For most American home buyers, the mortgage decision comes down to two options: an FHA loan backed by the government, or a conventional loan that is not. FHA loans are famous for forgiving credit and small down payments; conventional loans reward strong credit with lower long-term costs. Choosing the wrong one can cost you thousands over the life of the loan, so this guide compares requirements, costs and who qualifies for each.

The Basic Difference

An FHA loan is insured by the Federal Housing Administration. The government does not lend the money; it insures the lender against loss, which is why lenders accept riskier borrowers. A conventional loan has no government backing and usually follows the rules set by Fannie Mae and Freddie Mac. Because the lender carries more risk, conventional underwriting is stricter, but strong borrowers are rewarded with better pricing and more flexibility.

Credit Score and Down Payment Requirements

This is where the two loans differ most clearly.

• FHA: You can qualify with a credit score as low as 580 with 3.5 per cent down, or 500 to 579 with 10 per cent down. Many lenders set their own minimums slightly higher, but FHA is still the most forgiving mainstream option, and it allows higher debt-to-income ratios, sometimes above 50 per cent with compensating factors.
• Conventional: Most lenders look for a score of at least 620, and the best rates go to borrowers at 740 and above. Down payments start at 3 per cent for eligible first-time buyers, but private mortgage insurance pricing and rates improve markedly as your score and down payment rise.

In short, FHA lets you in with weaker credit; conventional charges you less when your credit is strong.

Mortgage Insurance: MIP vs PMI

Mortgage insurance is the hidden cost that decides many comparisons. FHA charges a Mortgage Insurance Premium in two parts: an upfront premium of 1.75 per cent of the loan, usually rolled into the balance, plus an annual premium of around 0.55 per cent paid monthly. For most borrowers putting less than 10 per cent down, FHA insurance lasts for the entire life of the loan. The only escape is to refinance into a conventional loan later.

Conventional loans charge Private Mortgage Insurance only when you put less than 20 per cent down. PMI costs vary with your credit score, roughly 0.2 to 1.5 per cent of the loan per year, and crucially it can be cancelled once you reach 20 per cent equity, and it drops off automatically at 22 per cent. For a buyer with good credit, conventional PMI is often cheaper than FHA’s MIP from day one.

Other Costs and Rules to Compare

Interest rates on FHA loans are often slightly lower than conventional rates for the same borrower, but the lifetime insurance cost usually erases that advantage if you keep the loan for many years. FHA also imposes property standards through its appraisal process: the home must meet health and safety requirements, which can complicate purchases of fixer-uppers. FHA loans are for primary residences only and have loan limits that vary by county. Conventional loans cover second homes and investment properties, allow larger loans, and have more flexible property rules. Both loan types allow gift money for the down payment, with documentation.

Who Qualifies Best for Each Loan?

FHA usually fits you if: your credit score is under 680, your savings cover little more than 3.5 per cent down, your debt-to-income ratio is high, or you are rebuilding after a bankruptcy or foreclosure, since FHA waiting periods are shorter than conventional ones.

Conventional usually fits you if: your score is 720 or higher, you can put 10 to 20 per cent down, you want to drop mortgage insurance as soon as possible, or you are buying a home that might not pass FHA’s property standards. High-credit borrowers almost always pay less overall with a conventional loan.

Can You Switch Later?

Yes, and many buyers plan to. A common strategy is to buy with an FHA loan when your credit is weak, then refinance into a conventional loan once your score improves and you have 20 per cent equity, eliminating mortgage insurance entirely. Just remember refinancing has closing costs and depends on rates at the time, so treat it as a bonus, not a guarantee.

Conclusion

FHA is the loan of accessibility: low scores, small down payments and flexible ratios. Conventional is the loan of value: stricter to get, but cheaper for strong borrowers, especially once mortgage insurance falls away. Compare both quotes on the total cost over the years you realistically expect to keep the loan, not just the monthly payment in year one, and the right choice usually becomes obvious.

A Quick Side-by-Side Summary

Minimum credit score: FHA allows 580 with 3.5 per cent down, or 500 with 10 per cent down; conventional generally starts at 620. Mortgage insurance: FHA charges 1.75 per cent upfront plus annual premiums, usually for the life of the loan, while conventional PMI can be cancelled once you reach 20 per cent equity. Property rules: FHA is stricter and covers only your main home. Before you decide, ask each lender for a full Loan Estimate and compare the total cost of both options across five years, including insurance, fees and interest. That single page usually settles the argument.