Choosing between an FHA loan and a conventional loan is one of the biggest decisions you'll make as a homebuyer. Both are excellent options, but they serve different needs. Here's a clear, side-by-side breakdown to help you decide which one fits your situation.
Quick Comparison
| Feature | FHA Loan | Conventional Loan |
|---|---|---|
| Min. Down Payment | 3.5% | 3% (first-time buyers) |
| Min. Credit Score | 580 (3.5% down) | 620 |
| Mortgage Insurance | MIP for life of loan (with <10% down) | PMI removable at 80% LTV |
| DTI Ratio | Up to 50% | Up to 45-50% |
| Loan Limits | County-specific | County-specific (higher) |
| Property Types | Primary residence only | Primary, second home, investment |
Credit Score Requirements
FHA loans are designed to be accessible. You can qualify with a credit score as low as 580 for the minimum 3.5% down payment. Scores between 500 and 579 may qualify with 10% down.
Conventional loans typically require a minimum score of 620, though you'll get the best rates and terms with a score of 740 or higher. If your credit is strong, conventional loans often offer better overall pricing.
Bottom line: If your credit score is below 620, FHA is likely your best path. If it's 700+, conventional loans may save you money.
Down Payment Differences
Both loan types offer low down payment options:
- FHA: 3.5% minimum down payment
- Conventional: 3% minimum for first-time buyers (5% for repeat buyers with some programs)
The difference might seem small, but on a ,000 home, that's ,500 (FHA) vs. ,000 (conventional). However, the real cost difference comes from mortgage insurance.
Mortgage Insurance: The Big Difference
This is where the two loan types diverge significantly.
FHA Mortgage Insurance Premium (MIP):
- Upfront MIP: 1.75% of the loan amount (usually rolled into the loan)
- Annual MIP: 0.55% of the loan amount per year
- Cannot be removed if you put less than 10% down — it lasts the entire life of the loan
Conventional Private Mortgage Insurance (PMI):
- No upfront premium
- Monthly PMI: typically 0.3-1.5% annually, depending on credit score and down payment
- Automatically drops off when you reach 78% loan-to-value (or you can request removal at 80%)
Bottom line: Conventional PMI is temporary; FHA MIP is (usually) permanent. Over time, this can save conventional borrowers thousands of dollars.
When to Choose FHA
An FHA loan might be the better choice if:
- Your credit score is between 580 and 619
- You have a higher debt-to-income ratio
- You've had a recent bankruptcy or foreclosure (FHA has shorter waiting periods)
- You're using gift funds for most or all of your down payment
When to Choose Conventional
A conventional loan might be the better choice if:
- Your credit score is 680 or higher
- You can put 10-20% down (to minimize or avoid PMI)
- You want the flexibility to buy a second home or investment property
- You plan to stay in the home long enough that PMI removal saves you money
Can You Switch Later?
Yes! If you start with an FHA loan, you can refinance into a conventional loan later once you've built equity and improved your credit. This is a common strategy to eliminate permanent MIP.
The Best Option Is the One That Gets You Home
There's no universally "better" loan — it depends on your credit profile, savings, and goals. The most important thing is working with a loan officer who takes the time to compare both options for your specific situation.
Ready to find out which loan is right for you? Contact me for a free side-by-side comparison based on your real numbers.