FHA vs. Conventional Loans: Which One Is Right for You?

Choosing the wrong loan could cost you thousands in extra interest, fees, and unnecessary stress. If you're wondering whether an FHA loan or a conventional loan is the smarter move for you, you're in the right place.

This guide breaks down the key differences, pros, and cons of both loan types, so you can confidently choose the one that aligns with your credit score, down payment, and long-term homeownership goals without second-guessing your decision.

An FHA loan is a government-backed mortgage insured by the Federal Housing Administration (FHA). An FHA loan is designed for home buyers with low credit scores or a limited downpayment.

The government backs FHA loans. This motivates lenders to approve FHA loans for less cash-ready buyers.

• Credit Score: You can opt for an FHA loan with a minimum credit score of 580 and just a 3.5% downpayment. Home buyers with credit scores between 500 - 579 may qualify with a 10% downpayment.

• Debt-to-Income Ratio (DTI): The DTI ratio measures the percentage of your monthly income used to pay debts. You need a minimum of 43% DTI to qualify for an FHA loan.

• Loan Limits: FHA loan limits vary by location. For 2025 the range is between $524,225 and $1,209,750.

• Employment History: You must show your employment history and proof of income to the lender. This proves that you can repay the loan you are asking for.

• Property Details: The FHA has certain safety and livability checks that your dream house has to tick-mark.

Let’s do a quick comparison of an FHA loan with a conventional loan

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• Lower Down Payment: FHA loans are popular among first-time home buyers because you need only a 3.5% down payment and a credit score of 580. Young home buyers who have not had the chance to save up for the down payment or those who are still building their credit can benefit from an FHA loan.

• Lenient Credit Requirements: Unlike a conventional loan, an FHA loan is designed to help buyers with less-than-perfect financial health. Borrowers with scores as low as 500 can qualify (with a higher down payment). These loans allow for more flexibility with financial hiccups, such as past bankruptcies (eligible after three years) or foreclosures.

• Competitive Interest Rates: The government backing reduces the lender’s risk, allowing them to offer lower rates to borrowers.

• Streamline Refinancing Options: FHA loans offer a simple refinancing option called the FHA Streamline Refinance. The process allows buyers to refinance their existing FHA loan to a lower interest rate. You can also seek better terms without the need for a full appraisal.

• Mortgage Insurance Costs: You must pay two types of mortgage insurance on an FHA loan. Upfront Mortgage Insurance Premium - a one-time payment of 1.75% of the total loan amount. You also pay a monthly Mortgage Insurance Premium (MIP) for the lifetime of the loan.

• Property Limits: FHA loans are limited to financing primary residences. You can’t use them to buy a vacation home or investment property! Additionally, the house must meet FHA safety and livability standards

• Higher Long-Term Costs: You can get an FHA loan for a minimum of 3.5% down. While this is great for first-time homebuyers, you end up with a bigger principal amount. This means a bigger monthly expense!

First-Time Home Buyers: FHA loans are best for home buyers trying to buy their first homes with a low credit score.

• Buyers in High-Priced Markets: Those purchasing within FHA loan limits but struggling to meet conventional requirements.

• Borrowers with Credit Issues: If you have faced bankruptcy or foreclosure, you can opt for an FHA loan after a three-year waiting period.

If meeting your lender’s conditions seems overwhelming, you might have options to reduce monthly payments. Learn how recasting your mortgage can help you adjust your loan terms.

Find the Perfect Mortgage for Your Dream Home with Be My Neighbor.

Compare options, calculate payments, and get expert guidance - all in one place.

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Unlike an FHA loan, a conventional loan is not backed by the government. These loans are funded by private lenders under guidelines by Fannie Mae and Freddie Mac.

• Credit Score: To opt for a conventional loan you need a minimum credit score of 620. Borrowers with high credit scores (740 and above) can get a loan with less than 20% down.

• DTI: A maximum DTI of 50% is acceptable but most lenders prefer a lower DTI ratio.

• Mortgage Insurance: Buyers with less than 20% down need to pay for private mortgage insurance.

• Loan Limits: The Federal Housing Finance Agency (FHFA) sets limits on conventional loans based on property location and unit count.

For 2025, the baseline conforming loan limits for conventional loans are as follows:

For designated high-cost areas within the contiguous states, the loan limits are:

Important Note: Alaska, Guam, Hawaii, and the U.S. Virgin Islands do not have designated high-cost areas for 2025. Loan limits remain at elevated baseline levels for these areas.

• Opt-out of Mortgage Insurance: Home buyers putting a minimum of 20% down do not require mortgage insurance. For FHA loans you are required to opt for insurance.

• Higher Loan Limits: Conventional loans have higher limits compared to FHA loans. This makes it ideal for buyers looking for expensive properties.

• No Property Limits: Unlike an FHA loan which can be only used against your primary residence, conventional loans do not limit on property type. You can buy your second home, vacation home, or investment property with a traditional loan.

• Competitive Interest Rates: Borrowers with good to excellent credit (above 700) can qualify for lower interest rates.

• Customizable Loan Terms: You can select loan terms based on your financial stability and goals. For example, you can opt for different mortgage types like 15-year, 30-year, or adjustable-rate options.

• Strict Credit Requirements: Only buyers with a good credit score (min. 620) can apply for a conventional loan.

• No Government Backing: Conventional loans do not have government backing. This means private lenders will have stricter requirements for borrowers and higher risk-related costs.

• Higher Down Payment: A minimum downpayment of 20% is typical for a conventional loan.

Find the Perfect Mortgage for Your Dream Home with Be My Neighbor.

Compare options, calculate payments, and get expert guidance - all in one place.

Get Pre-approved

Should you opt for an FHA loan or a conventional loan? The right answer depends on your financial condition, goals, and income stability. First-time home buyers can benefit from FHA loans. However, home buyers with a good credit score and eyeing a more expensive home should opt for a conventional loan.

The current median home price is $437,300. This means you need $87,460 (20% down payment required on a conventional loan) upfront to buy a house in 2025. You will also need around $26,238 to pay the seller and buyer-side agent.

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The answer depends on your financial situation and goals. An FHA loan is better if you have a low credit score (500–579) or limited savings for a down payment. It requires only 3.5% down for scores above 580. A conventional loan is better suited for borrowers with strong credit (620 or higher) and the ability to put at least 20% down. This allows you to avoid private mortgage insurance and reduce your long-term costs.

The main difference lies in eligibility requirements and cost structure. The government backs FHA loans. They are easier to qualify for with lower credit scores (starting at 500) and smaller down payments (as low as 3.5%). However, they require mortgage insurance premiums (MIP) for the life of the loan.

Conventional loans are not government-backed and generally require a higher credit score (620 or more). If you put down 20%, you can avoid private mortgage insurance (PMI) entirely. Conventional loans also offer more flexibility for property types, including second homes and investments.

FHA mortgages are home loans insured by the Federal Housing Administration (FHA). These loans are designed to make homeownership more accessible. FHA loans allow borrowers with lower credit scores (as low as 500) and smaller down payments (starting at 3.5%) to qualify for a loan which is backed by the government.