FHA vs. Conventional Loans: Which One Is Right for You?
When you’re planning to buy a home, one of the biggest decisions you’ll face is choosing the right type of mortgage. Two of the most common options are FHA loans and conventional loans—but they differ in key ways. Understanding the pros and cons of each can help you make the best choice for your financial goals and homeownership plans.
What Is an FHA Loan?
An FHA loan is backed by the Federal Housing Administration. These loans are designed to help first-time and lower-income buyers qualify for a mortgage, even if they don’t have perfect credit or a large down payment.
Key Benefits of FHA Loans:
- Lower credit score requirements (as low as 580 with 3.5% down)
- Low down payment options (3.5% minimum)
- More flexible debt-to-income (DTI) guidelines
- Can use gift funds for down payment and closing costs
Things to Consider:
- Requires mortgage insurance premiums (MIP) for the life of the loan if your down payment is less than 10%
- Limits on how much you can borrow based on your area
- Often more paperwork and stricter property standards
What Is a Conventional Loan?
A conventional loan is not backed by the government and is offered by private lenders. It’s best suited for buyers with stronger credit, steady income, and some savings for a down payment.
Key Benefits of Conventional Loans:
- No mortgage insurance required if you put 20% down
- Mortgage insurance (if needed) can be canceled once you reach 20% equity
- More flexibility with property types (condos, second homes, etc.)
- Higher loan limits than FHA in many areas
Things to Consider:
- Generally requires a higher credit score (typically 620 or above)
- Higher down payment for the best rates (5–20% recommended)
- Stricter qualification criteria for income and debt
FHA vs. Conventional: Side-by-Side Comparison
| Feature | FHA Loan | Conventional Loan |
|---|---|---|
| Minimum Credit Score | 580 (with 3.5% down) | 620+ |
| Minimum Down Payment | 3.5% | 3%–5% (first-time buyers) |
| Mortgage Insurance | Required (MIP) | Required <20% down (PMI) |
| Can Cancel Insurance | No (unless 10% down + 11 yrs) | Yes, once 20% equity is reached |
| Loan Limits | Lower (area-based) | Higher in many areas |
| Ideal For | First-time or credit-challenged buyers | Buyers with solid finances |
Which One Is Right for You?
- Choose FHA if: You have a lower credit score, limited savings, or need more flexibility in qualifying.
- Choose Conventional if: You have good credit, stable income, and can afford a higher down payment—or want to avoid long-term mortgage insurance.
Pro Tip: Get Pre-Approved First
Whether you’re leaning toward FHA or conventional, a pre-approval can help clarify what you qualify for and give you a better idea of your options. A trusted mortgage broker can walk you through both loan types and help you compare rates, terms, and monthly payments side by side.