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When you’re buying a home, two of the most common loan programs you’ll encounter are FHA and conventional. Both can work well depending on your situation, but they have meaningful differences in credit requirements, down payment, and mortgage insurance. Here’s how to think through the comparison based on your profile.
What’s the Core Difference?
FHA loans are backed by the Federal Housing Administration. Because the government insures the loan, lenders can offer more flexibility on credit and down payment. The trade-off is mortgage insurance that typically stays for the life of the loan.
Conventional loans are not government-backed. They follow guidelines set by Fannie Mae and Freddie Mac. Qualification standards are generally stricter, but mortgage insurance (PMI) is cancellable once you reach 20% equity.
Credit Score Comparison
- FHA: Minimum 580 for 3.5% down; 500-579 for 10% down. More forgiving of past credit events.
- Conventional: Typically 620 minimum for basic access. 740+ for the most competitive rates.
If your credit score is below 620, FHA is likely your most accessible path. If your score is 700 or above, you should compare both programs on total cost, not just rate.
Down Payment Comparison
- FHA: 3.5% minimum (580+ credit)
- Conventional: As low as 3% through programs like HomeReady and Home Possible; typically 5-20% for standard programs
Both programs allow gift funds for the down payment in most cases.
Mortgage Insurance: The Key Long-Term Difference
This is where the comparison often tips in favor of conventional for buyers who qualify.
FHA MIP:
- Upfront: 1.75% of the loan amount (typically financed)
- Annual: Roughly 0.55-1.05% depending on loan amount and LTV, paid monthly
- Duration: Permanent for loans with less than 10% down; removable after 11 years with 10%+ down
Conventional PMI:
- No upfront premium
- Monthly cost varies based on credit and LTV
- Cancellable once you reach 20% equity
- Automatically terminates at 22% equity on the original amortization schedule
The practical implication: A borrower who puts 5% down on a conventional loan and has a credit score of 720 may pay PMI for a few years, then have it removed. That same borrower using FHA would pay MIP for the life of the loan. Over 10+ years, the cost difference can be significant.
Property Restrictions
FHA requires the home to meet FHA Minimum Property Requirements, which are enforced during the appraisal. Certain property conditions (peeling paint, structural issues, missing handrails) can create closing delays if they need to be addressed before the loan can close.
Conventional has property condition requirements too, but they’re typically less stringent. This matters in competitive markets where sellers may prefer a conventional offer over FHA.
When FHA May Be the Better Fit
- Credit score below 680
- Limited down payment savings
- Past credit events (bankruptcy, foreclosure) within the past few years
- Higher debt-to-income ratio that doesn’t fit conventional guidelines
When Conventional May Be the Better Fit
- Credit score of 680 or higher (especially 720+)
- Down payment of 5-20%
- Ability to eventually cancel PMI
- Purchasing a second home or investment property (FHA is primary only)
- Property in a condition that might create FHA appraisal issues
The Right Answer Is Specific to You
Both programs can close deals. The best choice depends on your credit profile, savings, the property, and how long you plan to stay. A loan officer can model both options side by side, including the long-term mortgage insurance costs, so you can make an informed comparison.
Ready to compare? Contact American Mortgage Services to talk through which programs may fit your scenario.
All loans subject to credit approval. Program availability, rates, and terms subject to change. Not a commitment to lend.