• FHA loans (Fair Housing Administration loans) are government-backed mortgages with more flexible credit requirements designed to help homebuyers purchase a home with a low down payment.
  • Conventional loans are privately-backed loans designed to help first time homebuyers and repeat homebuyers purchase a home.
  • Conventional loans may be more versatile, but they have lower loan limits.

FHA loans and conventional loans are two of the most popular home loan options in the United States, accounting for around 91% of all American home loans originated in 2024.[1]

Neither option is inherently better than the other. It’s just about finding which option is likely to work better for you. 

Understanding FHA vs. Conventional Loans

Your ability to qualify for a home loan will depend upon which type you choose. The loan type will also determine your monthly payment and total cost over the course of the loan. So it’s important to understand the basics of FHA vs conventional loans.

What Are FHA Loans?

FHA loans are home mortgage loans backed by the U.S. Federal Housing Administration (FHA).[2] This means the FHA guarantees the lender that a portion of the debt will be repaid, which makes it less risky for the lender to loan funds to the homebuyer. 

FHA loans make homeownership more accessible to buyers with lower credit scores and/or lower down payment amounts. Because of the more flexible qualification criteria, FHA loans are a popular choice for first-time homebuyers (although they are not exclusively limited to this group). Also, the seller can assist with up to 6% of the purchase price toward closing costs. The funds for a down payment or closing cost can also be from a gift or down payment assistance program.      

What Are Conventional Loans?

Conventional loans are home mortgages not backed by the government. The lender or secondary market investor assumes the full risk of the loan with exception to loans requiring private mortgage insurance.[3] Due to the additional risk to the lender borrowers may need to meet stricter requirements for a conventional loan depending on the amount of your down payment.

Conventional loans are often considered more versatile than FHA loans, as they allow buyers to purchase a wider range of properties, including second homes and investment properties.

Key Differences Between FHA and Conventional Loans

There are several important differences between FHA and conventional loans. 

Down Payment Minimums

FHA loans require a minimum of 3.5% down, while conventional loans require a minimum of 3% down.[2,3] However, a higher down payment may be required for borrowers with increased risk factors, such as lower credit scores or higher loan amounts. 

You can use an online down payment calculator to estimate your down payment amount, and consider down payment assistance programs to help manage this upfront cost.     

DTI Ratio

Your debt-to-income (DTI) ratio is the measurement of your monthly debt payments as a percentage of your pre-tax income.  

DTI can be measured on the “front end” by dividing only the projected mortgage payment by your pre-tax income. It can also be measured on the “back end” by dividing all your monthly debt payments, including the projected mortgage, by your pre-tax income. 

While requirements vary by lender, a front-end DTI of 31% or less is typically needed for an FHA loan, while a front-end ratio of 28% or less may be needed for a conventional loan.[4] 

Mortgage Insurance Requirements

Mortgage insurance is an insurance policy that enables lenders to offer low-down-payment home loans by protecting them against borrower default. The borrower pays for the policy, so any required mortgage insurance adds to the cost of homebuying. 

FHA loans require an upfront mortgage insurance premium (UFMIP) as well as ongoing mortgage insurance premiums (MIPs). All FHA mortgages, regardless of the size of the down payment, require MIP.[5] FHA borrowers with a down payment of 10% or more can have the MIP canceled after 11 years of payments, while FHA borrowers with a down payment of less than 10% carry the MIP for the life of the loan.[6] It may be possible for you to remove the MIP requirement by refinancing to a conventional loan in the future.   

The mortgage insurance plan for conventional loans is called private mortgage insurance (PMI). PMI is typically only required when the down payment is less than 20%[7]. PMI can often be removed from a conventional loan once the loan balance reaches 80% or less of the property’s current appraised value.   

Interest Rates

Mortgage interest rates are the cost of borrowing money to buy a home. While interest rates vary from one borrower to the next based on a combination of factors (including your credit score, loan amount, down payment amount, and loan term).

Loan Limits

FHA loan limit amounts vary by county and are set by the U.S. Department of Housing and Urban Development (HUD). You can search current limits for your area on HUD.gov.

Conventional loan limits are typically higher, vary by county, and are set by the Federal Housing Finance Agency. Furthermore, a type of non-conforming conventional loan, called a jumbo loan, offers even larger loan amounts to well-qualified buyers.

Credit Score Requirements

Your credit score is a numerical indication of how well you have managed debt. The higher the number, the less perceived risk may be associated with lending you money. Higher scores may help you earn more favorable interest rates.  

Inspection and Appraisal Requirements

FHA loans require an appraisal by an FHA-licensed and approved home appraiser to confirm the fair market value of the property. The property must meet the FHA’s minimum property standards for health and safety.

Conventional loans require an appraisal by a licensed home appraiser to confirm the fair market value as well as the health and safety.  

Refinancing Options

Refinancing is when an existing loan is replaced by a new loan. Refinancing is often done to secure a lower interest rate, secure a lower monthly payment, change the loan type, such as changing from an adjustable rate to a fixed rate (or vice versa), adjust the loan term, or cash out some of the equity built in the property. 

FHA loans can be refinanced by:

  • An FHA streamline refinance: A simplified method of refinancing one FHA loan with another. This process requires minimal paperwork, which reduces the associated refinancing costs.
  • A rate and term refinance: The standard method of refinancing without converting any home equity into cash.  
  • A cash-out refinance: A strategy for pulling out some of your home equity by replacing your current loan with a larger loan. The new loan pays off the existing loan, plus closing costs, and you can pocket the difference. 
  • Conventional loans can be refinanced by both a rate and term and cash-out refinance.  

Pros and Cons of FHA Loans

Before choosing an FHA loan, it is important to consider the benefits and potential downsides.

Advantages of FHA Loans

  • Lower credit score requirements
  • Low down payment
  • Flexible DTI ratios
  • Streamlined refinance option

Potential Disadvantages of FHA Loans

  • Mandatory mortgage insurance 
  • Lower loan limits apply
  • Available only for primary residence 

Pros and Cons of Conventional Loans

Conventional loans also offer a mix of benefits and possible downsides.

Advantages of Conventional Loans

  • More versatile as they can be used for primary residences, second homes, or investment properties
  • Higher loan limits
  • PMI is only required if the down payment is less than 20% and may be cancelled once equity reaches 20%

Potential Disadvantages of Conventional Loans

  • Higher credit score requirements
  • Some borrowers (such as those who are not using the property as a primary residence) may need to put down more than the 3% minimum

How To Choose Between an FHA Loan and a Conventional Loan

Consider these five factors to help you choose between an FHA loan and a conventional loan:

  1.  Property price and use. How much is the property and will it serve as a primary residence, investment property, or other purpose?
  2. Your overall credit profile. Do you have past blemishes in your credit history?
  3. Your down payment savings. How much can you afford to put down?
  4. Monthly payment amounts and long-term costs. What are the estimated monthly mortgage payments, and how much will you spend over the course of the loan if you choose an FHA vs. a conventional loan?
  5. Market conditions. Do today’s interest rates or buyer competition affect your financing decision? If you’re not sure, ask your mortgage loan officer or real estate agent. 

Final Thoughts on FHA vs. Conventional Loans

FHA loans and conventional loans can both be solid options for financing a home purchase. Conventional loans are typically preferred by homebuyers for their versatility, accounting for around 78% of mortgages originated in 2024. However, FHA loans provide a path to homeownership for those who are unable to qualify for a conventional loan with favorable terms. 

To determine your likelihood of qualifying for either loan type, you can complete a pre-approval online to have a lender review your finances and discuss your home loan options.