The core difference: who backs the loan and what that means for you

An FHA loan is insured by the Federal Housing Administration, a government agency. A conventional loan is not backed by any government program — the lender takes the full risk if you stop paying. This one fact drives nearly every other difference between them: down payment size, credit score requirements, how fast you can close, and what happens if your finances change mid-process.

Because the government insures FHA loans, lenders can afford to take on borrowers with lower credit scores and smaller down payments. Conventional lenders have stricter rules because they're not protected by insurance. Neither loan is inherently "better" — which one works depends on your credit, savings, and how quickly you need to buy.

Key Takeaways

  • FHA loans require a minimum 3.5% down payment and accept credit scores as low as 580; conventional loans typically want 5% to 20% down and a score of 620 or higher.
  • FHA loans charge mortgage insurance premiums (an upfront fee plus monthly payments) for the life of the loan if you put down less than 10%; conventional loans may not require insurance at all if you put down 20%.
  • FHA loans close faster and have more flexible debt-to-income rules, making them easier to get approved for if your finances are tight.
  • Conventional loans offer more options for loan terms, rates, and features once you're approved, and you can remove insurance payments once you build equity.
  • FHA loans have limits on how much you can borrow in your area; conventional loans have no government cap.

Down payment and credit score requirements

FHA loans let you put down as little as 3.5% of the home's purchase price. Conventional loans typically require 5% to 20% down, depending on the lender and your credit profile. If you have $30,000 saved and want to buy a $300,000 home, an FHA loan gets you there; a conventional loan usually does not.

Credit score minimums tell a similar story. FHA loans accept scores as low as 580 (some lenders go lower). Conventional loans typically start at 620, and better rates require 680 or higher. If your credit took a hit from medical debt or a late payment, FHA is often the only realistic path to homeownership right now.

Mortgage insurance: cost and how long you pay it

This is where the real money difference lives. FHA loans charge mortgage insurance premiums (MIP) in two parts: an upfront fee (usually 1.75% of the loan amount, rolled into your mortgage) and a monthly payment added to your regular mortgage bill. You pay the monthly MIP for the life of the loan if you put down less than 10%. If you put down 10% or more, it drops off after 11 years.

Conventional loans may require private mortgage insurance (PMI) if you put down less than 20%, but PMI can be removed once you reach 20% equity in the home — typically in 5 to 10 years. If you put down 20% or more on a conventional loan, you pay no insurance at all.

The math: on a $300,000 FHA loan with 3.5% down, you're paying roughly $200 to $300 extra per month in insurance, and that doesn't stop. On a conventional loan with 10% down, PMI might be $150 to $200 per month, but it ends when you hit 20% equity. Over 30 years, FHA insurance costs significantly more.

Debt-to-income limits and approval speed

Lenders measure how much of your monthly income goes to debt payments — your debt-to-income ratio (DTI). FHA allows ratios up to 50% or sometimes higher with compensating factors (like a large savings account). Conventional lenders typically cap DTI at 43% to 45%. If you earn $4,000 a month and owe $1,800 in car loans and credit cards, FHA might still approve you; conventional lenders often won't.

FHA loans also close faster because the underwriting process is more standardized. You typically close in 30 to 40 days. Conventional loans can take 40 to 50 days because each lender has different requirements and the process is less uniform.

Loan limits and borrowing caps

FHA loans have a maximum amount you can borrow in your county — the limit changes yearly and varies by location. In 2024, limits range from roughly $440,000 in rural areas to over $1 million in high-cost cities. If you're buying a $600,000 home in a county with a $500,000 FHA limit, you cannot use an FHA loan.

Conventional loans have no government cap. You can borrow as much as a lender will give you based on your income and credit. This matters if you're buying in an expensive market or want to finance a higher-priced home.

Property and appraisal rules

FHA loans have strict property standards. The home must be safe, structurally sound, and meet minimum health and safety codes. The FHA appraiser checks for things like working plumbing, no lead paint hazards, and a functioning roof. If the home fails inspection, the seller must fix the issues before closing — you cannot waive the appraisal contingency.

Conventional loans have no such requirements. The appraisal is a value check, not a safety inspection. You can waive the appraisal contingency and close on a home that doesn't meet FHA standards. This flexibility matters in competitive markets or when buying older homes that need work.

Interest rates and loan terms

Interest rates depend on market conditions and your credit score, not on whether you choose FHA or conventional. On any given day, an FHA rate and a conventional rate for the same borrower are usually within 0.1% to 0.3% of each other. The real rate difference comes from the total cost: FHA's insurance premiums add to your effective rate over time.

Conventional loans offer more flexibility in loan terms. You can choose 15-year, 20-year, or 30-year mortgages, and some lenders offer adjustable-rate options. FHA loans are more limited in term choices, though 30-year fixed is standard.

When to choose each loan type

Choose an FHA loan if you have a credit score below 620, less than 5% saved for a down payment, or a debt-to-income ratio above 45%. FHA is also the right choice if you're a first-time buyer with limited savings and need to close quickly. The trade-off is paying mortgage insurance for years.

Choose a conventional loan if you have a credit score of 640 or higher, can put down 10% or more, and have a stable income with low existing debt. Conventional makes sense if you plan to stay in the home long enough to build equity and remove PMI, or if you can put down 20% and avoid insurance entirely. You'll also have more options for loan features and terms.

Frequently Asked Questions

Can I refinance from an FHA loan to a conventional loan later?

Yes. Once you've built equity and your credit improves, you can refinance to a conventional loan and potentially remove the mortgage insurance. This usually makes sense after 3 to 5 years if rates are favorable and you've paid down the principal enough to reach 20% equity.

Do FHA loans have prepayment penalties?

No. You can pay off an FHA loan early without penalty. Paying extra toward principal each month reduces the total interest you pay and gets you to 20% equity faster, which can help if you later refinance to a conventional loan.

What if I'm self-employed — does that change which loan I can get?

Both FHA and conventional loans work for self-employed borrowers, but both require more documentation. You'll typically need two years of tax returns and profit-and-loss statements. FHA's higher debt-to-income limits make it slightly easier if your income is variable or lower than W-2 employees in your field.

Can I use an FHA loan to buy a second home or investment property?

FHA loans are for primary residences only — the home you'll live in most of the time. Investment properties and second homes require conventional loans. Some lenders offer FHA loans for second homes in rare cases, but it's not standard.

Which loan is faster to close?

FHA loans typically close in 30 to 40 days because the process is standardized. Conventional loans usually take 40 to 50 days. The difference is small, but if you're in a time crunch, FHA has a slight edge.