If you are shopping for a mortgage, you have likely heard about FHA loans and conventional loans. They sound different, and they are — but the difference is not "one is better." It is "one is better for you." This guide breaks down everything you need to know to make the right choice.
The quick comparison
An FHA loan is insured by the Federal Housing Administration (a government agency), while a conventional loan is not. This one fact changes everything about down payments, credit requirements, interest rates, and insurance costs.
FHA loans
- Down payment: 3.5% minimum
- Credit score: 580+ (some lenders go lower)
- Mortgage insurance: Yes, called MIP — you pay it for the life of the loan
- Interest rates: Often slightly lower than conventional
- Gift funds: Allowed (great for first-time buyers)
Conventional loans
- Down payment: 3-5% (or 20%+ to avoid PMI)
- Credit score: 620+ (sometimes 640-660+ for best rates)
- Mortgage insurance: Yes, called PMI — but it drops off at 80% loan-to-value
- Interest rates: Competitive, especially with good credit
- Gift funds: Allowed, but with more restrictions
The biggest difference: FHA mortgage insurance is permanent (unless you refinance). Conventional PMI drops off when you reach 20% equity. This matters for your long-term costs.
Down payment: FHA's advantage for first-time buyers
For a $250,000 home: FHA (3.5% down) requires $8,750. Conventional (3% down with PMI) requires $7,500 but adds PMI to your monthly payment. Conventional (20% down) requires $50,000 but has no PMI ever. For most first-time buyers, FHA wins here.
Mortgage insurance: The long-term cost
FHA mortgage insurance (MIP)
- Upfront MIP: 1.75% of your loan amount (usually rolled into your loan)
- Annual MIP: 0.55-0.80% per year (added to your monthly payment), forever
Here is the catch: unlike conventional PMI, FHA insurance does not go away. Even when you have 20%, 30%, or 50% equity, you still pay MIP forever — unless you refinance to a conventional loan.
Conventional PMI
PMI varies by credit score and down payment, typically 0.5-2% per year. The big difference: it drops off automatically once you hit 80% loan-to-value (20% equity). On a $250,000 home, you reach 80% LTV after about 5-7 years.
Who wins in each scenario?
FHA wins if you:
- Have less than 5% saved for a down payment
- Have credit below 620
- Are planning to refinance within 5-7 years
- Want to use gift funds
- Have a non-traditional income or employment history
Conventional wins if you:
- Have 5%+ saved for down payment
- Have credit of 640+
- Plan to stay in the home 5+ years (PMI drops off)
- Want the option to drop insurance and build equity faster
- Have stable, traditional employment
Other loan options: VA and USDA
VA loans
- Zero down payment
- No mortgage insurance at all
- No credit score minimum (most lenders require 580-620)
- Often lower interest rates than FHA or conventional
- No prepayment penalties
USDA loans
- Zero down payment
- Lower mortgage insurance than FHA
- Often lower interest rates
- Income limits vary by area
The refinance strategy
- 1Buy with FHA (3.5% down, lower credit requirements)
- 2Make on-time payments for 5-7 years
- 3Build equity and improve credit score
- 4Refinance to a conventional loan and drop MIP forever
This way, you get the benefits of FHA upfront and then switch to conventional once you are in a stronger position. It is a legitimate strategy and many lenders expect this path.
The bottom line
There is no universal "best" loan. FHA makes sense for buyers with less cash and tighter credit. Conventional makes sense for buyers with 5%+ saved and decent credit. VA and USDA are the clear winners if you qualify. The key is understanding the long-term costs — not just the down payment.
