The core difference
FHA loans are insured by the Federal Housing Administration and designed for buyers with lower credit scores or smaller down payments. Conventional loans are not government-backed — they meet standards set by Fannie Mae and Freddie Mac and are funded by private lenders. Both can be used to buy a primary residence, but they serve different borrower profiles and carry meaningfully different costs over the life of the loan.
The choice is rarely obvious upfront. FHA has a lower credit score floor and more flexible debt-to-income ratios, but its mortgage insurance is more expensive and — crucially — cannot be cancelled on loans with less than 10% down. Conventional PMI disappears once you reach 20% equity. That difference alone can cost tens of thousands of dollars over a 30-year term.
Side-by-side comparison
| Factor | FHA loan | Conventional loan |
|---|---|---|
| Min. down payment | 3.5% (580+ score) 10% (500–579) | 3% (first-time buyer programs) 5% standard |
| Min. credit score | 500 (with 10% down) 580 (with 3.5%) | 620 minimum 740+ for best rates |
| Mortgage insurance | Upfront MIP + annual MIP Permanent if <10% down | PMI only if <20% down Cancellable at 80% LTV |
| Debt-to-income ratio | Up to 57% with compensating factors | 43–45% typical max |
| Loan limits (2026) | $524,225 standard $1,209,750 high-cost | $806,500 standard $1,209,750 high-cost |
| Property condition | Strict appraisal standards — must meet HUD minimum property requirements | Standard appraisal only |
| Investment properties | Primary residence only | Up to 10 financed properties |
MIP vs PMI — the hidden cost gap
This is where FHA loans hurt the most. Conventional PMI is a private insurance product that disappears once you hit 20% equity — you can request cancellation at 80% LTV and lenders must auto-cancel at 78%. FHA Mortgage Insurance Premium works differently and is far more expensive on loans originated after 2013.
(rolled into loan)
Conv: Yes at 80% LTV
The FHA upfront MIP of 1.75% is typically rolled into the loan balance, meaning you pay interest on it for the life of the loan. Combined with the higher annual MIP rate and permanent duration, FHA mortgage insurance costs significantly more than conventional PMI for borrowers who stay in the home beyond the PMI cancellation point.
How credit score shifts the equation
The main reason to choose FHA over conventional is a credit score below 620 — conventional lenders generally won't lend below that threshold. But above 620, the picture changes quickly. Conventional PMI rates drop sharply as credit scores rise, and at 740+ the conventional rate advantage can more than offset FHA's lower down payment requirement.
| Credit score | FHA rate (approx) | Conventional rate (approx) | Better choice |
|---|---|---|---|
| 500–579 | Available (10% down) | Not available | FHA only option |
| 580–619 | Available (3.5% down) | Not available | FHA only option |
| 620–659 | ~6.9% | ~7.3% | FHA — lower rate |
| 660–699 | ~6.7% | ~6.9% | FHA slight edge |
| 700–739 | ~6.6% | ~6.6% | Roughly equal — compare MIP |
| 740+ | ~6.5% | ~6.4% | Conventional — lower total cost |
2026 loan limits
FHA and conventional conforming loans both have limits set annually. For 2026, the standard conforming limit rose to $806,500 for a single-family home in most US counties — up from $766,550 in 2024. FHA limits are lower, at $524,225 in standard-cost counties. Both programs have higher limits in designated high-cost areas, up to $1,209,750.
If your purchase price exceeds the conforming limit, you're in jumbo territory — neither FHA nor standard conventional applies, and you'll need a jumbo loan with stricter qualifying requirements and typically a 20% down payment.
FHA vs conventional — which fits your situation
Choose FHA if…
- Credit score below 620
- Limited savings — need 3.5% down
- High debt-to-income ratio (45–57%)
- Recent credit events (bankruptcy 2+ years ago)
- Gift funds covering full down payment
- Purchase price under $524,225
Choose conventional if…
- Credit score 700 or above
- Can put 10–20% down
- Want PMI to eventually cancel
- Buying above FHA loan limits
- Purchasing a second home or investment property
- Property in below-average condition
FHA is the right tool for buyers who can't qualify for conventional — credit below 620, thin down payment, high DTI. For everyone else with a score above 680 and a path to 20% equity, conventional typically wins on total cost over the loan term. The permanent FHA MIP on loans under 10% down is the deal-breaker for long-term holders — if you plan to stay 7+ years, run the full MIP vs PMI cost comparison before committing.