FHA Loans vs. Conventional Mortgages: What's the Real Difference

The core difference: down payment, credit score, and who backs the loan

An FHA loan is backed by the Federal Housing Administration, which means the government insures the lender against loss if you stop paying. A conventional loan is not backed by any government agency — the lender takes the full risk themselves. This difference changes almost everything about the deal: how much money you need upfront, what credit score you need, how much the loan costs, and how long approval takes.

FHA loans let you put down as little as 3.5 percent of the home's price. Conventional loans typically require 5 to 20 percent down, though some lenders will go lower. If you have a credit score below 620, FHA is often your only option — most conventional lenders want 620 or higher, and many want 640 or better. The trade-off is that FHA loans come with mortgage insurance you pay for the life of the loan, while conventional loans with less than 20 percent down have mortgage insurance you can eventually remove.

Both types of loans take roughly 30 to 45 days from application to closing, though FHA loans sometimes take longer because the appraisal process is stricter. Both require a job history, income verification, and a debt-to-income ratio the lender will accept — usually 43 to 50 percent of your gross monthly income going to all debts combined.

Key Takeaways

• FHA loans require as little as 3.5 percent down and accept credit scores as low as 580, while conventional loans typically need 5 to 20 percent down and a score of 620 or higher.
• FHA loans charge mortgage insurance for the entire loan term, while conventional loans with less than 20 percent down have mortgage insurance you can remove once you have enough equity.
• FHA loans have stricter property standards and appraisal rules, which can disqualify homes that would pass a conventional appraisal.
• Conventional loans usually close faster and cost less over time if you can afford the larger down payment and have decent credit.
• Your choice depends on your down payment savings, credit score, and how long you plan to stay in the home.

Down payment and credit score requirements

FHA loans are designed for buyers who have limited savings or credit challenges. The minimum down payment is 3.5 percent of the purchase price on a home up to the FHA loan limit in your county. If you are buying a $300,000 home, you would need $10,500 down. The minimum credit score is 580, though some lenders require 600 or higher and most want 620 to get the best rates.

Conventional loans do not have a government-set minimum, so each lender sets their own rules. Most require 5 to 20 percent down, with 10 percent being common for buyers with good credit. Credit score minimums vary widely — some lenders will work with 580, but most want 620 to 640, and the best rates go to borrowers with 740 or higher. If you put down less than 20 percent on a conventional loan, you will pay private mortgage insurance (PMI), which protects the lender but costs you money each month.

The real cost difference shows up over time. On a $300,000 home with 3.5 percent down, an FHA loan at current rates costs roughly $1,400 to $1,500 per month in principal and interest, plus $200 to $300 in mortgage insurance. A conventional loan with 10 percent down on the same home costs roughly $1,500 to $1,600 per month in principal and interest, plus $150 to $250 in PMI — but you can stop paying PMI once you reach 20 percent equity, which typically takes 8 to 12 years.

Mortgage insurance: how long you pay and what it costs

This is where FHA and conventional loans diverge most sharply. FHA mortgage insurance has two parts: an upfront premium (usually 1.75 percent of the loan amount, rolled into your monthly payment) and an annual premium (0.55 to 0.8 percent of the loan balance per year, also rolled in). You pay both for the entire 30-year loan term, with no way to remove it.

Conventional PMI works differently. You pay it only while your loan balance is above 80 percent of the home's value. Once you reach 20 percent equity — either through payments or home appreciation — you can request that PMI be removed. Some lenders will remove it automatically once you hit 22 percent equity. This means a conventional loan buyer who puts down 10 percent and pays steadily can stop paying insurance in 8 to 12 years, while an FHA buyer pays insurance forever.

On a $300,000 loan, the difference adds up. FHA mortgage insurance costs roughly $200 to $300 per month for 30 years — that is $72,000 to $108,000 over the life of the loan. Conventional PMI on the same loan might cost $150 to $250 per month for 10 years, then zero — that is $18,000 to $30,000 total. If you plan to stay in the home for 15 years or more, the FHA insurance cost becomes substantial.

Property standards and appraisal differences

FHA loans come with strict property requirements that conventional loans do not have. The home must be safe, sound, and sanitary. The roof must have at least two years of life remaining. The foundation cannot have major cracks. Electrical, plumbing, and heating systems must work. Peeling paint is a problem in homes built before 1978 because of lead paint rules. Mold, water damage, and pest damage are deal-killers.

An FHA appraisal is more thorough than a conventional appraisal because the government is insuring the loan. The appraiser checks not just the home's value but whether it meets FHA safety standards. Homes that fail FHA appraisal can sometimes be fixed and re-appraised, but repairs can be expensive and time-consuming. A conventional appraisal focuses mainly on value and condition as it affects resale — a home with cosmetic issues or deferred maintenance might pass conventional appraisal but fail FHA.

This matters most if you are buying an older home, a fixer-upper, or a home in rough condition. An FHA loan might not work, forcing you to either find a different home or go conventional and put down more money. Sellers sometimes refuse FHA offers because they know the appraisal is stricter and the deal is more likely to fall apart.

Debt-to-income ratio and income verification

Both FHA and conventional lenders look at your debt-to-income ratio (DTI) — the percentage of your gross monthly income that goes to debt payments. Most lenders want this at 43 percent or lower, though some will go to 50 percent for strong borrowers. The calculation includes your new mortgage payment plus car loans, student loans, credit cards, child support, and any other monthly debt obligations.

FHA lenders are sometimes slightly more flexible with DTI if you have compensating factors — a large down payment, significant savings, or a strong payment history. Conventional lenders tend to be stricter about the number itself. Both require recent pay stubs, W-2s or tax returns, and employment verification. If you are self-employed, both will ask for two years of tax returns and possibly a profit-and-loss statement.

The income verification process is similar for both loan types, but FHA sometimes takes longer because the government reviews the file. Conventional loans can move faster if the lender has streamlined their process. Neither loan type cares whether your income is from employment, Social Security, disability, rental property, or investments — they care whether it is documented and stable.

Closing costs and interest rates

FHA loans typically have lower interest rates than conventional loans because the government insurance reduces the lender's risk. The difference is usually 0.25 to 0.5 percent, which sounds small but adds up. On a $300,000 loan, a 0.5 percent rate difference means roughly $100 to $150 less per month in interest.

Closing costs are similar for both loan types — typically 2 to 5 percent of the loan amount — but FHA has some rules about who pays what. The seller can pay up to 6 percent of the purchase price toward your closing costs on an FHA loan, while conventional loans usually cap seller contributions at 3 percent. This can make FHA loans easier to close if you are short on cash at closing.

FHA loans also allow you to roll the upfront mortgage insurance premium into the loan amount, which means you do not need cash at closing for that cost. Conventional loans do not have this option — PMI is paid monthly, not upfront. For a buyer with limited savings, this is a real advantage.

How to decide which loan is right for you

Choose FHA if you have less than 5 percent saved for a down payment, your credit score is below 620, or you are a first-time buyer with limited savings. FHA is also worth considering if the seller is willing to cover closing costs, because the 6 percent cap gives you more help than conventional loans allow.

Choose conventional if you have 10 to 20 percent saved for a down payment, your credit score is 640 or higher, and you plan to stay in the home for at least 10 years. Conventional loans make sense if you want to avoid paying mortgage insurance forever and you can afford the larger upfront payment. They also close faster and face fewer property restrictions.

If you are on the fence — say, you have 5 to 7 percent saved and a 620 credit score — get quotes from both an FHA lender and a conventional lender. Compare the total monthly payment (principal, interest, and insurance), the closing costs you will owe, and the total cost over 10 years. The math will tell you which loan saves you money given your specific situation.

Frequently Asked Questions

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

Yes. Once you have built equity and your credit score improves, you can refinance to a conventional loan and potentially remove the mortgage insurance. This typically makes sense after 5 to 7 years if your home has appreciated or you have paid down the balance significantly. You will pay refinancing costs, so run the numbers to see if the savings on insurance justify the cost.

What if my home does not pass the FHA appraisal?

The seller can make repairs to bring the home into compliance, or you can renegotiate the price to cover repair costs. If the seller will not repair or lower the price, the deal falls apart and you keep your earnest money. You can then pursue a conventional loan on the same home if you have enough down payment saved.

Do I need a larger down payment if I have bad credit?

Not necessarily with FHA — the minimum is still 3.5 percent regardless of credit score, as long as you are at 580 or above. However, lenders may charge you a higher interest rate if your credit is poor. Conventional lenders often require a larger down payment (10 to 15 percent) if your credit score is below 640.

Can I remove PMI from a conventional loan before 20 percent equity?

Some lenders allow you to request PMI removal once you reach 15 percent equity if you have made on-time payments and the home has not declined in value. This is not may provide — it depends on your lender's rules. FHA mortgage insurance cannot be removed early under any circumstances.

Which loan is faster to close?

Conventional loans typically close in 30 to 40 days, while FHA loans often take 40 to 45 days because the appraisal and government review take longer. The difference is not huge, but it matters if you are on a tight timeline. Some lenders have streamlined FHA processes and can close faster.