How Do FHA Loans Compare to Conventional Mortgages?
February 12, 2025
Q: What's the biggest difference between FHA and conventional loans?
A: One of the most significant differences is the down payment requirement. FHA loans are known for their low down payment options, often as low as 3.5% of the purchase price. This makes them attractive to first-time homebuyers and those with limited savings.
Conventional loans generally require a larger down payment, typically ranging from 5% to 20% or even more. While some conventional programs offer low down payment options, they often have stricter qualifying criteria.
Q: I have a lower credit score. Can I still get a mortgage?
A: Possibly, with an FHA loan. FHA loans are generally more lenient with credit score requirements than conventional loans. While specific requirements vary by lender, the FHA often insures loans for borrowers with credit scores as low as 500, though a 10% down payment is usually required for scores below 580.
A credit score of 580 or higher usually qualifies you for the minimum 3.5% down payment. Conventional loans typically require higher credit scores, often 620 or above, with better terms available for scores above 680.
Q: What is mortgage insurance, and do I need it for both types of loans?
A: Mortgage insurance protects the lender if you default on your loan. Both FHA and conventional loans may require it, but the type and duration differ. FHA loans require two types of mortgage insurance premiums (MIP): Upfront MIP (UFMIP) and Annual MIP. UFMIP is paid at closing or added to the loan balance, while Annual MIP is paid monthly.
For most FHA loans originated after June 3, 2013, Annual MIP is required for the life of the loan. Conventional loans, when the down payment is less than 20%, typically require Private Mortgage Insurance (PMI). PMI is also paid monthly, but unlike FHA MIP, it can usually be canceled once you reach a certain equity position in the home, typically 20%.
Q: Are there limits on how much I can borrow with these loans?
A: Yes, both FHA and conventional loans have loan limits, though these limits differ. The FHA sets FHA loan limits and vary by geographic area, reflecting median home prices. Conventional loan limits, also known as conforming loan limits, are set by Fannie Mae and Freddie Mac and are also subject to geographic variation.
Q: What is a debt-to-income ratio (DTI), and how does it affect my loan approval?
A: Your debt-to-income ratio (DTI) is a measure of your total debt compared to your gross monthly income. Lenders use it to assess your ability to manage debt. FHA loans generally allow for higher DTI ratios than conventional loans. While specific guidelines vary, the FHA may insure loans with DTI ratios up to 43%, and sometimes even higher with compensating factors. Conventional loans typically prefer lower DTI ratios, often below 43%, and sometimes even lower for the best loan terms.
Q: Do FHA and conventional loans have different property requirements?
A: Yes, both have property requirements, but they differ in stringency. FHA loans have minimum property standards that must be met to ensure the safety, soundness, and sanitation of the dwelling. FHA appraisals are more thorough, focusing on these criteria.
Conventional loans also have property requirements, but they are generally less stringent. Lenders want to ensure the property is a worthwhile investment, but they may not be as strict regarding specific health and safety standards.
Q: Can I use an FHA loan to buy an investment property?
A: No. FHA loans are strictly for primary residences; they cannot be used to purchase investment properties. Conventional loans, on the other hand, can be used for investment properties. However, lenders typically require a larger down payment and may charge higher interest rates for these loans due to the increased risk.
FHA Loan Articles
August 19, 2026Homebuyers who have enough cash for a down payment still need to consider their full financial picture before choosing between a conventional mortgage and an FHA loan. Having cash on hand changes the math for both options, but savings alone won't make a conventional loan the automatic winner. Credit scores, current debt, and the type of property you want to buy all determine which loan will cost less over time.
August 11, 2026Homeowners with FHA adjustable-rate loans need to track their loans more closely. That is because FHA ARM loans start with introductory interest rates that eventually expire and are subject to change afterwards based on market rates. When interest rates rise, monthly housing payments climb on ARM loans, pushing many homeowners to consider refinancing into a fixed-rate mortgage.
August 10, 2026If you want to buy a home with an FHA mortgage, you must set up an escrow account to cover property taxes, homeowner insurance, and upfront closing expenses. While the FHA loan program has rules for funding these accounts, buyers often do not realize those rules can include approved and unallowed sources for escrow funds. What do you need to know before you set up and fund your escrow account for an FHA mortgage?
August 3, 2026Buying a home in a high-cost area requires understanding how FHA loan limits shape your financing options. Does the house for sale have a price above the local FHA loan limit? You may need to explore your jumbo loan options. There are conventional jumbo loans and FHA versions. Which is right for you? Much depends on your financial needs, plans, and goals for the loan.
July 30, 2026There is a common misconception about FHA loans that only a first-time home buyer can use the program. This is not true; repeat buyers can qualify for an FHA loan, but why does this misconception exist? Partially because state and local programs have first-time buyer requirements for down payment and/or closing cost assistance programs. So while you do not need to be a first-time buyer to get an FHA loan, you may need to meet that definition to qualify for down payment help.
