FHA loans require just 3.5% down and accept credit scores as low as 580, but charge permanent mortgage insurance (MIP). Conventional loans need higher credit scores and typically 5%+ down, but PMI drops off at 20% equity — saving thousands long-term.
What Is an FHA Loan?
FHA (Federal Housing Administration) loans are government-backed mortgages designed for first-time homebuyers and borrowers with lower credit scores. The FHA doesn't lend directly — it insures the loan, reducing risk for lenders and allowing more flexible qualification requirements.
FHA loans require an upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount, plus annual MIP of 0.55% for loans with less than 10% down. This insurance lasts for the life of the loan unless you put 10%+ down (then it drops after 11 years).
What Is a Conventional Loan?
Conventional loans are not government-backed. They follow guidelines set by Fannie Mae and Freddie Mac. They typically require a credit score of 620+ (680+ for best rates) and a down payment of at least 3%–5%. PMI is required if you put less than 20% down, but it can be cancelled once you reach 20% equity.
Conventional loans generally offer lower interest rates for borrowers with good credit and no upfront mortgage insurance premium.
Side-by-Side Comparison
| Feature | FHA Loan | Conventional Loan |
|---|---|---|
| Minimum down payment | 3.5% | 3%–5% |
| Minimum credit score | 580 (3.5% down), 500 (10% down) | 620 minimum, 680+ for best rates |
| Mortgage insurance | Required (life of loan for <10% down) | PMI drops at 20% equity |
| Upfront insurance cost | 1.75% of loan ($7,000 on $400K) | None |
| Annual insurance cost | 0.55% of loan balance | 0.2%–1.5% (varies by credit/LTV) |
| Interest rates | Competitive but slightly higher | Lower for good credit (720+) |
| Property requirements | Must meet FHA standards (strict) | More flexible |
| Loan limits (2025) | $524,225 (standard areas) | $806,500 (standard areas) |
When to Choose FHA vs Conventional
- Your credit score is below 680
- You have a limited down payment (3.5%)
- You have a higher debt-to-income ratio (up to 50%)
- You're a first-time homebuyer needing flexible terms
- Your credit score is 700+
- You can put 10%–20% down
- You want PMI to drop off automatically at 20% equity
- The home price exceeds FHA limits in your area
- You want to avoid the 1.75% upfront MIP cost
Real-World Example
FHA: Loan $337,750 + $5,911 UFMIP rolled in = $343,661. Monthly: $2,174 (P&I) + $155 (annual MIP) = $2,329. MIP lasts the life of the loan.
Conventional: Loan $332,500. Monthly: $2,101 (P&I) + $165 (PMI). PMI drops at 20% equity (~year 8). After PMI drops: $2,101/month.
Over 30 years, the conventional loan saves approximately $38,000 due to PMI cancellation and no upfront premium.
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Frequently Asked Questions
Can I switch from FHA to conventional later?
Yes. You can refinance from an FHA loan to a conventional loan once you have 20% equity and a credit score of 620+. This eliminates the permanent MIP, potentially saving hundreds per month.
Do FHA loans have lower interest rates?
FHA rates are often competitive with conventional rates, but when you factor in the upfront and annual mortgage insurance premiums, the total cost is usually higher — especially for borrowers with good credit.
What is the FHA loan limit in my area?
The standard FHA loan limit for 2025 is $524,225. High-cost areas can go up to $1,209,750. Check the HUD website for your county's specific limit.
Is PMI the same as MIP?
They serve the same purpose (protecting the lender) but differ in structure. FHA MIP has an upfront cost plus annual premiums that may last the life of the loan. Conventional PMI has no upfront cost and automatically cancels at 20% equity.
Can I use an FHA loan for an investment property?
No. FHA loans are for primary residences only. You must live in the home as your main residence. Conventional loans can be used for investment properties with a higher down payment (typically 15%–25%).