Many people assume one mortgage path is only for first-time buyers and the other is only for borrowers with perfect credit. That’s an oversimplification.
Both major mortgage types—FHA and conventional loans—have distinct advantages. Which is best depends on your credit history, available down payment, and overall financial picture.
This side-by-side guide cuts through the confusion and walks through the critical factors—credit score, down payment, debt-to-income ratio, mortgage insurance, and loan limits—so you can compare your options with real numbers.
Estimated read time: about 10 minutes. If you’re short on time, jump to the Key Takeaways below.
Want a quick next step? Check your credit score and get pre-approval quotes from at least two lenders to see how FHA vs Conventional options stack up for your situation.
- The myth that FHA is only for first-time buyers and conventional is only for perfect-credit borrowers is false.
- Both government-backed and private market loans serve a wide range of borrowers and loan needs.
- Your best choice depends on credit score, down payment amount, mortgage insurance cost, and DTI.
- Compare total loan costs (including mortgage insurance and fees), not just advertised interest rates.
- Use this guide to ask better questions and get comparable Loan Estimates from lenders.
Understanding the Basics: FHA and Conventional Loans
Home financing generally falls into two categories: government-backed mortgages and private-market (conventional) mortgages. Knowing the basic structure of each helps you understand why lenders set different rules and which option fits your situation.
This section is useful whether you’re a first-time buyer or a repeat purchaser: the right choice depends on your credit, savings, and long-term goals.
What Is an FHA Loan?
An FHA loan is a mortgage insured by the Federal Housing Administration, an agency within the U.S. Department of Housing and Urban Development (HUD). Because the FHA provides insurance, lenders face less risk and can offer more flexible qualification rules.
The program was designed to expand access to homeownership for borrowers with modest savings or imperfect credit. There are no formal federal income caps for FHA eligibility, but the property must meet FHA safety and livability standards.
When to consider an FHA loan: if you have a lower credit score, limited down payment funds, or need flexible gift fund rules.
What Is a Conventional Loan?
A conventional loan is issued by private lenders and is not insured by a government agency. The lender assumes the mortgage risk unless the loan meets conforming guidelines that allow it to be sold to Fannie Mae or Freddie Mac.
Conventional loans include conforming products (which follow FHFA-set limits and agency underwriting) and non-conforming or jumbo loans that exceed those limits and rely on individual lender criteria.
When to consider a conventional loan: if you have stronger credit, a larger down payment, or want to avoid long-term government mortgage insurance when possible.
For authoritative definitions and the most current rules, check HUD’s FHA pages and the FHFA (Federal Housing Finance Agency) resources before you apply.
FHA vs Conventional Loans: Key Differences at a Glance
A quick snapshot of the core contrasts can help you decide which loan program fits your situation best.
This side-by-side overview highlights the major areas where government-backed and private-market loans diverge. Use it to identify which features align with your credit, savings, and long-term goals.
The table below summarizes the most important dimensions; we unpack each row in later sections so you can compare real numbers for your situation.
| Feature | Government-Backed Loan | Private Market Loan |
| Minimum Credit Score | Often 580 for 3.5% down | Typically 620 or higher |
| Minimum Down Payment | 3.5% (with qualifying score) | As low as 3% |
| Max Debt-to-Income (DTI) Ratio | Up to 50% in some cases | Often capped around 43% |
| Mortgage Insurance | Required on all loans (MIP) | Required if down payment < 20% (PMI) |
| Typical Loan Limits | Set by FHA, often lower | Conforming limits are generally higher |
| Property Appraisal | Strict safety/condition standards | Focuses primarily on market value |
In general, FHA loans have more lenient qualifying rules, which can benefit borrowers with lower credit scores or smaller down payments. Conventional loans usually require higher credit scores and lower DTIs, but they can be less expensive over time for well-qualified borrowers.
Remember: total loan cost includes interest, mortgage insurance, and fees — not just the advertised rate. Use the table to prioritize which factors matter most for you (credit scores, down payment, loan limits, or appraisal rules) and follow the detailed sections for exact numbers.
How we compared: data is based on FHA guidelines, FHFA/Fannie Mae/Freddie Mac conforming definitions, and common lender practices. For an immediate, personalized result, use a mortgage comparison calculator or download our checklist to plug in your numbers.
Credit Score Requirements: How Low Can You Go?
Your path to homeownership often starts with one three-digit number: your credit score. Lenders use this score to assess risk, and it strongly affects your eligibility, interest rate, and the long-term cost of your loan.
Higher credit scores typically mean better rates and lower mortgage insurance costs; lower scores may push you toward programs with more flexible underwriting.
Minimum Credit Scores for FHA Loans
The FHA program is known for flexible credit rules. Federal guidelines allow a minimum credit score of 580 to qualify for the 3.5% down payment option.
If your score is between 500 and 579, you may still qualify for an FHA loan, but lenders typically require a larger down payment (commonly around 10%). Remember that these are baseline FHA rules—individual FHA-approved lenders can impose stricter standards (overlays), so shop multiple lenders.
One practical benefit: FHA mortgage insurance costs (MIP) are generally standardized and less tied to your individual credit score than private mortgage insurance for conventional loans.
Minimum Credit Scores for Conventional Loans
Conventional loans are more score-sensitive. A typical minimum credit score for many conventional programs is around 620.
Specific products, such as Fannie Mae’s HomeReady, may require a 620–660 score depending on program rules. With conventional loans, your credit score has a direct impact on private mortgage insurance (PMI) rates—a lower score usually means higher monthly PMI and higher overall loan costs.
Because conventional pricing is so score-dependent, borrowers with higher credit scores (especially 740+) can often secure the lowest interest rates and better long-term savings.
Practical Steps: Check and Improve Your Credit
- Pull your credit reports from the three bureaus (annualcreditreport.com) and check for errors; dispute inaccuracies promptly.
- Avoid opening new credit accounts or making large purchases before applying—these can temporarily lower your score.
- Pay down high-interest credit card balances to improve your score and reduce your DTI.
- If you have derogatory items, document any recent positive behavior (steady income, on-time rent) to discuss with lenders who may consider compensating factors.
Two Quick Examples
Example A — Lower credit: A borrower with a 580 score may qualify for an FHA loan at a modestly higher interest rate and pay MIP; this path can require only 3.5% down and be the fastest route to approval.
Example B — Higher credit: A borrower with a 740 score may qualify for a conventional loan with a lower interest rate and lower PMI (or eliminate PMI sooner). Over 10–30 years, better rates and removable PMI can save thousands.
Bottom line: if your score is below ~620, the FHA loan is often your primary route; if you’re 620 or above, run side-by-side estimates for FHA vs conventional. Small score improvements can yield meaningful rate and cost differences, so check your credit and, if possible, improve it before applying.
Down Payment Requirements: From 3% to 10%
Down payment rules vary by program, typically ranging from about 3% to 10% depending on your chosen path. This upfront cash is your personal investment in the property and directly affects your loan amount and monthly payment.
Below we break down common down payment options for FHA and conventional loans and highlight practical considerations like gift funds and mortgage insurance triggers.
FHA Loan Down Payment Options
FHA loans offer clearly defined minimums tied to credit score. With a credit score of 580 or higher, you may qualify with a 3.5% down payment. If your score is between 500 and 579, many lenders require a larger down payment—commonly around 10%—to offset risk.
A major advantage of the FHA program is flexible gift-fund rules: the entire down payment can be a gift from family, friends, an employer, labor union, or a qualifying charity, making it easier for some borrowers to come up with the required amount.
Conventional Loan Down Payment Options
Conventional loans also offer low-down options. Popular programs such as Conventional 97, HomeReady®, and Home Possible® allow qualifying borrowers to put as little as 3% down. These programs typically expect a minimum credit score around 620, though specific product rules vary.
Gift-fund rules for conventional loans are generally more restrictive when your down payment is under 20%—gifts usually must come from family members or a domestic partner rather than broader sources allowed under FHA.
| Feature | FHA-Insured Loans | Private Market Loans |
| Minimum Down Payment | 3.5% (580+ score) or ~10% (500–579) | As low as 3% (e.g., Conventional 97) |
| Common Low-Down Programs | Standard FHA program | Conventional 97, HomeReady®, Home Possible® |
| Typical Minimum Credit Score | 580 for 3.5% down | ~620 for many 3% programs |
| Gift Funds Allowed | Yes — broad sources allowed (family, friend, employer, charity) | Yes — typically restricted to family/relatives for down payment <20% |
| Mortgage Insurance Trigger | Required on all FHA loans (MIP) | Required if down payment <20% (PMI) |
Worked Example: 3.5% vs 3% Down on a $300,000 Home
Purchase price: $300,000
- 3.5% down = $10,500 down; loan amount ≈ $289,500 (before UFMIP financing on FHA)
- 3% down = $9,000 down; loan amount ≈ $291,000
Difference in initial cash: $1,500. But remember: FHA loans include an upfront mortgage insurance premium (UFMIP) that can be financed into the loan and an annual MIP, while conventional loans with <20% down will have PMI that can be removed later once you build sufficient equity. Over time, those insurance costs drive much of the total difference.
Practical Tips
- Account for closing costs in addition to your down payment—these are separate and typically range from 2%–5% of the purchase price.
- Explore state and local down payment assistance programs—many compatible with FHA and some conventional products.
- If you can increase your down payment toward 20%, you’ll avoid mortgage insurance entirely on conventional loans and substantially reduce monthly payments.
- Use a down payment and mortgage calculator to compare monthly payment, mortgage insurance, and long-term costs for FHA vs conventional based on your specific loan amount and credit score.
Choosing the right down payment strategy depends on your available savings, long-term plans, and whether you prioritize lower upfront cash or lower long-term costs. Compare loan estimates from multiple lenders to see which program maximizes your cash and minimizes total loan cost.
Debt-to-Income Ratio (DTI): What Lenders Allow
How much of your gross monthly income goes toward debts each month? Lenders use your Debt-to-Income Ratio (DTI) to judge whether you can manage a new mortgage payment. It’s a simple calculation but a powerful underwriting metric.
To calculate DTI: add up your required monthly debt payments (minimum credit card payments, car loans, student loans, etc.), then add the estimated new mortgage payment. Divide that total by your gross monthly income and multiply by 100 to get a percentage.
Different loan programs have different DTI requirements, and individual lenders can apply overlays, so shopping around matters.
DTI Limits for FHA Loans
FHA-backed loans are generally more flexible. Typical guidance shows a front-end (housing) ratio target near 31% and a back-end (total debt) ratio of about 43%. Automated underwriting systems (AUS) can approve borrowers with DTIs up to around 50% when compensating factors are strong.
Compensating factors that help FHA approvals at higher DTI include large cash reserves, a high credit score, a history of stable employment and income, and a small loan-to-value (LTV) when possible.
DTI Limits for Conventional Loans
Conventional loans from private lenders usually have stricter DTI expectations. Many lenders prefer a back-end DTI of 36% or lower, and automated systems commonly cap approvals around 43%. In limited cases, manual underwriting can allow DTIs up to the mid-40s, but ratios above 50% are rare.
With conventional financing, strong credit scores, significant down payment (lower LTV), and sizable reserves are common compensating factors that can offset a higher DTI.
| Factor | Government-Insured Loan Guidelines | Private Market Loan Guidelines |
| Typical Front-End DTI (Housing) | ~31% | ~28% preferred |
| Typical Back-End DTI (Total Debt) | ~43% | ~36% ideal; 43% common cutoff |
| Maximum with Compensating Factors | Can reach ~50% via AUS | May reach 45–50% with manual underwriting |
| Key Compensating Factors | Large reserves, high credit score, stable job history | Large down payment, excellent credit, low LTV |
Example DTI Calculation
Example: gross monthly income = $6,000. Current monthly debts = $800 (car + student + minimum cards). Estimated new mortgage payment = $1,900.
- Total debt payments = $800 + $1,900 = $2,700
- DTI = $2,700 ÷ $6,000 = 0.45 → 45%
At 45% DTI, FHA programs with compensating factors may approve you; many conventional lenders would want a lower DTI or stronger compensating factors.
How to Improve Your DTI Before Applying
- Pay down high-interest credit card balances to reduce monthly minimums.
- Avoid opening new credit accounts or taking on car loans before applying.
- Increase your down payment to lower the loan amount (and mortgage payment).
- Accumulate cash reserves or document additional stable income to strengthen compensating factors.
DTI is a major but not sole factor—lenders also weigh credit, assets, and employment. Use an online DTI calculator to model scenarios, then compare Loan Estimates from multiple lenders to see how your numbers translate into real loan options.
Mortgage Insurance: PMI vs. MIP Explained
Mortgage insurance is a key driver of your loan’s total cost — and it protects the lender, not you. Understanding the differences between Private Mortgage Insurance (PMI) on conventional loans and the FHA Mortgage Insurance Premium (MIP) is essential when comparing long-term costs.
PMI and MIP follow different rules and durations, so the choice of program can add or subtract thousands from your lifetime housing costs.
Private Mortgage Insurance (PMI) for Conventional Loans
With a conventional loan, PMI is typically required if your down payment is less than 20% because the lender bears more risk.
The annual PMI premium varies widely — it depends heavily on your credit score and the loan-to-value (LTV) ratio. Typical ranges are roughly 0.3% to 1.5% of the original loan amount per year, paid monthly as part of your mortgage payment.
The major advantage of PMI is that it’s temporary: once you reach about 20% equity, you can request cancellation, and the law requires automatic termination when your loan balance reaches 78% of the original value (subject to accurate servicing and timely payments).
FHA Mortgage Insurance Premium (MIP)
FHA loans require mortgage insurance on every loan, regardless of down payment size. MIP has two components:
- An upfront mortgage insurance premium (UFMIP), typically financed into the loan; and
- An annual MIP paid monthly. A common example is an upfront 1.75% of the loan amount plus an annual MIP around 0.55% (paid monthly), though exact rates can vary by loan terms and timing.
The duration of MIP depends on your initial down payment: with a down payment of 10% or more, MIP may last about 11 years; with less than 10% down, MIP generally remains for the life of the loan unless you refinance into a non‑FHA product.
| Feature | Private Mortgage Insurance (PMI) | FHA Mortgage Insurance (MIP) |
| When Required | Down payment < 20% | On all FHA loans |
| Cost Influence | Heavily tied to credit score & LTV | Standardized rates; less tied to score |
| Upfront Premium | Rare; sometimes lender-paid | UFMIP (commonly ~1.75% of loan amount) |
| Annual Premium Range | ~0.3% to 1.5% of loan amount | ~0.15% to 0.75% (often ~0.55%) |
| Duration | Until ~20–22% equity (can be canceled) | 11 years (≥10% down) or loan life (<10% down) |
| How It Ends | Borrower request or automatic termination | Refinance into a non‑FHA loan |
The long-term cost difference between PMI and MIP can be substantial. Because MIP can last the entire loan life for low-down FHA borrowers, refinancing to a conventional loan later is a common strategy to eliminate MIP once you have sufficient equity and a qualifying credit score.
Worked Comparison Example (Illustrative)
For a $300,000 loan (illustrative):
- Conventional with good credit: PMI might be ~$100/month and could be removed after ~8 years as equity builds;
- FHA: MIP might be ~$137/month (plus UFMIP financed into the loan) and could last 11 years or the loan life depending on down payment.
These figures are examples — use a mortgage insurance calculator and request exact quotes from lenders to compare your specific loan scenarios over 5, 10, and 30 years.
Recommendations
- If you expect to stay in a home long-term and can qualify for a conventional loan, the ability to remove PMI later often makes conventional financing cheaper over time.
- If you need low down payment flexibility or have lower credit now, FHA can get you into a home sooner — but plan to refinance to remove MIP when your credit and equity allow.
- Always compare Loan Estimates that list mortgage insurance costs line-by-line and model total payments across your expected ownership timeframe.
Loan Limits for 2025: How Much Can You Borrow?
Before you start house hunting, know the ceiling you can borrow under each program: your maximum loan amount. Loan limits are updated annually to reflect home price changes, and they determine which financing options are available for a given property and area.
If the home you want exceeds the applicable program limit, you’ll likely need a jumbo or other non‑conforming product with stricter underwriting.
FHA Loan Limits
FHA loan limits are county-specific and designed to reflect local housing costs. For 2025 the standard national FHA limit for a single-family home is listed here as $524,225, but limits rise in higher-cost counties.
In many high-cost areas the FHA ceiling increases significantly — up to $1,209,750 in certain counties — and special area adjustments apply to places like Alaska and Hawaii (reported here as $1,814,625).
“FHA loan limits are set to reflect local housing costs, making the program accessible in both affordable and high-cost markets.”
Because FHA limits can be lower than conforming limits, buyers in pricier markets sometimes must use conventional conforming or jumbo financing instead.
Conventional Loan Limits
Conventional conforming limits are set by the Federal Housing Finance Agency (FHFA). For 2025 the baseline conforming limit referenced here is $806,500 for a single-family property, with the same high-cost ceiling of $1,209,750 and special area adjustments (e.g., $1,814,625 for AK/HI).
Staying within conforming limits usually makes loans easier to sell to Fannie Mae or Freddie Mac and can mean more competitive rates than jumbo loans. If your purchase price requires financing above these caps, expect tighter requirements: higher credit scores, larger down payments, and possibly higher interest rates.
| Loan Type | 2025 Baseline Limit (Single-Family) | High-Cost Area Ceiling | Special Area Limit (AK, HI) |
| FHA-Insured Loan | $524,225 | $1,209,750 | $1,814,625 |
| Conventional Conforming Loan | $806,500 | $1,209,750 | $1,814,625 |
What this means for you: check county limits before making an offer. If your target property is above the FHA or conforming cap, you’ll need to plan for a jumbo conventional loan or other non‑conforming route — expect stricter underwriting and different loan amounts from lenders.
Quick action items: 1) Look up your county limits on HUD (for FHA) and FHFA (for conforming) using the property’s ZIP code; 2) If limits block FHA eligibility, get conventional/jumbo quotes early to understand required credit, down payment, and rate differences.
Interest Rates and Overall Costs
Finding the most affordable mortgage means looking beyond the headline interest rate to the total cost over the years you own the home. Your monthly payment includes interest, mortgage insurance, and fees — and those add up differently depending on whether you choose an FHA or a conventional loan.
A full cost comparison prevents surprises and helps you choose the loan that fits your timeline and financial goals.
Typical Government-Backed Loan Interest Rates
FHA loans, insured by the Federal Housing Administration, often allow lenders to offer competitive interest rates to borrowers with lower credit scores or smaller down payments. Because the government insurance lowers lender risk, FHA rates can be attractive to borrowers in the 600s credit-score range.
However, lower interest alone doesn’t guarantee a cheaper loan — durable costs like MIP (FHA mortgage insurance) can make the FHA path more expensive over time for some borrowers.
Typical Private Market Loan Interest Rates
Conventional loan interest rates are highly personalized. Lenders price conventional loans based on your credit score, loan-to-value ratio, and overall risk profile. Borrowers with excellent credit (740+) often secure the best conventional rates, which can make the total loan cost lower than an FHA option once mortgage insurance is considered.
Always compare APRs (Annual Percentage Rates) in addition to nominal interest rates. APR incorporates certain fees and gives a more complete basis for comparing loan options.
Get Loan Estimates from multiple lenders for both FHA and conventional programs to see real-world pricing for your situation.
Example Comparison (Hypothetical)
Illustrative scenario: a borrower with a 640 credit score might see a 6.5% FHA rate versus a 7.0% conventional rate. At first glance, the FHA rate looks better — but FHA’s ongoing MIP may make total monthly payments higher over 10–30 years compared with a conventional loan where PMI can be canceled after reaching sufficient equity.
Use a mortgage cost calculator to model several ownership timelines (3, 5, 10, 30 years) so you can see break-even points and the cumulative effect of mortgage insurance and fees.
Action Steps
- Request Loan Estimates for both FHA and conventional loans from at least two lenders — capture interest rate, APR, mortgage insurance line items, and lender fees so you can compare apples to apples.
- Model your expected ownership period (short-term move vs long-term) to determine which loan minimizes total cost.
- Consider refinancing later if you start with an FHA loan and later qualify for a conventional refinance to remove MIP.
Shopping around and doing the math are essential — the lowest interest rate doesn’t always deliver the lowest total loan cost. Compare total payments, mortgage insurance, and fees to identify the best option for your home purchase.
The Appraisal Process: Why It Matters
An appraisal is a lender-required, professional assessment of a home’s market value and, in some programs, its condition. This behind-the-scenes step protects the lender and helps you avoid overpaying — but it also varies by loan type and can affect your offer and closing timeline.
Understanding appraisal requirements and differences between FHA and conventional loans will help you set realistic expectations and negotiate more effectively.
FHA Appraisal Standards
FHA appraisals are a two-part review: the appraiser establishes fair market value and completes a property condition review to confirm the home meets HUD’s Minimum Property Standards (MPS). The condition review emphasizes safety, security, and soundness.
Common FHA repair items include correcting peeling lead-based paint (pre-1978 homes), fixing broken windows, ensuring functional heating, securing handrails, and addressing major roof issues. Because FHA appraisals focus on habitability as well as value, they can require repairs before closing and sometimes take longer to clear.
Conventional Appraisal Standards
Conventional appraisals concentrate on market value using comparable sales (“comps”). Appraisers note defects but generally do not require minor repairs unless they affect value or safety. This approach is often quicker and less likely to trigger seller-requested repairs.
Some conventional loans may qualify for appraisal waivers or hybrid appraisals (desktop or automated elements) for low-risk transactions, which can speed closing timelines.
| Aspect | FHA Appraisal | Conventional Appraisal |
| Main Focus | Value + Property condition (MPS) | Market value (comps); condition noted |
| Common Repair Requests | Peeling paint, heating, roof, safety items | Only if value or safety is affected |
| Turnaround | Often longer (repairs may delay closing) | Often faster; waivers possible |
Practical Timeline & Checklist
Typical appraisal timeline: 7–14 days to order and complete, plus additional time if repairs are required. FHA appraisals may add days or weeks for seller repairs or re-inspection.
- Order appraisal promptly after contract acceptance.
- Ask seller for recent inspection or repair records to anticipate issues.
- If FHA-related repairs are required, negotiate whether seller will complete them, provide a credit, or lower price.
Negotiation Strategies When Repairs Are Requested
- Request seller repairs with a clear deadline and licensed contractor estimates when possible.
- Ask for a seller credit at closing instead of repairs if the seller prefers not to perform work (verify lender acceptance).
- Escrow holdbacks or price reductions are alternatives — coordinate with your lender and title company.
Appraisal vs. Home Inspection
Remember: an appraisal is for the lender; a home inspection is for the buyer. Always include a professional home inspection contingency in your offer to uncover issues beyond the appraisal scope. Inspection findings can inform negotiation even if not required by the lender.
Bottom line: appraisal differences between FHA and conventional loans can influence which offers sellers prefer, especially in competitive markets. Factor appraisal standards and expected timelines into your offer strategy and be prepared with negotiation options if repairs are identified.
How to Choose Between FHA and Conventional Loans
Choosing between FHA and conventional loans isn’t about which is objectively “better” — it’s about which program matches your finances, timeline, and homeownership goals. Evaluate your credit, down payment, debt levels, and how long you plan to stay in the home.
This section turns the earlier details into practical guidance and scenarios so you can pick the right option or know when to compare both.
When an FHA Loan Makes Sense
Consider FHA financing when you need more flexible qualifying rules or lower upfront cash requirements. Typical situations where FHA shines:
- Lower credit scores (roughly 500–620). FHA is the most lenient major program for borrowers building credit.
- Limited down payment funds. The 3.5% down option (580+ score) or the ~10% option for lower scores makes homeownership more accessible.
- Higher DTI. Automated underwriting may allow DTIs up to about 50% with strong compensating factors.
- Flexible gift funds. FHA permits a broad range of gift sources for the entire down payment.
- Buying a move-in ready property that meets FHA property standards. FHA appraisals emphasize safety and habitability.
FHA is often the fastest route to approval if your credit or savings are still catching up. Plan to compare the long-term cost impact of MIP vs. PMI and consider refinancing later to remove MIP once you have more equity and a stronger credit score.
When a Conventional Loan Is Better
Conventional loans reward stronger financial profiles with lower long-term costs. Typical situations where conventional financing is preferable:
- Higher credit scores (typically 620+, best pricing 740+). Better scores usually lead to lower interest rates and PMI costs.
- Down payment of ~10% or more. Larger down payments reduce loan amount and speed reaching 20% equity to remove PMI.
- Want to avoid permanent mortgage insurance. PMI can be canceled once you reach roughly 20% equity; MIP on FHA can last longer without refinancing.
- Planning to stay long-term. If you’ll be in the home long enough to build equity, conventional loans can save money over time.
- Competitive offer needs. Sellers often prefer conventional financing because appraisals typically require fewer property condition repairs.
Conventional loans are often the best long-term value if you qualify — but they require stronger initial numbers.
Two Concrete Scenarios (Illustrative)
Scenario A — FHA path: Borrower has a 650 score and 5% down. FHA could allow a lower rate and higher DTI flexibility, but the borrower will pay MIP that may last many years unless they refinance.
Scenario B — Conventional path: Borrower has a 720 score and 5% down. They might pay a slightly higher nominal rate but have lower ongoing mortgage insurance (PMI) that can be removed at 20% equity — often the conventional route becomes cheaper over a 5–10 year horizon.
Use calculators to plug in your specific credit score, loan amount, down payment, and expected ownership period to find the break-even point for your situation.
Checklist: Questions to Ask and Documents to Bring for Pre-Approval
- Documents: recent pay stubs, W-2s or 1099s, last two years’ tax returns, bank statements, ID, and information on debts.
- Ask lenders: estimated interest rate, APR, all lender fees, mortgage insurance details (PMI vs. MIP amounts and duration), loan limits, and any overlays they apply to FHA or conventional products.
- Request at least two Loan Estimates (one FHA and one conventional) so you can compare APR, monthly payment, mortgage insurance, and total closing costs.
Action Steps
- Run side-by-side Loan Estimates from multiple lenders for FHA and conventional options.
- Model different ownership timelines (3, 5, 10 years) to see total cost and break-even points.
- If starting with FHA, plan for a future refinance to conventional to remove MIP when you have enough equity and a higher credit score.
- Shop lenders — overlays, pricing, and investor guidelines vary; a different lender may offer better terms.
There’s no one-size-fits-all answer. Use the guidance above to match your credit, down payment, and goals to the loan type that minimizes your total cost and supports your homeownership plan.
Securing the right mortgage is about matching a program to your financial picture. Your credit score, available down payment, and debt levels are the primary factors that determine whether an FHA or a conventional loan makes the most sense.
One path (FHA) tends to offer more flexible entry for borrowers with lower scores or limited savings; the other (conventional) often provides better long-term savings for well-qualified borrowers who can avoid or remove mortgage insurance.
Next Steps
- Pull your credit reports from the three bureaus and confirm your credit score.
- Calculate your DTI (debt-to-income) and estimated monthly payment for likely loan amounts.
- Get 2–3 Loan Estimates from different lenders for both FHA and conventional options and compare APR, mortgage insurance (MIP vs. PMI), and fees.
- Model different ownership timelines (3, 5, 10, 30 years) to find the option that minimizes total cost for your plan.
Talk with a knowledgeable loan officer to get personalized pre-approval and Loan Estimates. If you start with an FHA loan, remember refinancing to a conventional loan later is a common strategy to remove MIP as your credit score and equity improve.
Take action now: check your numbers, gather documents, and shop multiple lenders to find the loan and payment that fit your budget and long-term goals.
FAQ
What is the biggest difference in credit score requirements?
The Federal Housing Administration (FHA) program is generally more accessible for buyers with past credit challenges. You may qualify for FHA financing with a credit score as low as 580 for the 3.5% down option (and possibly 500–579 with a larger down payment), while most conventional programs typically expect a minimum score around 620 or higher for conforming loans.
How do the down payments really compare?
Both FHA and conventional paths offer low down payment choices. FHA commonly requires a minimum of 3.5% down (with a 580+ score). Many conventional programs also allow for as little as 3% down (e.g., Conventional 97, HomeReady®, Home Possible®) but usually expect higher credit scores and have stricter gift-fund rules.
Is mortgage insurance cheaper with one program?
Costs and structures differ. Conventional loans use Private Mortgage Insurance (PMI), which varies with credit score and LTV and can be canceled once you reach roughly 20% equity. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP) plus an annual MIP; for low down payments MIP can last the life of the loan, which can make FCA financing more expensive over time unless you refinance.
Are there limits on how much I can borrow?
Yes. FHA and conventional conforming loans have maximum loan limits that vary by county. See the Loan Limits section for 2025 baseline figures used in this guide. Always verify county-specific limits on HUD (for FHA) and FHFA (for conforming loans) using the property’s ZIP code, since local limits determine whether FHA, conforming, or jumbo financing applies.
Which type of financing is better for a first-time buyer?
It depends on the buyer’s profile. FHA is often a great fit for first-time buyers with lower credit scores or smaller savings because of its lenient qualifying rules and flexible gift-fund policies. If you have stronger credit (typically 620+ or better) and can make a larger down payment, a conventional loan may offer better long-term savings and quicker removal of mortgage insurance.
When should I consider refinancing?
Consider refinancing when you’ve built enough equity (generally to reach 20% for conventional PMI removal), when your credit score has improved significantly, or when market interest rates drop enough to offset closing costs. Borrowers who start with FHA often refinance to a conventional loan later to remove MIP and reduce monthly costs.