When you’re buying a home, one of the first decisions you’ll face is choosing the right type of mortgage. Two of the most common options are FHA loans and conventional loans. Each has its own advantages, drawbacks, and ideal borrower profiles. Understanding the differences can help you make a more confident, informed decision.
What Is an FHA Loan?
An FHA loan is a mortgage insured by the Federal Housing Administration. It’s designed to make homeownership more accessible, especially for first-time buyers or those with lower credit scores.
Pros of FHA Loans
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Lower credit score requirements
FHA loans are often available to borrowers with credit scores as low as the mid-500s (with larger down payments). -
Low down payment options
As little as 3.5% down for qualified borrowers. -
More flexible underwriting
FHA guidelines may be more forgiving with past credit issues or higher debt-to-income ratios. -
Gift funds allowed
The entire down payment can typically come from an approved gift source.
Cons of FHA Loans
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Mortgage insurance is required
FHA loans include both an upfront and monthly mortgage insurance premium (MIP). -
Mortgage insurance may last the life of the loan
In many cases, MIP does not automatically fall off unless you refinance. -
Loan limits may be lower than conventional
This can matter in higher-priced markets. -
Property condition standards
FHA appraisals have stricter condition requirements.
What Is a Conventional Loan?
A conventional loan is a mortgage not insured by a government agency. These loans follow guidelines set by major investors like Fannie Mae and Freddie Mac.
Pros of Conventional Loans
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Lower overall mortgage insurance costs (in many cases)
Private mortgage insurance (PMI) can be cheaper than FHA MIP, especially with good credit. -
PMI can be removed
Once you reach sufficient equity, PMI can typically be canceled. -
Higher loan limits available
Especially with certain conventional programs. -
Fewer property restrictions
Homes generally don’t need to meet FHA-specific condition standards.
Cons of Conventional Loans
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Stricter credit requirements
Typically better suited for borrowers with higher credit scores. -
Higher down payment in some scenarios
While some programs allow as little as 3% down, qualification can be tougher. -
More sensitive to debt-to-income ratios
Borrowers with higher debts may find FHA more forgiving.
Side-by-Side Comparison
| Feature | FHA Loan | Conventional Loan |
|---|---|---|
| Minimum Down Payment | 3.5% (with qualifying credit) | As low as 3% (if qualified) |
| Credit Score Flexibility | More flexible | Typically higher scores preferred |
| Mortgage Insurance | Required, often for life of loan | Required under 20% down, but removable |
| Property Standards | Stricter appraisal requirements | More flexible |
| Best For | Lower credit or higher debt | Strong credit and stable finances |
Which One Is Better?
There’s no universal “best” loan—only the one that fits your situation.
FHA may be better if:
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Your credit score is on the lower side
-
You have limited savings for a down payment
-
Your debt-to-income ratio is higher
Conventional may be better if:
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You have strong credit
-
You want to avoid long-term mortgage insurance
-
You’re putting more money down
The Bottom Line
Both FHA and conventional loans can be excellent options depending on your financial profile and homeownership goals. The right choice often comes down to credit score, down payment, debt levels, and long-term plans.
If you’re not sure which loan makes the most sense, it’s worth running the numbers both ways. A quick comparison can sometimes save thousands over the life of the loan.
