What’s the difference between FHA and conventional loans?
If you’re wading through the alphabet soup of home loans, you’re probably trying to decide between an FHA and a conventional mortgage. Here’s the straight story: FHA loans let you in with a lower credit score and a smaller down payment—3.5% if your score is 580 or higher. Conventional loans, on the other hand, start at just 3% down but usually demand a score of 620 or better. The catch? FHA loans saddle you with upfront and monthly mortgage insurance that never really goes away, while conventional loans let you drop private mortgage insurance once you hit 20% equity.
Quick Fix Summary
Need the short version? FHA loans are easier to qualify for and let you put down as little as 3.5% with a credit score as low as 580. Conventional loans can cost less over time because you can cancel mortgage insurance once you reach 20% equity, but you’ll usually need a higher score (620+) and a stronger financial profile.
What’s the deal with FHA and conventional loans?
FHA stands for Federal Housing Administration, which insures the loan so lenders feel safer taking on riskier borrowers. Conventional mortgages are backed by private lenders, not a federal agency, so they set their own rules. As of 2026, FHA loans still require an upfront mortgage insurance premium equal to 1.75% of the loan amount plus an annual premium that lasts the life of the loan unless you refinance. Conventional loans let you request PMI cancellation once your loan balance dips below 80% of the home’s value, and it automatically ends at 78%.
(Honestly, this is where conventional loans usually win on flexibility.) Sellers often prefer conventional offers because FHA appraisals are stricter; they flag safety issues like peeling paint or broken handrails that need fixing before closing. FHA loans can also run into trouble in HOA communities that haven’t gone through FHA’s approval process, which requires certain financial ratios and rental limits.
How do I actually choose between them?
Use this table to decide which loan fits your situation:
| Factor |
FHA Loan |
Conventional Loan |
| Minimum Credit Score |
580 (500–579 = 10% down) |
Usually 620 |
| Minimum Down Payment |
3.5% |
3% |
| Mortgage Insurance |
Required for life unless refinanced |
Can be canceled at 20% equity |
| Debt-to-Income Ratio Cap |
< 43% |
Varies by lender, often < 50% |
| Seller Flexibility |
May require repairs |
Generally no repair mandates |
To move from FHA to conventional:
- Check your current credit score and debt-to-income ratio; most conventional lenders want a score of 620+ and a DTI below 50%.
- Gather two years of W-2s or tax returns, recent pay stubs, and bank statements.
- Shop rates at least three lenders; use a mortgage broker if you’re unsure where to start.
- Apply for a conventional refinance and request a rate-and-term quote that eliminates FHA mortgage insurance.
- Close the new loan and pay off the old FHA mortgage.
What if neither option seems to work for me?
- Try a conventional loan with 3% down if your score is 620–679. Some lenders offer HomeReady or HomePossible programs that reduce mortgage insurance costs for low- to moderate-income borrowers.
- Consider a state Housing Finance Agency (HFA) loan—many states pair down-payment assistance with conventional-style loans and offer below-market rates.
- Wait and rebuild credit if your score is stuck below 620. Pay down credit cards to lower your utilization ratio, avoid opening new accounts, and dispute any errors on your credit reports.
How can I avoid costly mistakes with these loans?
Before you apply, run the numbers on both loan types with an online mortgage calculator that includes PMI. Remember that FHA’s upfront mortgage insurance premium (1.75%) is baked into the loan, so a $300,000 purchase actually finances $305,250. Conventional loans let you roll closing costs into the loan only if the appraised value supports it, so keep an eye on your DTI and avoid big purchases right before applying.
If you’re in a condo or planned community, check whether the HOA is FHA-approved; if not, ask the board to start the process or steer clear of FHA financing altogether. Finally, aim to put at least 10% down on an FHA loan if your score is between 500 and 579 to avoid higher monthly payments and a larger loan balance.
According to the U.S. Department of Housing and Urban Development, FHA loans insured over 1.2 million purchase loans in 2025 alone, making them a popular choice for first-time buyers. Meanwhile, the Federal National Mortgage Association reports that 30-year fixed conventional mortgage rates have averaged 0.35% lower than FHA rates since mid-2025, giving conventional borrowers a clear interest-rate edge when they qualify.
Why do sellers sometimes prefer conventional loans?
Sellers often prefer conventional offers because FHA appraisals are stricter. They flag safety issues like peeling paint or broken handrails that need fixing before closing. That’s one less headache for the seller. Conventional loans don’t come with these repair mandates, which makes the transaction smoother in most cases.
Can I really get rid of mortgage insurance on a conventional loan?
Yes, you can. Conventional loans let you request PMI cancellation once your loan balance dips below 80% of the home’s value, and it automatically ends at 78%. That’s not the case with FHA loans—unless you refinance out of it.
What’s the upfront cost difference between these loans?
FHA loans charge an upfront mortgage insurance premium equal to 1.75% of the loan amount. So on a $300,000 purchase, that’s $5,250 added to your loan balance. Conventional loans don’t have this fee, though you’ll still pay for PMI if you put less than 20% down.
How do HOA rules affect my loan choice?
If you’re buying in an HOA community, check whether it’s FHA-approved. Many aren’t, and that can block you from using an FHA loan entirely. Conventional loans don’t have this restriction, so you’ll have more property options. If the HOA isn’t approved, ask the board to start the process—or just go conventional.
What credit score do I need for each loan type?
For an FHA loan, you can get in with a score as low as 580 (or 500–579 with 10% down). Conventional loans typically require 620 or higher. If your score is in the middle, you might qualify for both—but conventional will likely cost less over time.
How does the debt-to-income ratio affect my approval?
FHA loans cap your DTI at 43% in most cases. Conventional loans are more flexible—many lenders allow up to 50%. That extra breathing room can make a big difference if you’ve got student loans or other debts.
Can I use gift money for the down payment?
Yes, but the rules differ. FHA loans allow gift funds for the entire down payment. Conventional loans usually require you to put some of your own money down (often 3–5%), though gift funds can cover the rest. Always check with your lender first.
What’s the interest rate difference between FHA and conventional?
According to the Federal National Mortgage Association, conventional 30-year fixed rates have averaged 0.35% lower than FHA rates since mid-2025. That might not sound like much, but it adds up over 30 years.
How long does it take to refinance from FHA to conventional?
Plan on 30–45 days from application to closing, assuming your finances are in good shape. The key is building enough equity (usually 20%) and keeping your credit score steady. If rates drop sharply, you might refinance even sooner.
What’s the biggest mistake people make with these loans?
Underestimating how long FHA mortgage insurance sticks around. It doesn’t go away on its own like conventional PMI does. Many borrowers don’t realize this until years later—by which point refinancing feels like the only option.
Edited and fact-checked by the TechFactsHub editorial team.
