FHA vs Conventional Loans

Choosing between an FHA and conventional loan is one of the most important decisions you'll make as a first-time homebuyer. Both options can get you into your first home, but they work very differently—and the right choice depends entirely on your financial situation, credit history, and long-term goals.

FHA loans, backed by the Federal Housing Administration, were designed specifically to help buyers who might not qualify for traditional financing. Conventional loans, on the other hand, follow guidelines set by Fannie Mae and Freddie Mac and typically reward borrowers with stronger credit profiles.

In this guide, we'll break down every major difference between these two loan types—from credit score requirements to long-term costs—so you can make a confident, informed decision about which path makes sense for your first home purchase.

Before diving into the details, here's a high-level overview of how FHA and conventional loans stack up against each other for first-time buyers.

FHA loans have been helping Americans become homeowners since 1934. The program exists specifically to expand access to homeownership for buyers who might otherwise struggle to qualify for traditional financing. Here's what you need to know about how they work.

Credit Score Requirements

FHA loans offer the most flexible credit requirements of any major mortgage program. You can qualify with a credit score as low as 500, though your down payment requirements change based on your score:

• 580 or higher: Minimum 3.5% down payment
• 500-579: Minimum 10% down payment

This flexibility makes FHA loans particularly attractive for first-time buyers who are still building their credit history or recovering from past financial difficulties.

Mortgage Insurance Costs

Here's where FHA loans get complicated—and potentially expensive over time. FHA loans require two types of mortgage insurance:

Upfront Mortgage Insurance Premium (UFMIP): 1.75% of your loan amount, typically rolled into the loan balance.

Annual Mortgage Insurance Premium (MIP): Ranges from 0.15% to 0.75% of the loan balance annually, paid monthly. For most borrowers putting down less than 10%, this premium lasts for the entire life of the loan.

For a $300,000 loan, that upfront premium adds $5,250 to your balance, and you'll pay roughly $150-190 per month in ongoing MIP—costs that don't go away until you refinance or sell.

Pros of FHA Loans

• Lower credit score requirements than any conventional option
• Smaller down payment makes homeownership accessible sooner
• More forgiving of past credit issues including bankruptcies and foreclosures (with waiting periods)
• Assumable loans that future buyers could take over at your rate
• Gift funds allowed for entire down payment

Cons of FHA Loans

• Permanent mortgage insurance for most borrowers
• Stricter property requirements that can complicate purchases of older homes
• Lower loan limits in many areas compared to conventional
• Higher long-term costs due to ongoing MIP payments
• Less attractive to sellers in competitive markets

Conventional loans aren't backed by any government agency. Instead, they follow standards set by Fannie Mae and Freddie Mac, the two government-sponsored enterprises that buy most mortgages from lenders. This structure means conventional loans typically have stricter qualification requirements but offer significant advantages for borrowers who meet them.

Credit Score Requirements

Conventional loans require a minimum credit score of 620, but your score dramatically impacts your interest rate and terms:

• 740+: Best available rates and terms
• 700-739: Competitive rates with small premium
• 680-699: Good rates, slightly higher costs
• 620-679: Approval possible but higher rates and stricter requirements

According to FICO, the average American credit score is 715, which positions many first-time buyers well for conventional financing.

Down Payment Options

Contrary to popular belief, you don't need 20% down for a conventional loan. First-time buyers have several options:

• 3% down: Available through Fannie Mae's HomeReady and Freddie Mac's Home Possible programs for first-time buyers meeting income limits
• 5% down: Standard minimum for most conventional loans
• 10-19% down: Lower mortgage insurance costs
• 20% down: No private mortgage insurance required

Private Mortgage Insurance (PMI)

If you put less than 20% down on a conventional loan, you'll pay private mortgage insurance (PMI). However, unlike FHA's mortgage insurance, PMI offers a crucial advantage: it can be removed.

PMI typically costs between 0.2% and 2% of your loan amount annually, depending on your credit score and down payment. For a $300,000 loan, expect to pay $50-500 per month.

You can request PMI removal when you reach 20% equity, and lenders must automatically cancel it when you reach 22% equity based on the original property value.

Pros of Conventional Loans

• Removable mortgage insurance saves thousands over the loan's life
• Lower total costs for borrowers with good credit
• Higher loan limits in many areas
• More flexible property options with less stringent appraisal requirements
• More attractive to sellers especially in competitive markets
• Various PMI payment options including lender-paid and single-premium

Cons of Conventional Loans

• Higher credit score requirements exclude some buyers
• Credit-sensitive pricing means lower scores pay significantly more
• Stricter debt-to-income requirements for some borrowers
• Less flexibility for non-traditional credit histories
• Income limits apply to 3% down programs

While there are dozens of technical differences between FHA and conventional loans, a few factors have the biggest impact on your wallet and your approval odds. Let's focus on what matters most for first-time buyers.

The True Cost of Mortgage Insurance

This is often the deciding factor. Let's compare total mortgage insurance costs on a $300,000 loan over different timeframes:

FHA Loan (3.5% down, 580+ credit) - Upfront MIP: $5,250 - Monthly MIP: ~$175/month - 10-year cost: $26,250 (and continuing)

Conventional Loan (5% down, 720 credit) - Monthly PMI: ~$125/month - Removed at ~8 years (when reaching 20% equity) - Total cost: ~$12,000

The difference? Roughly $14,000+ in savings with the conventional loan—and that gap grows every year you keep the FHA loan.

Property Condition Requirements

FHA appraisals are notoriously strict. The property must meet HUD's Minimum Property Standards, which include requirements for:

• Safe and functional heating, electrical, and plumbing systems
• No peeling paint on homes built before 1978
• No structural defects or safety hazards
• Working appliances that convey with the home
• Adequate roof life remaining

Conventional appraisals focus primarily on market value rather than condition, making them more flexible for older homes or properties needing minor repairs. If you're considering a fixer-upper or older home, this difference matters significantly.

Seller Perception and Competitive Markets

In hot housing markets, how sellers view your offer matters. Many sellers and listing agents prefer conventional loan offers because:

• Faster closing timelines (fewer bureaucratic requirements)
• Less risk of appraisal issues delaying or killing the deal
• Perception of stronger financial qualifications

If you're competing against multiple offers, a conventional loan approval may give you an edge—though the right offer price and terms matter more than loan type.

After analyzing all the factors, here's our straightforward guidance for first-time buyers trying to decide between FHA and conventional loans.

Choose an FHA Loan If:

• Your credit score is below 620
• You have a limited credit history and can't qualify conventionally
• You've had a recent bankruptcy or foreclosure (FHA has shorter waiting periods)
• You have higher debt-to-income ratios that exceed conventional limits
• You need maximum flexibility on down payment sources

FHA loans serve as an excellent stepping stone to homeownership. Many buyers use FHA for their first purchase, build equity and improve their credit, then refinance into a conventional loan to eliminate the ongoing mortgage insurance.

Choose a Conventional Loan If:

• Your credit score is 680 or higher
• You can put at least 5% down (or qualify for 3% down programs)
• You want the option to cancel mortgage insurance
• You're buying in a competitive market where seller perception matters
• You're considering an older home that might not meet FHA property standards
• You prioritize lower total long-term costs

The Bottom Line

There's no universally "better" loan—only the loan that's better for your specific situation. If you have strong credit and can manage a 5% down payment, conventional loans typically offer better long-term value thanks to removable mortgage insurance. If you're still building credit or have limited savings, FHA loans provide a viable path to homeownership that might otherwise be out of reach.

The most important step? Get pre-approved for both loan types if possible. Seeing actual numbers for your specific financial situation—including interest rates, monthly payments, and total costs—will make your decision clear. Many lenders can run both scenarios during the pre-approval process, giving you the information you need to choose confidently.