If your down payment is less than 10%, the MIP stays in effect for the life of the loan.
Strict appraisal standards make it harder to qualify certain homes. FHA loans also can’t fund vacation or investment properties, except owner-occupied multi-unit dwellings. These limitations may reduce your flexibility in choosing properties.
Choosing the Right Loan for You
Picking the right loan depends on your finances and needs. Think about your credit score, down payment, and long-term goals.
When a Conventional Loan Makes Sense
A conventional loan works well if your credit score is 620 or higher. It rewards good credit with better interest rates and lower costs. If you can afford a down payment of at least 3-5%, this loan might be the right fit.
This option also suits those with a debt-to-income (DTI) ratio under 50%. Conventional loans often provide more flexible terms, such as adjustable or fixed rates, and offer larger loan limits in high-cost areas.
You may even qualify for down payment assistance to ease upfront costs.
When an FHA Loan Is a Better Fit
An FHA loan works well if you have a credit score of at least 580. You can even qualify with a score as low as 500, but this requires a 10% down payment upfront. These loans are available to buyers who don’t have much in savings or who struggle to meet higher credit standards.
This loan type allows for higher debt-to-income ratios, up to 57% if you meet other requirements. It’s also ideal if you want smaller down payments compared to conventional loans.
With these features, an FHA loan is beneficial for first-time homebuyers or for those re-entering the housing market after financial setbacks such as foreclosure.
Seller Preferences: FHA vs. Conventional Offers
Sellers often prefer conventional loans because they usually close faster and have fewer appraisal conditions. FHA loans can raise concerns about stricter property standards or delays in the process.
How Loan Type Affects Your Offer’s Appeal
The loan type you choose can impact how a seller views your offer. Conventional loans often appeal more to sellers because appraisals are faster and simpler. These loans usually require fewer property repairs, making the selling process smoother.
FHA loans, backed by the Federal Housing Administration, may raise concerns for some sellers. They come with stricter home appraisal requirements and could delay closing if repairs are needed.
This might make FHA offers less attractive in competitive markets.
Potential Seller Concerns with FHA Loans
FHA loans often make sellers hesitate due to strict property standards. The Federal Housing Administration requires homes to meet specific HUD requirements. These include safety, health, and structural conditions.
If the home does not pass inspection, you must fix issues before closing. This could delay the sale or add repair costs for the seller.
An FHA appraisal is also more detailed than a conventional one. Appraisers check for peeling paint, roofing problems, or exposed wiring. Even minor fixes can become deal-breakers if they are not addressed on time.
Sellers may view this as a hassle compared to offers with simpler appraisals, like those required for conventional loans.
Are FHA Loans Only for First-Time Buyers?
FHA loans aren’t just for first-time buyers—they’re open to many types of borrowers. Eligibility depends on factors like credit, income, and loan-to-value ratio.
Clarifying a Common Misconception
Many people think FHA loans are only for first-time buyers. This is not true. You can use these loans to buy a home or refinance an existing mortgage.
Borrowers with low credit scores or higher debt-to-income ratios may benefit, too. This makes them accessible for a wide range of borrowers, not just those entering the housing market for the first time.
Who Else Can Qualify?
FHA loans are not just for first-time buyers. You can qualify if you meet the credit, down payment, and debt-to-income ratio (DTI) limits. These loans also work for owner-occupied multi-unit properties, like duplexes or triplexes.
If you’re buying in high-cost areas, FHA loan limits adjust to match local housing prices. These loans may help you even if your credit score is lower than conventional lenders require.
Homebuyers with limited savings often find these options helpful too.
Decision-Making Guide
Think about your financial goals and current situation. Use tools like loan calculators to compare options easily.
Evaluate Your Financial Health
Check your credit report from Experian, Equifax, and TransUnion. Review your FICO Score since lenders rely on it. A strong score improves loan options. Payment history and amounts owed play key roles in this score.
Calculate your debt-to-income ratio (DTI). Divide total monthly debts by income before taxes. Most lenders prefer a DTI below 43%. Lower ratios indicate better financial stability for housing loans, such as FHA or conventional loans.
Compare Short-Term vs. Long-Term Goals
Short-term goals focus on immediate needs. These might include saving for a down payment or improving your credit score. They can help you qualify for better terms on a mortgage loan, like lower interest rates or smaller private mortgage insurance (PMI) costs.
Long-term goals take longer, such as building home equity or paying off the loan in full. Fixed-rate loans may fit these plans since they offer stable payments over the years. Adjustable-rate mortgages (ARMs), while variable after an initial period, could work if you plan to sell before the rate adjusts.
Use Loan Comparison Tools or Calculators
Loan comparison tools save time and simplify decisions. Websites like Bankrate or NerdWallet let you compare FHA loans, conventional loans, interest rates, and mortgage terms side by side.
These calculators show how factors such as credit score, down payment amount, and loan limits affect your total costs.
You can also see differences in monthly payments or upfront fees, such as private mortgage insurance (PMI) or MIP. Tools give a clear picture of how much you’ll pay over the life of the loan.
This helps narrow choices based on your budget and long-term goals without guesswork.
Talk to a Mortgage Professional
Speak with a mortgage lender to understand your options. Professionals like those at FourLeaf Federal Credit Union or NBKC can guide you, based on their credit requirements. NBKC accepts credit scores between 620 and 720, while New American Funding may work with scores as low as 580.
A professional will help review debt-to-income ratios and explain details about loan options, such as FHA or conventional loans. They’ll also clarify terms such as PMI costs for traditional loans and MIP for FHA loans.
This advice ensures you choose the right loan fit for your financial profile.
The Bottom Line
Choosing between a conventional loan and an FHA loan depends on your needs and finances.
If you have strong credit and savings, a conventional loan might work best. If your credit is lower or you need a smaller down payment, an FHA loan could be the right choice.
Compare costs, terms, and your long-term plans carefully. Always reach out to a mortgage pro if you’re unsure!
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