FHA vs. Conventional Loans

When you’re ready to purchase a home, it’s easy to get stuck on deciding the right mortgage for your needs. With so many options out there, it’s difficult to determine which is best for you.

FHA loans offer lenient eligibility criteria and smaller down payment requirements. Conventional loans, on the other hand, are more widely used and accessible to a broader range of people. FHA loans allow down payments as low as 3.5% with credit scores starting at 580, while certain conventional loans can start as low as 3% down but typically have additional borrower eligibility requirements.

But which is better: FHA or conventional loans? We’ll break it down below.

FHA Loans Overview

FHA loans are backed by the Federal Housing Administration and help reduce lenders' risk when issuing loans to buyers with lower incomes or credit scores.

As a result, lenders can afford to be more lenient and flexible with their eligibility requirements, which makes FHA loans a popular option for first-time buyers or those with lower credit scores.

Conventional Loans Overview

Unlike FHA loans, no government agency insures or backs conventional loans. This means that their eligibility criteria can be stricter. Those criteria might include a higher credit score or down payment requirement.

Most lenders offer conventional loans, and they suit a wide range of homebuyers.

Differences Between FHA and Conventional Loans

Both FHA and conventional loans are popular mortgage types and solid options for first-time homebuyers. However, you should be aware of some key differences before choosing one or the other.

FHA vs. Conventional Down Payments

The down payment is one of the biggest hurdles first-time homebuyers must overcome. For FHA loans, down payments can be as low as 3.5%, making it an attractive option for those with smaller savings.

While many people think you must put 20% down on a conventional loan, that’s a myth. Twenty percent down is often cited because it allows borrowers to avoid paying private mortgage insurance (PMI). However, many buyers can’t afford to put that much down. In practice, most lenders look for at least 5% down on a conventional loan.

Special programs, such as Fannie Mae’s HomeReady® and Freddie Mac’s Home Possible®, allow qualified borrowers to put down as little as 3%. These programs typically come with income limits and other eligibility requirements, but they can make conventional loans more accessible to first-time or lower-income buyers.

FHA vs. Conventional Credit Scores

Since the government backs FHA loans, lenders can set lower credit benchmarks. Per FHA loan credit requirements, the lowest possible credit score that qualifies for an FHA loan is 500, which is typically lower than conventional loan credit requirements. Buyers with a credit score below 580 can still qualify for an FHA loan, but they are usually expected to come up with a down payment of at least 10%. Not all lenders are willing to go that low, so availability depends on the lender’s own requirements.

Conventional loans typically require a credit score of 620 or higher. However, that score may be higher or lower, depending on the lender.

First Residential typically requires a 620+ credit score for all loan types.

FHA vs. Conventional Interest Rates

When comparing FHA vs. conventional mortgage rates, FHA loans typically have lower interest rates than conventional loans, another plus for this mortgage type. However, interest rates depend on your own unique financial history, regardless of loan type. The best thing to do is to pre-qualify with different lenders, who can help you learn more about your personal interest rate quotes when applying for a loan.

FHA vs. Conventional Debt-to-Income Ratio

A debt-to-income ratio (DTI) shows your debt level compared to your take-home income. Lenders want to see a relatively low DTI to ensure you can manage your monthly mortgage payments without issue. Those with a higher DTI might raise red flags for lenders.

For both FHA and conventional loans, lenders may allow a debt-to-income ratio up to 50%. While conventional lenders allow DTIs up to 50%, they generally prefer 43% or lower unless borrowers have strong compensating factors present.

FHA vs. Conventional Loan Limits

Both FHA and conventional loans limit the amount you can borrow. FHA loan limits are set by county and vary widely based on local housing costs. Conventional conforming loan limits are the same nationwide, but certain high-cost areas have higher conforming loan limits set by the FHFA.

In 2025, the FHA loan limit is $524,225 in low-cost areas and $1,209,750 in more expensive areas.

Conventional loan limits are set by the Federal Housing Finance Agency. The 2025 limit is set at $806,500 for the majority of mortgages and $1,209,750 for more expensive areas. If you need a mortgage greater than that, consider applying for a jumbo loan. For buyers in low-cost markets, conventional loans may offer more room before needing a jumbo loan.

FHA vs. Conventional Mortgage Insurance

Mortgage insurance acts as a safety net for lenders to protect them from borrowers who may be at higher risk of defaulting. If you have a low down payment, mortgage insurance is usually required.

For conventional mortgages, you pay mortgage insurance if you put down less than 20%. However, once you build up at least 20% equity in your home, that insurance is no longer required.

For FHA loans, you also pay mortgage insurance for lower down payments. The difference is that an FHA loan with less than 10% down means the mortgage insurance is required for the entirety of your loan—even if you reach 20% equity. If you put 10% down or more, you can remove the mortgage insurance after 11 years of payments.

Otherwise, to remove a PMI from your FHA loan, you would need to refinance to a conventional loan down the line.

Get in touch with a First Residential specialist today to learn more and to find trained staff and helpful advice.

Pros and Cons of FHA Loans

Here are the benefits of an FHA loan:

• Low down payment of 3.5%

• Lower credit score requirements

• No income limits, which is ideal for both low- or high-income borrowers

• Multiple housing options, meaning the loan can be used to buy single-family homes, condos, manufactured homes or multifamily homes

FHA loan downsides include the following:

• Loan limits; you can only borrow up to $524,225 in a low-cost area or $1,209,750 in a high-cost area

• Higher mortgage insurance payments; while less expensive, PMI is payable for the entire loan term if you put down less than 10%.

• Strict property standards in that properties must be appraised for safety and soundness, which can cause delays

• Use for primary residence only; FHA loans can't be used for investment properties or second homes

Pros and Cons of Conventional Loans

Conventional loans can provide many benefits, such as those listed below:

• Broad usage; in addition to primary residences, conventional loans can be used for vacation homes, investment properties or second homes

• Mortgage insurance isn’t always required; if you put 20% down or build up to 20% equity in your home, you can get rid of mortgage insurance

• Higher loan limits, allowing you to borrow more to purchase a home

• No income limits, meaning that whether you're a high- or low-income earner, you could qualify for this loan

There are also some challenges with conventional mortgages, which include the following:

• Higher required credit score; most lenders want a score of at least 620 score

• A lower debt-to-income ratio, with lenders generally wanting a DTI of 43%

• Stricter lending criteria due to higher credit scores and lower DTIs, meaning it can be harder to get approved

• The loans can come with higher interest rates than FHA loans

At the end of the day, both FHA and conventional home loans can be great options for first-time and repeat homebuyers. If you are still feeling unsure about which mortgage option is best for you, get in touch with one of our home loan specialists today.