FHA Vs. Conventional Loans: What’s The Difference?

David Papazian/ Getty Images; Illustration by Austin Courregé/Bankrate

The two most popular kinds of mortgage loans are conventional loans and FHA loans. The right choice for you depends on your credit score, property type and down payment amount. While FHA loan rates are typically lower than conventional rates, these government-backed loans require an upfront mortgage insurance payment, plus premiums for at least 11 years (sometimes the life of the loan).

Here’s how to look past the marketing, evaluate the tradeoffs and choose the right loan with confidence.

What is a conventional loan?

Conventional loans are standard mortgages that are not backed or guaranteed by the federal government. Because lenders bear all the risk if you default, they enforce stricter credit and financial requirements. These mortgages come with fixed or adjustable interest rates and standard terms of 15 or 30 years.

When to choose a conventional loan

Consider a conventional loan if:

• You have a credit score above 620
• You have a larger down payment
• You have monthly debts well under half of your income
• You want a house that exceeds the FHA loan limits in your area

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What is an FHA loan?

FHA loans have similar rate and term options as conventional loans. However, FHA loans are insured by the Federal Housing Administration (FHA), a division of the U.S. Department of Housing and Urban Development (HUD). If you stop making your payments, HUD reimburses the lender. This safety net allows lenders to accept lower credit scores and smaller down payments.

When to choose an FHA loan

An FHA loan is a good choice if:

• You have a credit score below 620
• You have a smaller down payment

Conventional loans vs. FHA loans

• Credit score

  • FHA loans: You can qualify with a credit score as low as 500. If your score falls between 500 and 579, you must make a 10% down payment. If your score is 580 or higher, your minimum down payment drops to 3.5%.
  • Conventional loans: You need a minimum credit score of 620. Lenders reserve their lowest interest rates for buyers with scores above 740.

  If you have excellent or good credit, choose a conventional loan to secure lower long-term costs.

• DTI ratio

  Your debt-to-income (DTI) ratio represents the percentage of your gross monthly income that goes toward paying debts, including your future mortgage.

  • FHA loans: Lenders cap your DTI ratio at 43%, but they can stretch this to 50% if you have significant cash reserves.
  • Conventional loans: Lenders generally limit your DTI ratio to 45%, though select programs allow up to 50%.

  If your monthly debt payments consume nearly half of your income, an FHA loan offers a more forgiving approval path.

• Down payment

  • FHA loans: The minimum requirement is 3.5% if your credit score is 580 or higher.
  • Conventional loans: First-time buyers can put down as little as 3% on a fixed-rate mortgage.

  While conventional loans offer a slightly lower entry point, an FHA loan lets you make a low down payment even if your credit is bruised.

• 2026 loan limits

  The price of your target home can dictate your loan choice.

  • FHA loans: The Federal Housing Finance Agency (FHFA) sets these limits annually. In 2026, the baseline FHA loan limit for a single-family home is $541,287 in most markets. It rises to $1,249,125 in high-cost areas.
  • Conventional loans: The 2026 baseline conforming limit is $832,750. If you borrow more than this baseline, your mortgage becomes a nonconforming jumbo loan, which requires stricter underwriting.

• Mortgage insurance

  If you put down less than 20%, you must pay mortgage insurance. The two loan types handle this fee very differently.

  • FHA loans: You cannot escape mortgage insurance premiums (MIP). You pay a 1.75% upfront fee at closing, plus an annual premium split into 12 monthly payments. If you put down less than 10%, you pay this monthly fee for the entire life of the loan. You can only remove it by refinancing into a non-FHA mortgage down the road.
  • Conventional loans: You pay private mortgage insurance (PMI). Lenders automatically cancel PMI once your loan balance drops to 78% of your home’s original value. If you put 20% down at purchase, you pay zero PMI.

  If you have a 20% down payment, you won’t have to pay PMI, and a conventional loan is likely a better choice.

• Appraisal

  When financing your home through a conventional mortgage, your lender will require a home appraisal. Lenders want to ensure the home is worth the amount of money they’re extending to you.

  • FHA loans:  FHA appraisers must follow strict HUD guidelines. They inspect the property for safety, structural soundness and building code violations. Sellers may avoid FHA buyers in competitive markets because these mandatory repairs can delay the closing process.
  • Conventional loans: The appraiser simply confirms that the property value matches the purchase price. The process is faster and rarely triggers mandatory repair checklists.

• Interest rates

  When comparing loans, look at the annual percentage rate (APR), which reflects the total yearly borrowing cost, including fees and insurance. Because of mandatory MIP fees, an FHA loan’s APR is often higher than that of a conventional loan.

Should you get an FHA loan or a conventional loan?

If your credit score is below 620, an FHA loan might be your only option. It might also be a better deal if you can’t make a 20% down payment, which is increasingly difficult with today’s high home prices.

But if you can make a 20% down payment, there’s far less benefit to seeking an FHA mortgage, unless you’re unable to qualify for a conventional mortgage due to credit issues.

The eight-year cost test

A lower advertised interest rate doesn’t guarantee a cheaper loan. Bankrate’s editorial team analyzed the true cost trajectory over an eight-year period — the average time a homeowner stays in a mortgage before selling or refinancing.

Let’s look at a $400,000 home purchase with a 5% down payment ($20,000):

Even though the FHA interest rate is lower, the FHA borrower pays $67 more every single month from day one. Over eight years, the FHA option costs thousands of dollars more because the upfront fee inflates the principal balance, and the monthly MIP never goes away.

Frequently asked questions

• Do sellers prefer conventional loans over FHA loans?

  Sellers may prefer working with a buyer who has a conventional loan rather than an FHA loan because of the time required for an FHA appraisal. If the appraiser flags an issue like peeling paint or a cracked window, the seller must fix it before the loan can close. Conventional appraisals focus primarily on property value, leading to faster, hassle-free closings.
  

• Which is more costly, an FHA loan or a conventional loan?

  FHA loan interest rates are often slightly lower than those of conventional loans, though that isn’t always the case.

  As of June 2, 2026, the national average for a 30-year FHA mortgage was 6.41%, while the 30-year conventional mortgage average sat at 6.54%. However, when you factor in the upfront and monthly insurance premiums, the FHA loan’s total APR often ends up costing you more.

• Are FHA loans only for first-time home buyers?

  No, anyone can apply for an FHA loan if they meet the credit and income requirements. Both first-time and repeat buyers can use FHA programs to purchase a primary residence or refinance an existing mortgage. You cannot, however, use an FHA loan to buy an investment property or a second vacation home.