FHA vs Conventional Loan: Which Is Right for You?
Choosing between an FHA loan and a conventional loan is one of the biggest decisions you’ll make as a home buyer. Both have advantages, and the right choice depends on your credit score, down payment, and financial situation.
Quick Comparison
| Feature | FHA Loan | Conventional Loan |
|---|---|---|
| Minimum credit score | 580 (3.5% down) or 500 (10% down) | 620+ (varies by lender) |
| Minimum down payment | 3.5% | 3% (with PMI) |
| Mortgage insurance | Required for life of loan (MIP) | PMI removed at 80% LTV |
| Loan limits (2025) | $524,225 (most areas) | $806,500 (most areas) |
| Interest rates | Typically 0.25-0.5% lower | Slightly higher |
| Property requirements | Must meet FHA standards | More flexible |
| Best for | Lower credit scores, smaller down payments | Good credit, want to remove PMI |
FHA Loan: Pros and Cons
Pros
- Lower credit score requirements — You can qualify with a 580 credit score (or even 500 with 10% down)
- Lower down payment — Just 3.5% down
- More lenient on debt-to-income — FHA allows up to 50% DTI in some cases
- Lower interest rates — Government backing means lenders offer competitive rates
Cons
- Mortgage Insurance Premium (MIP) never goes away — If you put less than 10% down, you pay MIP for the entire life of the loan. This is the biggest downside.
- Upfront MIP — 1.75% of the loan amount added to your balance at closing
- Ongoing MIP — 0.55% per year on most loans
- Property requirements — The home must meet FHA minimum standards, which can eliminate some fixer-uppers
- Lower loan limits — May not work in high-cost areas
MIP Cost Example
On a $300,000 home with 3.5% down ($289,500 loan):
- Upfront MIP: $5,066 (added to loan)
- Annual MIP: $1,620/year ($135/month)
- Over 30 years: $53,633 in MIP alone
Conventional Loan: Pros and Cons
Pros
- PMI is removable — Once you reach 80% LTV, PMI goes away. This is the single biggest advantage.
- Higher loan limits — Up to $806,500 in most areas
- No upfront insurance premium
- More property flexibility — Less strict inspection requirements
- Better for investment properties — FHA is primary residence only
Cons
- Higher credit score needed — 620 minimum, and best rates require 740+
- PMI costs can be higher — For borrowers with lower credit scores, conventional PMI can exceed FHA MIP
- Stricter DTI requirements — Typically max 43-45%
Side-by-Side Cost Comparison
Scenario: $300,000 home, 5% down, 6.5% rate, 30 years
| FHA | Conventional | |
|---|---|---|
| Down payment | $10,500 (3.5%) | $15,000 (5%) |
| Loan amount | $294,566 (includes upfront MIP) | $285,000 |
| Monthly P&I | $1,862 | $1,802 |
| Monthly mortgage insurance | $135 (MIP) | $190 (PMI) |
| Monthly PITI (est.) | $2,447 | $2,442 |
| Insurance duration | 30 years | ~8 years |
| Total insurance cost | $48,600 | ~$18,200 |
The FHA loan has a lower monthly insurance payment, but you pay it for 30 years instead of ~8 years. The conventional loan saves about $30,000 in total insurance costs.
Run both scenarios in our calculator to see exact numbers for your situation.
When FHA Makes More Sense
- Your credit score is below 680
- You have less than 5% for a down payment
- You have a higher debt-to-income ratio
- You plan to refinance within a few years (to a conventional loan once your credit improves)
When Conventional Makes More Sense
- Your credit score is 680 or above
- You can put 5% or more down
- You plan to stay in the home long-term (PMI removal saves thousands)
- The home doesn’t meet FHA property standards
- You want to avoid the upfront MIP fee
The Crossover Point
For most buyers, if your credit score is 680+, a conventional loan will cost less over time because of PMI removal. Below 680, FHA’s lower rates and easier qualification often win.
The sweet spot: if you can start with an FHA loan and refinance to conventional once your credit improves and you’ve built equity, you get the best of both worlds.
Calculate Your Options
Use our PITI calculator to compare monthly payments. Run it once with FHA terms and once with conventional terms to see the difference for your specific home price and down payment.