FHA Loans Overview

FHA loans are mortgages insured by the Federal Housing Administration, a government agency within the U.S. Department of Housing and Urban Development (HUD). The FHA does not lend money directly — instead, it provides insurance to approved lenders, reducing their risk and allowing them to offer more favorable terms to borrowers who might not qualify for conventional financing.

Created in 1934 during the Great Depression, FHA loans were designed to make homeownership accessible to a wider range of Americans. Today they remain one of the most popular loan programs for first-time homebuyers and borrowers with modest savings or lower credit scores. According to HUD data, FHA loans account for roughly 15% to 20% of all new mortgage originations in any given year.

Key features of FHA loans include:

• Low down payment: As little as 3.5% down with a credit score of 580 or higher. Borrowers with scores between 500 and 579 may still qualify with a 10% down payment.
• Flexible credit requirements: The minimum credit score is 500, though most lenders set their own overlays and typically require at least 580. This is significantly lower than the 620 to 640 minimum most conventional lenders require.
• Higher debt-to-income (DTI) allowance: FHA guidelines permit a back-end DTI ratio of up to 43%, and in some cases up to 50% with compensating factors such as significant cash reserves or a history of making similar-sized housing payments.
• 2026 loan limits: The standard FHA loan limit for most U.S. counties is $541,287 for a single-family home. In high-cost areas, the ceiling can reach $1,249,125. These limits are updated annually based on housing prices.
• Mortgage Insurance Premium (MIP): FHA loans require both an upfront MIP (1.75% of the loan amount, which can be rolled into the loan) and an annual MIP paid monthly. If you put down less than 10%, MIP remains for the life of the loan.
• Property standards: The home must meet FHA minimum property standards. An FHA appraisal is more rigorous than a conventional appraisal and evaluates safety, soundness, and habitability. Properties with significant deferred maintenance, peeling paint (in pre-1978 homes), or health and safety hazards may not pass FHA inspection.

Conventional Loans Overview

Conventional loans are mortgages that are not insured or guaranteed by a federal government agency. They are originated and funded by private lenders — banks, credit unions, and mortgage companies — and are typically sold to Fannie Mae or Freddie Mac on the secondary market. These two government-sponsored enterprises (GSEs) set the underwriting guidelines that most conventional lenders follow.

Conventional loans are the most common type of mortgage in the United States, making up approximately 75% to 80% of all originations. They offer greater flexibility in loan amounts, property types, and mortgage insurance options compared to government-backed programs.

Key features of conventional loans include:

• Down payment as low as 3%: Programs like Fannie Mae’s HomeReady and Freddie Mac’s Home Possible allow down payments as low as 3% for eligible borrowers. The traditional standard is 5% to 20%, with 20% eliminating the need for private mortgage insurance entirely.
• Higher credit score requirements: Most conventional lenders require a minimum credit score of 620, and the best rates are reserved for borrowers with scores of 740 or above. Your credit score has a significant impact on the rate you receive.
• DTI requirements: Conventional guidelines generally cap the back-end DTI ratio at 36% to 45%, though automated underwriting systems may approve borrowers with a DTI up to 50% when other factors like credit score, reserves, and down payment are strong.
• 2026 conforming loan limits: The conforming loan limit for most counties is $832,750 for a single-family home. In designated high-cost areas, the limit rises to $1,249,125. Loans exceeding these limits are classified as jumbo loans and carry different underwriting standards.
• Private mortgage insurance (PMI): Required when the down payment is less than 20%. Unlike FHA’s MIP, conventional PMI can be removed once you reach 20% equity in the home — either through payments, appreciation, or a combination of both.
• Flexible property types: Conventional loans can be used for primary residences, second homes, and investment properties. FHA loans are limited to primary residences only. Conventional appraisals are also generally less strict than FHA appraisals.

Side-by-Side Comparison

The following table summarizes the key differences between FHA and conventional loans. Use it as a quick reference when deciding which program best fits your financial situation:

To see how these differences affect your monthly payment, run both scenarios through our mortgage calculator. Enter the same home price with the different down payment amounts and rates to compare the actual dollar figures.

Mortgage Insurance: PMI vs. MIP

Mortgage insurance is often the deciding factor between FHA and conventional loans, and it is critical to understand how each program’s insurance works because the long-term cost differences can be substantial.

FHA Mortgage Insurance Premium (MIP): FHA loans require two forms of mortgage insurance. The first is an upfront MIP of 1.75% of the base loan amount, which is typically financed into the loan rather than paid out of pocket at closing. The second is an annual MIP that is divided into monthly payments and added to your mortgage payment. For most borrowers with a 30-year loan and a down payment of less than 10%, the annual MIP rate is 0.55% of the outstanding loan balance.

The critical distinction is permanence. If you put down less than 10% on an FHA loan, MIP remains for the entire life of the loan — it never goes away unless you refinance into a conventional loan. If you put down 10% or more, MIP is removed after 11 years. This lifetime MIP requirement is the single biggest drawback of FHA loans for borrowers who plan to keep the loan long-term.

Conventional Private Mortgage Insurance (PMI): Conventional PMI is required when the down payment is less than 20%, but it comes with a significant advantage: it can be canceled. Under federal law, your lender must automatically remove PMI when your loan balance reaches 78% of the original purchase price. You can also request cancellation when your balance hits 80% of the original value, or when you believe your home’s current value gives you 20% equity (this may require a new appraisal).

PMI costs vary based on your credit score, down payment amount, and loan size. Borrowers with strong credit (740+) and a 10% down payment might pay as little as 0.25% to 0.40% annually. Borrowers with lower credit scores could pay 0.75% to 1.5% or more. PMI can be paid monthly, as a single upfront premium, or through lender-paid PMI built into a slightly higher interest rate.

For a detailed breakdown of PMI costs, removal strategies, and ways to avoid it entirely, see our complete guide to private mortgage insurance.

Which Loan Is Right for You?

The best loan type depends on your credit profile, savings, how long you plan to keep the mortgage, and the type of property you are buying. Here are guidelines to help you decide:

An FHA loan may be the better choice if:

• Your credit score is below 680. FHA loans offer more competitive rates for borrowers in the 580 to 679 range. The rate difference between FHA and conventional can be significant at lower credit tiers — sometimes 0.5% or more.
• You have limited savings for a down payment. The 3.5% minimum down payment is lower than most conventional programs, and FHA allows the entire down payment to come from gift funds. For a $300,000 home, the minimum FHA down payment is $10,500 compared to $9,000 on a 3% conventional program, but the FHA qualification standards are less stringent.
• You have a higher DTI ratio. If your existing debts consume a larger portion of your income, FHA’s more generous DTI limits give you more borrowing power.
• You plan to refinance within a few years. If you expect your credit to improve or plan to build equity quickly, you can start with FHA and refinance into a conventional loan later to eliminate the lifetime MIP.
• You are a first-time buyer. FHA loans are designed with first-time buyers in mind, offering more forgiving qualification criteria. Review our first-time homebuyer guide for a complete roadmap.

A conventional loan may be the better choice if:

• Your credit score is 680 or higher. Conventional loans reward strong credit with lower rates and lower PMI costs. At scores above 740, you will likely receive a significantly better deal on a conventional loan than on an FHA loan once you factor in mortgage insurance costs.
• You can put down 10% or more. With a larger down payment, conventional PMI costs drop substantially and you are closer to the 20% threshold where PMI is eliminated entirely.
• You plan to keep the loan long-term. Because conventional PMI can be removed once you reach 20% equity, your long-term costs will be lower than an FHA loan where MIP is permanent. Over a 30-year period, this savings can amount to tens of thousands of dollars.
• You are buying a second home or investment property. FHA loans are restricted to primary residences. If you are purchasing a vacation home or a rental property, a conventional loan is your only option among these two programs.
• The property may not meet FHA standards. If you are buying a fixer-upper, a home with deferred maintenance, or a condo in a complex that is not FHA-approved, a conventional loan avoids the stricter FHA property requirements.
• You need a higher loan amount. With a conforming limit of $832,750 compared to FHA’s $541,287 standard limit, conventional loans accommodate more expensive homes without entering jumbo loan territory.

In many cases, the right answer is to get quotes for both loan types from the same lender. Ask for a side-by-side comparison that includes the interest rate, monthly payment, mortgage insurance cost, and total cost over the time period you expect to hold the loan. The closing costs may also differ between the two programs, so request a full Loan Estimate for each option.

Key Takeaways

• FHA loans require as little as 3.5% down with a 580 credit score, making them accessible to borrowers who may not qualify for conventional financing.
• Conventional loans require a minimum 620 credit score and offer down payments starting at 3%, but reward strong credit profiles with better rates and lower insurance costs.
• The biggest long-term difference is mortgage insurance: FHA MIP is permanent (for loans with less than 10% down), while conventional PMI can be removed once you reach 20% equity.
• FHA loan limits are lower ($541,287 standard) than conventional conforming limits ($832,750), which matters in higher-priced markets.
• FHA loans allow higher DTI ratios and accept lower credit scores, making them the more forgiving option for borrowers with less-than- perfect finances.
• Conventional loans offer greater flexibility in property types (including second homes and investment properties) and have less stringent appraisal requirements.
• Always request quotes for both loan types and compare total costs over your expected holding period, not just the monthly payment. Use our mortgage calculator to run the numbers.

Frequently Asked Questions

Can I switch from an FHA loan to a conventional loan later?

Yes, this is called an FHA-to-conventional refinance and it is one of the most common refinance strategies. Once you have built 20% equity in your home — through a combination of payments and property appreciation — you can refinance into a conventional loan and eliminate mortgage insurance entirely. You will need to meet conventional credit requirements (typically a 620+ score), pay closing costs on the new loan, and go through a new appraisal. Many borrowers find that the monthly savings from eliminating MIP more than offset the refinance costs within 12 to 24 months. Learn more about refinancing in our closing costs guide.

Are FHA interest rates lower than conventional rates?

FHA interest rates are often slightly lower than conventional rates because the government insurance reduces lender risk. However, this rate advantage can be misleading. When you factor in the upfront MIP (1.75% of the loan amount) and the ongoing annual MIP, the total cost of an FHA loan frequently exceeds a conventional loan for borrowers with credit scores above 680. The break-even point depends on your specific credit score, down payment, and how long you plan to keep the loan. Always compare the total cost of both options, not just the interest rate.

Do FHA loans take longer to close than conventional loans?

FHA loans can take slightly longer to close, primarily because of the more rigorous appraisal process. If the FHA appraisal identifies issues — such as peeling paint, faulty handrails, or structural concerns — the seller must complete repairs before the loan can close. This can add days or weeks to the timeline. Conventional appraisals are focused primarily on market value and are less likely to require repairs, resulting in a smoother closing process. On average, FHA loans close in 45 to 50 days compared to 40 to 45 days for conventional loans.

Can I use an FHA loan for a condo or multi-family property?

FHA loans can be used for condominiums, but the condo project must be on the FHA-approved condo list or qualify for single-unit approval. Many condo complexes are not FHA-approved, which limits your options. FHA loans can also be used for multi-family properties with up to four units, as long as you live in one of the units as your primary residence. This makes FHA an attractive option for house-hacking, where you live in one unit and rent out the others to help cover your mortgage payment. Conventional loans are generally more flexible with condos since they do not require the same project-level approval process.