The difference between FHA and conventional financing comes down to three variables: your credit score, your down payment, and how long you plan to stay in the home. In some cases, FHA is clearly the better choice. In others, conventional financing costs less over time even if the initial approval is harder to get.
Here’s how to evaluate them for your specific situation.
The Core Difference
A conventional loan isn’t backed by the federal government. Lenders take on the full risk, which is why they require stronger credit and — for low down payments — private mortgage insurance (PMI).
An FHA loan is insured by the Federal Housing Administration. Because the government backstops the lender’s risk, FHA lenders can accept borrowers with lower credit scores and smaller down payments. The tradeoff: FHA has its own mortgage insurance structure that costs more over time for many borrowers.
Credit Score Requirements
| Loan type | Minimum credit score | Notes |
|---|---|---|
| Conventional | 620 | 740+ for best pricing |
| FHA (3.5% down) | 580 | 10% down required for 500–579 |
If your score is below 620, FHA is likely your only conventional-lender path. If your score is 740 or higher, conventional pricing is usually better — you’ll get favorable loan-level price adjustments that FHA doesn’t offer.
The 620–739 range is where the decision gets interesting. You qualify for both, but the mortgage insurance costs differ meaningfully.
Down Payment Requirements
Conventional: As low as 3% (Fannie Mae HomeReady or Freddie Mac Home Possible programs for qualifying borrowers), though 5–10% is more common and 20% eliminates PMI.
FHA: As low as 3.5% with a 580+ credit score; 10% if your score is 500–579.
For buyers with limited savings, FHA’s 3.5% minimum is often the deciding factor.
Mortgage Insurance: The Key Difference
This is where the long-term cost comparison diverges significantly.
Conventional PMI:
- Required if down payment is less than 20%
- Rate depends on credit score and LTV, typically 0.5%–1.5% of loan amount annually
- Automatically cancels when you reach 22% equity (by original amortization schedule)
- Can be requested for cancellation at 20% equity
FHA Mortgage Insurance Premium (MIP):
- Upfront premium: 1.75% of loan amount, rolled into the loan at closing
- Annual premium: currently around 0.55% for most 30-year loans with less than 10% down
- Lasts the life of the loan if your down payment was less than 10%
- With 10% or more down, MIP cancels after 11 years
The lifetime MIP is the key reason buyers who qualify for conventional often choose it instead. A buyer who buys with 5% down and stays for 7 years will pay meaningful additional insurance costs with FHA vs. conventional, even if the FHA rate is slightly lower.
Loan Limits
Both loan types have purchase price limits.
Conventional (conforming limits): Set annually by FHFA based on median home prices. In most areas in 2025, the single-family limit was $806,500. High-cost areas have higher limits. Loans above the limit are “jumbo” loans with different underwriting standards.
FHA limits: Set by HUD and vary by county based on local median prices. Generally lower than conventional conforming limits. In high-cost areas, FHA limits are a percentage of the conventional limit.
In expensive markets, this difference can be decisive: the home you want might exceed the FHA limit but fall within the conventional conforming limit.
When FHA Is the Better Choice
- Credit score below 620 (FHA is usually the only option)
- Credit score 620–679 with a limited down payment (FHA’s insurance cost advantage at lower scores can offset the lifetime MIP)
- You need the seller to pay more of your closing costs (FHA allows up to 6% seller concessions vs. 3% for conventional with less than 10% down)
- You’re buying in a lower-cost market and plan to stay long enough to refinance out of the MIP later
When Conventional Is the Better Choice
- Credit score 720 or higher — conventional pricing tiers significantly improve
- You can put 10–20% down — PMI cancellation makes the total cost lower than lifetime FHA MIP
- The home price exceeds FHA loan limits in your area
- You want a second home or investment property (FHA is primary residence only)
The Hybrid Strategy
Some buyers use FHA financing to buy now, then refinance into a conventional loan once they’ve built 20% equity — either through payments, appreciation, or both. This works if rates remain favorable for refinancing, but carries the risk that rates rise and the refinance is less attractive than expected.
Use the Affordability Calculator on LendingPulse to compare your PITI under both loan structures: adjust the down payment, insurance type, and rate to see which produces a payment you can comfortably qualify for.