FHA vs. Conventional Loans: How to Choose the Right Option for Your Home Purchase

When you start exploring mortgage options, you’ll quickly hear two terms over and over again: FHA loans and conventional loans. They’re the two most common paths to homeownership, but they work very differently, especially when it comes to credit, down payments, and mortgage insurance.

If you’re a first-time buyer, moving into a new home, or even refinancing, understanding the differences will help you choose the option that truly fits your financial situation. Here’s a simple breakdown.

1. Down Payment Requirements

The biggest reason many buyers start with FHA is lower down-payment flexibility.

FHA Loans

• Minimum 3.5% down with a credit score of 580 or higher

• If your credit score is below 580, minimum down payment increases to 10%

• Designed to be more accessible for buyers with limited savings or credit challenges

Conventional Loans

• As a first-time homebuyer, you may qualify for 3% down

• Many buyers start around 5% down because of how mortgage insurance works on conventional loans

• Best suited for borrowers with stronger credit and more cash available

Bottom line: FHA tends to open more doors for buyers with smaller savings or lower credit scores. Conventional offers more long-term benefits once you have stronger credit or more equity.

2. Credit Score Flexibility

This is where the two programs differ the most.

FHA Loans

FHA is much more forgiving when it comes to credit. You can still qualify for competitive rates and reasonable mortgage insurance costs with a mid-range credit score.

Conventional Loans

You’ll often see “620 minimum credit score” online, but in reality, getting approved with a low score and a low down payment is rare. Conventional loans reward borrowers who already have their financial picture put together.

Think of it this way: FHA helps you rebuild while becoming a homeowner. Conventional expects you to already be solid financially.

3. Mortgage Insurance: How It Works for Each Loan

Mortgage insurance (PMI or MIP) is something nearly every buyer pays if they put less than 20% down. How long you pay it depends heavily on the loan type.

FHA Mortgage Insurance (MIP)

• Required on every FHA loan

• Stays for the life of the loan

• Can only be removed by refinancing into a conventional loan

Think of MIP like wearing extra hiking gear. You may not want it, but it keeps the lender safe and helps you move forward on your homeownership journey.

Conventional PMI

• Required if you put less than 20% down

• Automatically drops off once you reach 20% equity

• Often cheaper than MIP if you have strong credit

For long-term costs, conventional typically wins. For accessibility and flexibility, FHA comes out ahead.

4. Loan Limits

Both loan types have maximum limits.

FHA Loan Limits

• Standard FHA limit is roughly $472,000, though it varies slightly by year

• In high-cost areas, FHA limits can exceed $1 million

• Limits depend on your county and market

Conventional Loan Limits

• Set annually and apply before a loan becomes a jumbo

• Typically higher than FHA in standard-cost areas

5. Property Standards and Appraisal Differences

This is something many buyers overlook.

FHA Requirements

FHA appraisals must meet HUD’s minimum standards for:

• Safety

• Security

• Soundness

If the home has major hazards or repair issues, they’ll need to be fixed before closing. FHA also offers specialized renovation loans, such as FHA 203k, but they are more complex and less common.

Conventional Requirements

Conventional loans are generally more relaxed:

• Older homes with minor issues usually pass

• Better suited for properties that need TLC or updates

If FHA won’t allow a condition, it’s usually something you’d want fixed anyway as a buyer.

Which Loan Is Right for You?

Both FHA and conventional loans are simply tools, and the best tool depends on your situation.

Choose FHA if:

• You have a lower credit score

• You have limited down-payment savings

• You want more flexible approval guidelines

Choose Conventional if:

• You have strong credit

• You want mortgage insurance to eventually fall off

• You’re buying a home that may not meet FHA property standards

The key is understanding your goals and choosing the loan structure that supports your long-term financial health.