FHA vs Conventional Loans: Which Mortgage Is Better?
FHA loans require just 3.5% down and accept lower credit scores, but carry mandatory mortgage insurance for life in most cases. Conventional loans offer lower long-term costs for qualified borrowers. This guide walks through every comparison point so you can choose confidently.
FHA vs Conventional: The Core Differences
The fundamental difference between FHA and conventional loans is who bears the default risk. FHA loans are insured by the federal government — specifically the Federal Housing Administration, a division of HUD. If a borrower defaults, the FHA reimburses the lender from its Mutual Mortgage Insurance Fund. This government guarantee allows FHA-approve
Credit Score Requirements
FHA's minimum credit score requirement is 500 for loans with 10% down and 580 for the 3.5% down payment tier. In practice, most FHA lenders impose overlays — internal requirements above the FHA floor — typically requiring 580–620+ for 3.5% down programs. The 500–579 range is technically FHA-eligible but practically difficult to finance through most
Down Payment Requirements
FHA loans require a minimum 3.5% down payment for borrowers with 580+ FICO scores. On a $300,000 home, that's $10,500 — meaningfully less than a conventional 5% minimum ($15,000). FHA also has broader gift fund rules — the entire down payment can come from gifts from family members, employers, or nonprofit organizations without requiring any of the
Mortgage Insurance: The Most Important Comparison
Mortgage insurance is where FHA and conventional loans diverge most significantly on long-term cost. Understanding each program's structure is essential to making the right choice. FHA Mortgage Insurance Premium (MIP) has two components: 1. Upfront MIP (UFMIP): 1.75% of the loan amount, due at closing (almost always rolled into the loan). On a $290
Frequently Asked Questions
Is it harder to get approved for an FHA loan than a conventional loan?
Generally no — FHA is easier to qualify for. FHA accepts credit scores as low as 580 for 3.5% down programs, while conventional requires 620+. FHA allows higher Debt-to-Income Ratio Calculator s (up to 50% with compensating factors vs. 43%–45% for conventional). And FHA's governm
Can I switch from FHA to conventional?
Yes — this is called an FHA-to-conventional refinance. Once your home has reached 80% LTV (through appreciation plus principal paydown), you can refinance into a conventional loan and eliminate MIP entirely. The break-even period depends on closing costs vs. monthly savings. For
What is the FHA funding fee?
FHA charges an upfront Mortgage Insurance Premium (UFMIP) of 1.75% of the loan amount — not a 'funding fee' (that term applies to VA loans). UFMIP is typically financed into the loan balance. FHA also charges an annual MIP ranging from 0.15% to 0.75% depending on loan term, LTV,
Does FHA require 3.5% down or 20% down?
FHA requires only 3.5% down for borrowers with 580+ FICO scores — one of the lowest down payment thresholds of any loan program. The 20% figure is not an FHA requirement; it's the threshold at which mortgage insurance is eliminated on conventional loans. An FHA borrower with less
What credit score do I need for a conventional loan?
The minimum credit score for a conventional loan (Fannie Mae/Freddie Mac) is 620. However, rates improve substantially at higher scores through loan-level price adjustments. To get truly competitive conventional pricing, target 720+. For the absolute best rates, 740+ is the optim
Can I get an FHA loan on an investment property?
No — FHA loans require owner occupancy. You must intend to live in the property as your primary residence. FHA can be used for 2-4 unit properties as long as the borrower occupies one unit, making it viable for house-hacking strategies. For pure investment properties, conventiona