FHA vs Conventional Loan: How to Choose

If you're shopping for your first mortgage, two names come up again and again: the FHA loan and the conventional loan. They're the two most common ways to finance a home in the US, and the right choice can save — or cost — you thousands of dollars over the years you own the place. The catch is that there's no universal winner. FHA loans are built to get buyers with thinner credit or smaller savings into a home; conventional loans tend to cost less over time for borrowers who qualify cleanly. This guide walks through the real differences and gives you a way to decide.

The short version: an FHA loan is government-backed (insured by the Federal Housing Administration) and forgiving on credit and down payment, but it carries mortgage insurance that's hard to shed. A conventional loan isn't government-backed, sets a higher bar to qualify, but lets you drop mortgage insurance once you build enough equity. Which one is cheaper depends almost entirely on your credit score and how long you'll keep the loan.

How they differ on the things that matter

Down payment

FHA loans allow as little as 3.5% down if your credit score is 580 or higher. Conventional loans can go even lower on paper — some programs allow 3% down for qualifying first-time buyers — but most borrowers putting little down will find FHA easier to actually get approved.

The bigger story is what happens at and above 20% down. On a conventional loan, 20% equity removes mortgage insurance entirely. On an FHA loan, the down payment doesn't buy you out of mortgage insurance the same way — more on that below. If you're weighing how much to put down in the first place, our guide on how much down payment you really need breaks down the trade-offs.

Credit score

This is where FHA earns its reputation. FHA guidelines allow scores down to 580 for 3.5% down, and even down to 500 with 10% down. Conventional loans generally want 620 or higher, and the best pricing is reserved for scores in the 740s and up.

So if your score is in the high 500s or low 600s, FHA may be your only realistic path — or at least the cheaper one, because conventional pricing punishes lower scores heavily. If your score is strong, conventional usually wins.

Mortgage insurance — the deciding factor

Both loan types charge mortgage insurance when you put less than 20% down, but they work very differently.

On a conventional loan it's called PMI (private mortgage insurance). You pay it monthly, and crucially, you can cancel it once you reach about 20% equity — and it drops automatically by law at 22%. We cover the cancellation rules in detail in PMI explained.

On an FHA loan it's called MIP (mortgage insurance premium), and it comes in two parts: an upfront premium of 1.75% of the loan amount (usually rolled into the balance) plus an annual premium paid monthly. The sticking point: if you put down less than 10%, FHA MIP lasts for the entire life of the loan. You can't cancel it by building equity — the only escape is to refinance into a conventional loan later.

That single rule is why so many borrowers start with FHA and refinance out of it once their credit and equity improve.

A worked example

Say you're buying a $320,000 home with 5% down — a $304,000 loan — and rates are around 6.5% on a 30-year term. Run any of these scenarios yourself in the mortgage calculator to see the monthly payment side by side.

Conventional path (assume a 700 credit score):

• Loan: $304,000
• PMI: roughly $130–$180 a month at this credit tier and down payment
• PMI cancels once you hit ~20% equity — often within 7 to 10 years, sooner if home values rise or you make extra payments

FHA path:

• Upfront MIP of 1.75% adds about $5,320 to the loan (financed), so you borrow ~$309,320
• Annual MIP runs roughly $130–$170 a month at 0.55% of the balance
• Because you put down less than 10%, that MIP never goes away on its own

In year one the monthly cost is similar. The difference compounds over time: the conventional borrower stops paying PMI after a few years, while the FHA borrower keeps paying MIP for decades unless they refinance. Over a 10-year hold, that gap can easily reach $10,000 or more.

When FHA is the better choice

FHA isn't a consolation prize. It's the smarter pick when:

• Your credit score is below ~660. Conventional pricing gets expensive fast at lower scores; FHA pricing doesn't penalize credit nearly as steeply.
• Your down payment is tight. 3.5% down with documented gift funds is straightforward on FHA.
• Your debt-to-income ratio is high. FHA is often more flexible on DTI, sometimes approving ratios conventional underwriters would decline.
• You plan to refinance later. If you expect your credit and income to improve, FHA can get you in the door now, with a conventional refinance as the exit plan.

When conventional is the better choice

Conventional tends to win when:

• Your credit score is 680+. You'll likely get a better rate and lower mortgage insurance — or skip insurance entirely at 20% down.
• You're putting down 10–20% or more. The PMI-cancellation feature becomes a real, dollar-denominated advantage.
• You're buying a higher-priced home. FHA caps loan amounts by county; conventional conforming limits are generally higher, and jumbo options exist above that.
• You want flexibility on property type. FHA has stricter property condition and appraisal requirements, which can complicate offers on older or fixer-upper homes in competitive markets.

What about refinancing out of FHA later?

Because FHA's MIP often lasts the life of the loan, a common strategy is to start FHA and refinance into a conventional loan once two things are true: your home has reached about 20% equity, and your credit score has climbed into conventional-friendly territory.

When both happen, refinancing can eliminate mortgage insurance entirely and sometimes lower your rate at the same time. The catch is that refinancing isn't free — you'll pay a fresh round of closing costs, usually 2%–5% of the new loan, so you need the monthly savings to justify it. Run the break-even before you commit. If the FHA-to-conventional refinance saves you $180 a month in MIP and costs $6,000 to do, you break even in about 33 months — fine if you're staying, less attractive if you might move soon. The point: an FHA loan today doesn't lock you into its mortgage insurance forever, as long as you have a realistic exit plan.

Don't forget rates, location, and total cost

The loan type is only one input. Your interest rate swings the payment more than almost anything, and rates differ by program, lender, and state — check the current 30-year fixed rates and compare a few lenders before assuming a number. Rates also vary regionally, so if you're buying in a big market it's worth seeing rates in California or Texas specifically.

And remember that mortgage insurance is just one line on the bill. Property taxes, homeowner's insurance, and any HOA dues stack on top of principal and interest, and they're identical whether you go FHA or conventional. Model the full payment, not just the loan, when you compare.

The bottom line

Choose FHA when qualifying is the hard part — lower credit, smaller down payment, tighter DTI — and treat it as a stepping stone you may refinance out of once your equity and credit improve. Choose conventional when you can clear the credit bar, because the ability to cancel PMI makes it cheaper over any reasonable holding period.

The honest way to decide is to price both. Get a quote for each from the same lender on the same day, plug the numbers into the mortgage calculator, and look at the total cost over the years you actually expect to stay — not just the first month's payment. The cheaper loan on day one is frequently the more expensive one by year five.