The Core Difference: Who Backs the Loan
The fundamental distinction between these two loan types is who bears the risk if a borrower defaults. A conventional loan is issued by a private lender — a bank, credit union, or mortgage company — and is not guaranteed by the federal government. A Federal Housing Administration (FHA) loan is also issued by a private lender, but the government insures it against default.
That government backing is why FHA lenders can accept riskier borrower profiles. They're protected. The tradeoff is that the borrower pays for that protection through mortgage insurance premiums (MIP) — both an upfront charge at closing (currently 1.75% of the loan amount) and an annual premium folded into monthly payments.
Before diving into the numbers, if you're still getting your bearings, the foundational first-time buyer guide covers the essential vocabulary and financial preparation steps you'll need.
Credit Score and Down Payment Requirements
These two criteria typically determine which loan you're eligible for in the first place.
| Criterion | Conventional Loan | FHA Loan |
|---|---|---|
| Minimum credit score | 620 (most lenders) | 580 (3.5% down); 500 (10% down) |
| Minimum down payment | 3–5% | 3.5% (score 580+) |
| Mortgage insurance | PMI; removable at 80% LTV | MIP for life of loan (if <10% down) |
| Upfront insurance fee | None | 1.75% of loan amount |
| Loan limits (2024 baseline) | $766,550 | $498,257 |
| Property condition standards | Market value focus | Safety and habitability required |
| Government backing | None | FHA (HUD) insured |
With a conventional loan, borrowers with scores of 740 or higher generally qualify for the best rates. Scores between 620 and 739 may still qualify but expect a higher interest rate. Falling below 620 usually closes the door on conventional financing entirely.
FHA loans are more forgiving: a 580 score qualifies for the 3.5% minimum down payment. Scores between 500 and 579 may still qualify, but require a 10% down payment. Note that individual lenders may apply stricter internal standards — called overlays — above the FHA minimums.
If you're working on your credit profile before applying, the credit and banking hub offers practical guidance on improving scores and managing accounts effectively.
The Mortgage Insurance Difference: Long-Term Cost Matters
This is where many first-time buyers underestimate the true cost of an FHA loan.
0.55%
Typical annual FHA MIP rate
As of 2023, the FHA reduced its annual mortgage insurance premium to 0.55% for most new borrowers, down from 0.85%, per HUD guidance.
~28%
Share of purchase loans that are FHA-backed
FHA loans have historically represented roughly a quarter to a third of purchase mortgages for first-time buyers, according to HUD annual reports.
2–5%
Estimated cost to refinance out of FHA
Refinancing from an FHA to a conventional loan to remove lifetime MIP typically costs 2–5% of the outstanding loan balance in closing costs.
On a conventional loan, private mortgage insurance (PMI) is required when your down payment is less than 20%. But once your loan balance drops to 80% of the home's original value — through payments or appreciation — you can request cancellation. By law (the Homeowners Protection Act), it must be automatically terminated at 78% loan-to-value.
FHA loans issued after June 2013 with a down payment below 10% carry MIP for the life of the loan. The only way to remove it is to refinance into a conventional loan once you've built sufficient equity. That refinance involves closing costs — typically 2–5% of the loan balance — so buyers should factor that future expense into their long-term calculations.
For a fuller breakdown of upfront and ongoing costs that buyers often overlook, see the real cost of buying a home.
This article is for general informational purposes only and does not constitute financial or mortgage advice. Consult a licensed mortgage professional or financial adviser for guidance tailored to your specific situation.
FHA MIP Rules Changed in 2013
Prior to June 2013, FHA loans allowed MIP cancellation after 11 years for certain loan-to-value ratios. Loans originated after that date with less than 10% down carry MIP permanently, unless refinanced. If you took out an FHA loan before that date, different rules may apply — check your loan documents or contact your servicer.
Loan Limits and Property Standards
FHA loans come with county-level loan limits set annually by the Department of Housing and Urban Development (HUD). In lower-cost areas, the 2024 FHA floor is $498,257 for a single-family home; in high-cost counties it can reach $1,149,825. If a property's price exceeds the local FHA limit, the loan isn't available regardless of your qualifications.
Conventional loans conforming to Fannie Mae and Freddie Mac guidelines carry their own limits (the 2024 baseline is $766,550 for most areas, higher in designated high-cost markets), but these are generally more accommodating in expensive metros.
FHA loans also impose minimum property standards. An FHA appraisal evaluates both market value and the home's physical condition — safety hazards, structural issues, and required repairs can stall or kill a purchase. Conventional appraisals focus primarily on value. Sellers sometimes prefer conventional buyers for this reason, particularly in competitive markets.
For a broader comparison that includes VA and USDA options, the four main loan types compared side by side provides a useful reference.
Which Loan Fits Your Situation?
There's no universal right answer — the better loan depends on your credit profile, savings, the local market, and how long you plan to stay in the home.
If you're stretching to enter the market with limited savings and a modest credit score, an FHA loan may be the only realistic path to ownership in the near term. Accepting the mortgage insurance cost now can make sense if homeownership builds equity faster than continued renting.
If your credit is solid and you have at least 5–10% to put down, a conventional loan typically wins on total cost. Avoiding lifetime MIP, accessing higher loan limits, and facing fewer property condition hurdles all tilt the math in its favor.
One often-missed consideration: down payment myths that trip up first-time buyers explores why putting down exactly 20% isn't always necessary — or even optimal. And if you're weighing the FHA path more deeply, FHA loan trade-offs explained covers the full picture of what you gain and give up.
