FHA vs. Conventional Loans: Which Fits Your Situation
The two loan types split on credit minimums, down payment floors and how long mortgage insurance sticks around — and those gaps decide the cheaper one.
By Priya Natarajan-Wells · Oct 06, 2026 · 8 min read
FHA and conventional loans are both widely available for a primary-residence purchase, but they qualify different borrowers. FHA reaches lower credit scores — as low as 500 with 10% down, or 580 with 3.5% down (National Association of REALTORS®, 2024-12-20) — while conventional loans start at a 620 score and a 3% down payment (Fairway Independent Mortgage Corporation, undated). The bigger long-run difference is mortgage insurance: FHA charges 1.75% upfront plus an annual premium, and conventional PMI has no upfront charge and cancels at 20% equity.
Which one costs you less depends on your score, how much cash you have, how long you plan to keep the loan, and whether the property is your home or an investment. This guide lays out the program rules side by side; it is not a substitute for a licensed loan officer's review of your file.
Side-by-Side Comparison
| Feature | FHA loan | Conventional loan |
|---|---|---|
| Minimum credit score | 580 for the 3.5% down option; 500 with 10% down (National Association of REALTORS®, 2024-12-20; The Mortgage Reports, 2026-01-08) | 620 (Fairway Independent Mortgage Corporation, undated) |
| Minimum down payment | 3.5% at 580+; 10% at 500–579 (National Association of REALTORS®, 2024-12-20) | 3% (Fairway Independent Mortgage Corporation, undated) |
| Upfront mortgage insurance | 1.75% of the loan amount (The Mortgage Reports, 2026-01-08) | None — no upfront premium or funding fee (Fairway Independent Mortgage Corporation, undated) |
| Ongoing mortgage insurance | Annual MIP, typically 0.55% of the loan amount (The Mortgage Reports, 2026-01-08) | PMI required under 20% equity; none required with 20% down (Fairway Independent Mortgage Corporation, undated) |
| When mortgage insurance ends | Life of the loan, or 11 years with a larger down payment (The Mortgage Reports, 2026-01-08) | Falls off at 20% home equity (Fairway Independent Mortgage Corporation, undated) |
| Debt-to-income ceiling | 43% preferred, up to 50% in some cases with compensating factors such as strong credit or savings (National Association of REALTORS®, 2024-12-20; The Mortgage Reports, 2026-01-08) | None cited in this guide's sources — ask each lender for the cap it applies to your file |
| Typical rate spread | None quoted here — this guide cites no dated rate survey, so compare same-day Loan Estimates | None quoted here — same |
| Occupancy allowed | Primary residence only; investment property or vacation home: none allowed (National Association of REALTORS®, 2024-12-20) | Primary, second home and investment property all allowed; occupancy restrictions: none (Fairway Independent Mortgage Corporation, undated) |
| Loan limits | Range from a published floor to a higher-cost-area ceiling, set by county (The Mortgage Reports, 2026-01-08) | Higher than FHA limits, which can finance a more expensive home (Fairway Independent Mortgage Corporation, undated) |
On rate comparisons: the interest rate is what you pay on the balance each year, while the APR folds lender fees — and, where applicable, mortgage insurance — into a single annualized figure. Two loans can share a rate and differ sharply on APR, which is why the 1.75% FHA upfront premium matters even when the quoted rates match. Any rate you compare should carry a source and a date, because pricing moves daily.
Closing costs beyond mortgage insurance vary by state and metro — transfer taxes, title practice, attorney-closing requirements and recording fees are all local — so take the Loan Estimate's Section B and C totals for your own county rather than a national average.
How They Compare
- Credit score 500–579, 10% down available, any time horizon: FHA. Conventional lending starts at 620 (Fairway Independent Mortgage Corporation, undated), so a conventional loan is not an option at this score. The cost of entry is the down payment: on a $300,000 purchase, 10% is $30,000 against the $10,500 a 580-score borrower would put down at 3.5%, a $19,500 cash difference.
- Credit score 580–619, 3.5% down, buying a primary residence: FHA. This band sits above the FHA 580 threshold and below the conventional 620 floor, so the comparison is FHA or wait. If you can lift the score above 620, the conventional 3% minimum cuts the down payment on that same $300,000 purchase from $10,500 to $9,000.
- Credit score 620+, 3–5% down, planning to stay past 20% equity: conventional. On a $300,000 loan amount over 30 years, FHA's 1.75% upfront premium is $5,250 added at closing or financed into the balance, and the 0.55% annual premium is roughly $1,650 a year, about $137.50 a month. Conventional has no upfront premium (Fairway Independent Mortgage Corporation, undated), and PMI stops at 20% equity, while FHA MIP can run for the life of the loan unless the down payment was large enough to cap it at 11 years (The Mortgage Reports, 2026-01-08).
- 20% down payment, 620+ score: conventional. With 20% down a conventional loan carries no mortgage insurance at all. FHA still charges the 1.75% upfront premium and the annual premium regardless of equity — $5,250 upfront on a $300,000 loan that you would simply not pay on the conventional side.
- Thin credit file, 43% DTI or a bit higher, two years of steady employment: FHA. FHA prefers DTI at or below 43% and allows up to 50% with compensating factors (The Mortgage Reports, 2026-01-08), and lenders generally want two years of employment history for income verification (National Association of REALTORS®, 2024-12-20). That flexibility is the trade for the ongoing 0.55% annual premium.
- Buying a duplex to rent out, a second home or a vacation property: conventional. FHA must be used for a primary residence and cannot fund an investment property or vacation home (National Association of REALTORS®, 2024-12-20); conventional financing allows both (Fairway Independent Mortgage Corporation, undated). Score and down payment do not change this one.
- Purchase price above your county's FHA ceiling: conventional. FHA limits run from a floor to a high-cost ceiling by county (The Mortgage Reports, 2026-01-08), and conventional limits sit higher (Fairway Independent Mortgage Corporation, undated). Check your county's figure before you shop a price range.
Who Should Choose Which
- First-time buyer with a 540 score and 10% saved, buying a primary residence — FHA, because conventional requires 620 and FHA accepts 500–579 at 10% down.
- First-time buyer with a 600 score and 3.5% down — FHA, the only one of the two available below a 620 score.
- Buyer with a 680 score, 5% down, planning to stay 10 years — conventional, which skips the 1.75% upfront premium and drops PMI at 20% equity.
- Buyer with a 720 score and exactly 3% down — conventional, whose 3% floor is lower than FHA's 3.5% and carries no upfront premium.
- Buyer with a 640 score, 20% down from a home sale — conventional, which requires no mortgage insurance at all at 20% down.
- Self-employed buyer with a 660 score, 10% down and DTI near 48% — FHA is worth pricing, since it allows up to 50% DTI with compensating factors; run both and compare APRs on the Loan Estimates.
- Buyer with a 700 score purchasing a two-unit property to live in one side and rent the other, or a second home — conventional, because FHA is limited to a primary residence.
- Buyer with a 700 score and 10% down shopping above the county FHA ceiling — conventional, which carries the higher loan limits.
- Existing FHA borrower with a 680 score who has reached 20% equity — price a conventional refinance, since that is the route out of a life-of-loan annual MIP.
- Buyer with a 580 score who expects to refinance within a few years — FHA now, with the understanding that the $5,250 upfront premium on a $300,000 loan is paid once and not refunded in full on an early refinance.
Frequently asked questions
What is the lowest credit score that still works?
Conventional lending starts at 620 (Fairway Independent Mortgage Corporation, undated). FHA goes to 580 for the 3.5% down payment and down to 500 if you put 10% down (National Association of REALTORS®, 2024-12-20; The Mortgage Reports, 2026-01-08). Between 500 and 619, FHA is normally the only one of these two programs open to you, and individual lenders can set overlays above those program minimums.
How much does FHA mortgage insurance actually cost?
FHA charges 1.75% of the loan amount upfront plus a typical 0.55% annual premium (The Mortgage Reports, 2026-01-08). On a $300,000 loan amount over 30 years with 3.5% down and a 580 score, that is $5,250 upfront — usually financed into the balance — and about $1,650 a year, roughly $137.50 a month, for as long as the premium runs.
Does mortgage insurance ever stop?
On a conventional loan PMI falls off at 20% home equity, and with a 20% down payment you never pay it (Fairway Independent Mortgage Corporation, undated). FHA's annual premium can last the life of the loan, or reduce to 11 years with a larger down payment (The Mortgage Reports, 2026-01-08). Borrowers who reach 20% equity on an FHA loan often price a conventional refinance to end the premium.
Can I use an FHA loan for a rental or a vacation home?
No. An FHA loan must be used for a primary residence and cannot finance an investment property or a vacation home (National Association of REALTORS®, 2024-12-20). Conventional loans can be used for second homes and investment properties (Fairway Independent Mortgage Corporation, undated), starting from the 620 minimum score, though down payment requirements for non-owner-occupied purchases are set higher than the 3% primary-residence floor.
Sources
- National Association of REALTORS® — FHA Loan Requirements: What Every Real Estate Agent Needs to Know (2024-12-20)
- The Mortgage Reports — FHA Loan Guide | Requirements and Benefits (2026-01-08)
- Fairway Independent Mortgage Corporation — Conventional Loan Down Payment: How Much Do You Need?
Written by
Priya Natarajan-Wells
Priya writes about first-time buyers and the emotional math of mortgages. She likes tracing how a single rate change ripples through an ordinary family's plans. Her pieces tend to start with a kitchen table, not a spreadsheet.
