Conventional vs. FHA Loan: Which Is Right for You?

Quick Answer

Choose an FHA loan if you have a lower credit score (580+) or a higher debt-to-income ratio — it's more forgiving, and FHA's program minimum down payment is 3.5% of the price. Choose a conventional loan if your credit is solid (roughly 680+): its program minimum down payment is 3% of the price for qualified first-time buyers, and its mortgage insurance (PMI) can be removed once your balance reaches 80% of the original value, whereas FHA mortgage insurance usually lasts the life of the loan. Terms and eligibility vary. Conventional is often cheaper long-term; FHA is often easier to get.

Side-by-side: the key differences

• Minimum down payment — Conventional: program minimum of 3% of the price for qualified first-time buyers, commonly 5% otherwise. FHA: program minimum of 3.5% of the price. Terms and eligibility vary.
• Minimum credit score — Conventional: many lenders still look for about 620; Fannie Mae and Freddie Mac no longer set a hard minimum for automated approvals. FHA: program minimum of 580 with the 3.5% minimum down payment (scores of 500–579 require a minimum down payment of 10% of the price).
• Mortgage insurance — Conventional PMI can be removed on request once your balance reaches 80% of the original value and ends automatically at 78%. FHA MIP typically lasts the life of the loan.
• Debt-to-income flexibility — FHA allows higher DTIs more readily than conventional.
• Upfront fees — FHA loans carry an upfront mortgage insurance premium (currently 1.75% of the loan amount, typically financed into the loan); terms vary. Conventional has no upfront mortgage-insurance premium (credit and down-payment pricing adjustments apply instead).

Why mortgage insurance is the deciding factor

On a conventional loan, private mortgage insurance (PMI) is required when you put less than 20% down — but it's cancellable. Once your balance reaches 80% of the original value you can request removal; some lenders also allow removal based on appreciation with a new appraisal. It ends automatically at 78%.

FHA mortgage insurance (MIP) works differently: on most FHA loans with the minimum down payment, the annual MIP stays for the life of the loan. The common escape is to refinance into a conventional loan later once you have enough equity and credit — a route a broker can plan with you from day one.

Which one wins for you

If your credit is in great shape and you can reach 20% equity within a few years, conventional usually costs less over time. If your credit is still climbing or your DTI is tight, FHA gets you into a home now — and you can refinance to conventional once your profile improves.

Because a broker can price both side by side using your real numbers, you don't have to guess. Forty Acres Lending routinely runs the FHA-vs-conventional comparison so you can see the monthly and lifetime cost of each before you decide.

Frequently Asked Questions

Is a conventional or FHA loan better?

Neither is universally better — it depends on your credit and equity timeline. FHA is easier to qualify for with lower credit and higher DTI, and its program minimum down payment is 3.5% of the price. Conventional needs stronger credit, but its PMI can be removed once your balance reaches 80% of the original value (and ends automatically at 78%), making it cheaper long-term. Terms and eligibility vary. Borrowers with good credit usually favor conventional; those rebuilding credit often start with FHA.

Can I switch from FHA to conventional later?

Yes, and many borrowers do exactly that. Once you've built enough equity (around 20%) and your credit qualifies, you can refinance an FHA loan into a conventional one to eliminate the lifetime FHA mortgage insurance premium. It's a common strategy to use FHA to buy now and refinance to save later.

Does FHA mortgage insurance really last the whole loan?

On most FHA loans made with FHA's minimum down payment (3.5% of the price), yes — the annual MIP remains for the life of the loan. With a down payment of 10% or more, FHA MIP can drop off after 11 years. Because of this, borrowers who can qualify conventional often prefer it to avoid permanent mortgage insurance.

What credit score do I need for each loan type?

FHA's program minimum is a 580 credit score (scores of 500–579 require a minimum down payment of 10% of the price). For conventional loans, many lenders still look for about 620; Fannie Mae and Freddie Mac no longer set a hard minimum for automated approvals, and the best pricing comes above 680–740. A mortgage broker can show you the rate at your exact score for both programs.

Which loan has the lower monthly payment?

It varies with your credit score and down payment. At lower credit scores, FHA often has the lower payment because its mortgage insurance isn't as credit-sensitive. At higher scores, conventional usually comes out lower because PMI is cheaper and cancellable. The only way to know for your file is to price both.