Short answer: choose FHA if your credit score is under 680 or your down payment is under 5% — its government backing gets you approved where conventional lenders say no. Choose conventional if your score is 680 or higher — you’ll skip the FHA upfront insurance premium and your mortgage insurance can be cancelled, which usually makes conventional cheaper over time.
What each loan actually is
An FHA loan is a mortgage made by a private lender but insured by the Federal Housing Administration, part of the U.S. Department of Housing and Urban Development (HUD). If you default, the FHA reimburses the lender — which is why lenders accept lower credit scores and smaller down payments.
A conventional loan is not government-insured. Most follow rules set by Fannie Mae and Freddie Mac, the two government-sponsored enterprises that buy mortgages from lenders. With less than 20% down, you’ll pay private mortgage insurance (PMI) instead of FHA’s mortgage insurance premium (MIP) — and that single difference drives most of the decision.
Side-by-side comparison
| Feature | FHA loan | Conventional loan |
|---|---|---|
| Minimum credit score | 580 (500–579 with 10% down) | Typically 620; best pricing at 740+ |
| Minimum down payment | 3.5% | 3% for some first-time buyers; 5% standard |
| Upfront insurance fee | 1.75% of the loan (usually rolled in) | None |
| Ongoing insurance | 0.55%/year MIP, typically for the life of the loan if you put less than 10% down | PMI, cancellable at 80% loan-to-value |
| 2026 loan limit (most areas) | $541,287 | $832,750 |
| Debt-to-income limit | Up to 43% (higher with compensating factors) | Typically 43–45% |
| Property rules | Primary residence; must meet FHA appraisal standards | Primary residence; standard appraisal |
| Best for | Lower credit scores, thin savings | Stronger credit, plans to cancel insurance |
The credit-score floor is FHA’s superpower: a 580 score opens the door, while most conventional lenders want at least 620. On the flip side, conventional’s 2026 loan limit of $832,750 in most areas is far above FHA’s $541,287 — in expensive markets, FHA simply can’t finance larger purchases.
The worked example that decides it
Take a $320,000 home bought by someone with a 660 credit score, using an illustrative 7.00% 30-year fixed rate for both loans:
FHA route (3.5% down):
- Down payment: $11,200 → base loan $308,800
- Upfront MIP of 1.75% ($5,404) gets rolled in → financed loan $314,204
- Annual MIP of 0.55% ≈ $144/month
- Principal & interest ≈ $2,090/month
- Total ≈ $2,234/month
Conventional route (5% down):
- Down payment: $16,000 → loan $304,000
- PMI at an illustrative 0.85% for a 660 score ≈ $215/month
- Principal & interest ≈ $2,023/month
- Total ≈ $2,238/month
Year one is essentially a tie — the FHA buyer pays about $3 less per month. The decision is about what happens next. The conventional borrower can request PMI cancellation at 80% loan-to-value — roughly 11 years of scheduled payments in this example — saving about $215/month from then on. The FHA borrower with less than 10% down pays the $144/month MIP for the full 30-year term unless they refinance. Run both timelines on the Loan Amortization Calculator to see how the insurance durations change your total cost.
When FHA is the better pick
- Your credit score is below 680. This is the clearest signal. FHA’s mortgage insurance rate is the same for everyone (typically 0.55% annually), while conventional PMI is priced to your score — a 620–660 score can push PMI well above 1%, erasing any advantage.
- You can only manage 3.5% down. If a 5% conventional down payment plus closing costs is out of reach, FHA’s 3.5% minimum gets you in the door.
- Your debts are high relative to income. FHA’s more flexible debt-to-income treatment helps borrowers who are stretched.
One caveat: FHA loans require the home to be your primary residence and pass FHA property standards — fixer-uppers with major safety issues can fail the FHA appraisal.
When conventional is the better pick
- Your score is 680+. At that point conventional PMI is usually cheaper than FHA’s flat-rate MIP, and — critically — it’s cancellable.
- You can put 5% or more down. You avoid the 1.75% upfront FHA fee entirely and keep your loan balance lower from day one.
- You’re buying above $541,287 (in most areas). FHA’s lower loan limits rule it out; conventional conforming limits reach $832,750.
The FHA exit: refinancing out of MIP
A common strategy: buy with FHA now, refinance into a conventional loan later. Once your credit improves or your equity reaches 20%, refinancing into a conventional mortgage drops the mortgage insurance entirely (or at least replaces permanent MIP with cancellable PMI). But refinancing costs 2–5% of the loan in closing costs, so check the Mortgage Calculator before you pay a dime in refi fees.
Frequently asked questions
Is FHA or conventional cheaper in the long run?
Conventional is usually cheaper over the full loan term for borrowers who qualify, because PMI can be cancelled while FHA’s MIP (with less than 10% down) lasts the life of the loan. But for buyers with scores under 680, FHA is often cheaper month-to-month because conventional PMI is priced steeply for low credit scores.
Can I get a conventional loan with 3% down?
Yes — programs like Fannie Mae’s HomeReady and Freddie Mac’s Home Possible allow 3% down, but they come with income limits (generally at or below 80% of the area median income) and sometimes a homebuyer education course. A standard conventional loan with 3% down is typically limited to first-time buyers.
Does FHA mortgage insurance ever go away?
If you put down less than 10%, the annual MIP stays for the life of the loan — the only exits are paying the loan off or refinancing into a non-FHA loan. If you put down 10% or more, the annual MIP is removed after 11 years. The 1.75% upfront premium is never refundable, though it is usually financed into the loan rather than paid in cash.
Which loan is better for a first-time buyer?
It depends on your profile, not your buyer status. First-time buyers with limited savings or imperfect credit usually do better with FHA’s 3.5% down and 580 credit floor. First-time buyers with solid credit and 5%+ saved usually do better with conventional’s cancellable PMI. Check the Consumer Financial Protection Bureau resources for worksheets that walk through both options.