FHA loans are government-backed with lower credit score and down payment requirements (as low as 3.5%) but require mortgage insurance, while conventional loans usually need higher credit and can drop mortgage insurance later.
FHA
- Down payment as low as 3.5% with a credit score of 580 or more.
- Insured by the Federal Housing Administration.
- Requires upfront and annual mortgage insurance premiums, often for the life of the loan if you put down less than 10%.
- Loan limits are set by county.
Conventional
- Not government-backed.
- Usually needs a 620 or higher score and 3% to 20% down.
- Private mortgage insurance can be dropped at 20% equity.
Which is better
FHA is easier to qualify for. Conventional is often cheaper with good credit.
Down payment and credit
FHA loans, insured by the Federal Housing Administration, allow a down payment of 3.5% with a credit score of 580 or higher, or 10% down with scores of 500 to 579. Conventional loans can start at 3% down for qualified first time buyers, and usually require a credit score of at least 620.
Mortgage insurance
- FHA: charges an upfront mortgage insurance premium (1.75% of the loan) and an annual premium of about 0.15% to 0.75%. With less than 10% down, the annual premium lasts for the life of the loan, unless you refinance.
- Conventional: private mortgage insurance (PMI) is required with less than 20% down and can be canceled when equity reaches 20% (and automatically at 22%).
Loan limits
FHA and conforming conventional limits are set each year by county. In 2024, the baseline conforming limit was 766,550 dollars in most of the US.
Debt to income ratios
FHA allows higher debt ratios, sometimes up to 50% or more with compensating factors. Conventional lenders typically cap at about 45% to 50%.
Property standards
FHA appraisals have minimum property standards for safety and soundness, and the house must be your primary residence.
Who each suits
FHA suits buyers with a lower score, higher debt or small savings. Conventional suits buyers with good credit and larger down payments, since insurance costs are lower.
Assumable loans
FHA loans can be assumed by a qualified buyer, which can be valuable when rates rise.
Closing costs
Both have costs, usually 2% to 5% of the loan amount, and sellers may contribute in negotiated deals.
Compare
Ask several lenders for a loan estimate with the same details, and compare the APR and monthly payment.
Down payment, credit and mortgage insurance
FHA loans are insured by the Federal Housing Administration and allow down payments as low as 3.5 percent with a credit score of 580 or higher, and 10 percent for scores from 500 to 579. Borrowers pay an upfront mortgage insurance premium of 1.75 percent and annual premiums, often about 0.55 percent of the loan, and for loans with less than 10 percent down the premium lasts for the life of the loan. Conventional loans often require a credit score of 620 or higher and allow as little as 3 percent down on some programs, and private mortgage insurance can be canceled once equity reaches 20 percent.
Limits and choosing between them
For 2024, the conforming loan limit for a single family home in most US counties was 766,550 USD, and FHA limits are lower in low cost areas, with a floor of 498,257 USD and a ceiling of 1,149,825 USD in high cost areas. FHA permits higher debt to income ratios, sometimes up to about 50 percent, and has property standards requiring an FHA appraisal. FHA loans are assumable, which can help in a high rate market. Conventional loans suit borrowers with strong credit and larger down payments, while FHA often suits those with lower credit scores. Compare total costs with a lender.
Based on data from HUD and the Federal Housing Finance Agency
