FHA or Conventional: Which Loan Fits You Better

My neighbor sold his starter home last year and bought something bigger. The whole process took him three months because he kept flipping back and forth between an FHA loan and a conventional one. His loan officer never really explained the difference clearly, so he ended up calling me at nine at night asking what the trade off actually was. I will try to lay it out here the way I wish somebody had laid it out for him.

Both of these loans let you buy a house. Both come from private lenders. The main difference is who stands behind them and what rules they follow.

What makes FHA different

FHA stands for Federal Housing Administration. The agency itself does not lend you money. Instead it insures the loan. If you default, the FHA pays the lender back. That insurance is why FHA lenders can accept lower credit scores and smaller down payments.

The baseline requirements for FHA are a credit score of 580 and a 3.5 percent down payment. If your score is between 500 and 579, you can still get in, but the down payment jumps to ten percent. The loan limit varies by county but the national floor for 2026 is around 542,000.

Here is the catch. FHA loans come with MIP, mortgage insurance premium. There is an upfront fee of 1.75 percent of the loan, which usually gets rolled into the loan amount. Then there is an annual fee of about 0.55 percent that you pay monthly for the life of the loan if you put less than ten percent down. For most FHA borrowers, that annual MIP never goes away without refinancing.

What makes conventional different

Conventional loans follow guidelines set by Fannie Mae and Freddie Mac, which are the government backed companies that buy mortgages from lenders. These loans require a 620 minimum credit score, and the down payment can be as low as three percent for first time buyers through programs like HomeReady or Home Possible.

If you put less than twenty percent down, you pay PMI, private mortgage insurance. The cost depends on your credit score, often falling between 0.3 and 1.5 percent of the loan annually. The big advantage over FHA is that PMI drops off once you reach 80 percent loan to value. You do not pay it forever.

The real decision point

Credit score usually makes the call. If your FICO is below 620, FHA is pretty much your only option on the conventional side. If your score is between 620 and 680, run both scenarios. The FHA quote will often look better upfront because the interest rate is lower, but the lifetime MIP adds up.

For a 300,000 dollar house with five percent down, I ran this comparison for my neighbor:

FHA at 6.5 percent, with MIP, monthly cost of principal, interest, and MIP comes to roughly 2,100. Over 30 years, the total MIP alone adds up to around 55,000.

Conventional at 6.85 percent with PMI, monthly cost starts higher at about 2,180 but PMI falls off in year seven or eight. Total PMI paid is closer to 14,000.

The conventional loan was more expensive each month at the start but much cheaper over time. His scores let him qualify for both, so he went conventional. If his score had been 600 instead of 680, the choice would have been easy, FHA.

Property type matters too

FHA has more restrictions on what you can buy. The property has to meet FHA minimum standards, which means the roof, electrical, and plumbing need to be in acceptable shape. Fixer uppers get flagged. In hot markets where buyers are competing with cash offers, sellers sometimes reject FHA buyers because they worry about the appraisal.

Conventional loans are flexible. You can buy investment properties, second homes, and condos that FHA might refuse to touch.

When FHA actually wins

A lot of first time buyers assume conventional is always better. It is not. FHA wins when:

Your credit score is below 620 or just barely above.

You have a thin credit file with limited history.

You have had a recent bankruptcy or foreclosure. FHA has shorter waiting periods, two years after Chapter 7 versus four for conventional.

You want to buy a slightly beat up house you plan to fix. The FHA 203k loan rolls renovation costs into the mortgage.

When conventional wins

You have a strong credit score, 720 and up.

You plan to put down ten percent or more.

You want flexibility on the property type.

You are buying in an area where sellers prefer conventional offers, which is most of the country honestly.

The usual move for people stuck in the middle is to start with FHA, build equity for three or four years, then refinance to a conventional loan to get rid of the MIP. That path works. Just be aware that refinancing costs around three percent of the loan in closing fees, so run the math before you assume it will pay off.

My neighbor is happy with his conventional loan. He is also already asking me how to request PMI cancellation next year. Which, honestly, is a great problem to have.