FHA vs. conventional loan: Definition and differences

Most people don’t have the money to a buy a house with cash up front. Instead, the majority of home buyers use a mortgage to finance their purchase. That way, they get the title and keys to the home when they close, and then they pay off the mortgage over time.

If you’re looking to buy a home, then it’s important to know that there are different types of mortgages and some might be a better fit than others depending on your situation. The two most common types of home loans are conventional loans and FHA loans. Here’s a rundown of what conventional and FHA loans are, how they work, and the key differences between the two.

What is an FHA loan?

An FHA loan is a government-backed home loan insured by the Federal Housing Administration. The government backing reduces the risk for lenders should the borrower default on the loan, which allows lenders to offer looser eligibility requirements.

FHA loans are available for a 3.5% down payment and allow for a lower minimum credit score than conventional loans. This makes FHA loans a good option for borrowers who don’t have great credit or very much in savings.

Government-backed loans are a type of nonconforming loan. That means that borrowers don’t need to meet conventional lending standards set by government-sponsored mortgage companies Fannie Mae and Freddie Mac, though government agencies can set their own qualification standards.

FHA loans are available as fixed-rate or adjustable-rate mortgages (ARMs). A fixed-rate mortgage has an interest rate that gets set when you close on the loan and never changes. As a result, your monthly payment stays consistent as you pay off your loan.

An ARM has an interest rate that stays the same for an introductory period. With an ARM, interest rate and monthly payment can fluctuate.

What is a conventional loan?

Conventional loans are offered by private lenders without any direct government backing. In other words, unlike FHA loans, they aren’t insured or guaranteed by a government agency.

They come with stricter eligibility requirements, but if you qualify, conventional loans can be cheaper than FHA loans. You’ll need to have a higher credit score, lower debt-to-income (DTI) ratio, and often a slightly higher down payment to qualify.

Conventional loans can be either conforming or nonconforming loans. Conforming loans meet Fannie Mae and Freddie Mac standards, which include loan limits and consumer protections.

Nonconforming loans - most commonly, jumbo loans - are for those looking to buy a home that exceeds conforming loan limits. Here at Rocket Mortgage®, we offer Jumbo Smart loans. They’re processed just like our conforming loans, so you get the same consumer protections with a much higher loan limit.

Like FHA loans, conventional loans are available as fixed-rate or adjustable-rate mortgages (ARMs). The most common home loan repayment terms are 15 or 30 years, but conventional loans are available for any term from 8 to 30 years.

It’s a common misconception that FHA loans are designed for first-time home buyers and conventional loans are better for experienced buyers. Both loan types have their advantages and drawbacks for either type of buyer depending on their financial situation. Below we’ll compare a variety of requirements for both loan types, including credit score, down payment, interest rates, appraisal processes, loan limits, and more.

FHA vs. conventional loans: Credit score

Regardless of which loan type you choose, you’ll need to meet a minimum credit score requirement. Lenders use your credit score to see how well you’ve managed debt in the past and determine how much risk you pose as a borrower.

Your credit score could range from excellent (800 and above) to poor (350 - 579), and it’s based on your credit history. The higher your credit score, the less of a risk you are to the lender and the lower the rate you’ll qualify for.

Most lenders look at your FICO^® Score, a credit scoring model developed by the Fair Isaac Corporation, which ranges from 350 points to 850 points. Lenders may also use VantageScore^®, another type of credit-scoring model. Your credit score and information are reported by each of the three major credit bureaus: Experian®, Equifax®, and TransUnion®. Your score may vary among credit bureaus.

If you're applying as a sole borrower, the median score among the three is considered the qualifying score. If you're applying with another borrower, the score that’s generally considered is the lowest median score between multiple clients. There’s one notable exception we'll get to below.

The following factors are taken into consideration to build your score:

• Whether you make payments on time
• How much you owe
• Length of your credit history
• Your new credit accounts
• Types of credit you use

So, what credit score do you need to get a loan? That depends on the type of loan you’re after.

Conventional loan credit score requirements

Credit score requirements for a conventional loan vary depending on the lender. You typically need a minimum credit score of 620 to qualify for a conventional mortgage. This is based on your median score as an individual.

If you have a co-borrower, Fannie Mae often looks at things a little differently than other mortgage investors. They take the average median score of all borrowers on the loan rather than the lowest median score. This can make it easier to qualify.

If your co-borrower has a median score of 580 and you have a median score of 720, in the past, both incomes couldn't be used to qualify for a conventional loan. Now Fannie Mae averages the two, making the qualifying score 650.

FHA loan credit score requirements

Generally, most FHA loan lenders (including Rocket Mortgage) require borrowers to have a credit score of 580 or above to get an FHA loan. You can qualify for an FHA home loan with a credit score as low as 500, but it does come with strings attached. For example, you need to be able to put 10% down to get an FHA loan with a credit score of 500.

The higher your credit score, the lower your down payment needs to be for an FHA loan. The qualifying credit score is the lowest median score if you have a co-borrower. If you're applying as an individual, it's your middle score.

FHA vs. conventional loans: Down payment

In order to get a conventional loan or an FHA loan, you’ll need to make a down payment. The minimum down payment you’ll need will depend on the loan type and in some cases your credit score.

Conventional loan down payment

Some conventional loans are available for a down payment as low as 3%. However, most lenders require a minimum down payment of 5% to qualify for a conventional loan.

It’s a popular misconception that home buyers must have a 20% down payment to get a mortgage loan. A 20% down payment is optimal because it allows home buyers to avoid private mortgage insurance (PMI) premiums, which adds to the cost of your monthly payment.

PMI protects the lender if you can’t make your mortgage payments. A smaller down payment equals more risk, so you mitigate that risk for the lender when you pay for mortgage insurance.

FHA loan down payment

For an FHA loan, a 3.5% down payment is sufficient if your credit score is 580 or above. If your credit score is between 500 and 579, you’ll need to make a 10% down payment.

Here’s an example of how much you’d pay for a down payment on both types of loans:

• Conventional loan down payment of 3% on a $400,000 house: $12,000
• FHA loan down payment of 3.5% on a $400,000 house: $14,000

FHA vs. conventional loans: Interest rates

The interest rate you’re offered on your mortgage will depend on a variety of factors, including:

• Your credit score
• Economic conditions
• Your down payment size
• Federal funds rate
• Loan type
• Loan amount
• Loan term
• Interest rate type
• Discount points

Some of these factors are out of your control - like current market rates and the state of the economy. Other factors that impact your credit score are based on your financial history and your loan size and type.

Fixed-rate mortgages keep the same interest amount and payment until you pay off the mortgage. Monthly payments on adjustable-rate mortgages change periodically depending on the prevailing interest rate after the initial fixed-rate period expires.

Discount points can be prepaid to a lender in exchange for a lower interest rate. You pay for discount points to enjoy lower monthly mortgage payments over the life of the loan.

Conventional loan interest rates

The interest rate you’re offered on a conventional loan will depend on your credit history, loan size, and loan-to-value ratio. The larger your down payment, the lower your LTV and the lower your interest rate.

Of course, it can take time to save up any down payment at all let alone a large one. Some buyers hold off on buying a home until they can make a large enough down payment to give them affordable monthly payments.

Your interest rate will also be impacted by your loan size and loan term. You can expect to pay a higher interest rate if your loan is especially small or large. Loans with shorter terms typically come with lower interest rates, while longer loan terms mean higher interest rates.

FHA loan interest rates

FHA loans typically come with more competitive interest rates than conventional loans. The reason is because FHA loans are backed by the government, so the lender faces lower risk. It’s important to note that FHA loans also require mortgage insurance no matter how large of a down payment you make. So, the money you save with a lower interest rate may be offset by the cost of mortgage insurance.

FHA vs. conventional loans: The appraisal process

During the home appraisal, a licensed appraiser will assess the property and compare it to similar properties in the area to determine its fair market value. The appraisal process is one of the biggest differences between the two types of loans, and it can lead sellers in a tight housing market to avoid offers backed by FHA loans.

Conventional appraisals

If you’re buying a home with a conventional loan, your lender will typically require a home appraisal, though some programs allow for hybrid appraisals or property inspection waivers. That’s because they want to be sure the house you want to buy with the loan has sufficient value so if they’re forced to sell after a foreclosure, they’ll recoup their losses. Lenders also use the appraisal to determine your interest rate, minimum down payment, and whether or not to approve you for the loan. Lenders typically won’t loan you an amount that exceeds the appraised value.

The home appraisal is also beneficial for the buyer, as it confirms the home is worth what you’re paying. The appraisal protects you from overpaying and getting cheated out of equity. This is why even if you’re offered a waiver to skip the appraisal, it’s not advisable to do so.

FHA appraisals

FHA appraisal standards are more demanding than those required by conventional lenders. In order to get government backing, a property must meet the requirements set by the U.S. Department of Housing and Urban Development that confirm the house is in good condition. For example, the home must:

• Have an undamaged foundation, roof, and exterior
• Not contain exposed electrical wiring
• Have safe property access
• Include all working utilities
• Have a functional heating system

Listing agents may advise their seller clients to avoid offers backed by FHA loans because of strict appraisal standards. Because the appraisal approval and value comes late in the process, FHA appraisal issues could delay the closing. If the sale falls through, sellers will have to disclose to future home buyers any conditions identified by the FHA appraisal process.

FHA vs. conventional loans: Loan limit

Conventional and FHA loans have different loan limits. For either mortgage type, your loan won’t be able cannot exceed that amount.

Conventional loan limit

The conventional conforming loan limits are set each year by the Federal Housing Finance Agency. For 2025, the limit is $806,500 in most places and $1,209,750 in higher cost areas, Alaska, Hawaii, Guam, and the U.S. Virgin Islands.

High-cost areas also exist in the District of Columbia and the following states: California, Colorado, Connecticut, Florida, Georgia, Idaho, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Tennessee, Utah, Virginia, Washington, West Virginia, and Wyoming.

If you need a conventional loan for a home that exceeds these loan limits, you need to consider a jumbo loan. They usually have stricter underwriting guidelines because of the larger loan size. For example, you can expect a higher minimum credit and down payment requirement for a jumbo loan.

FHA loan limit

New loan limits are set on FHA loans every year. These limits depend on where in the U.S. you consider a home purchase. The upper limit in low-cost counties is $524,225, such as in rural Missouri, and the upper limit in high-cost counties is $1,209,750, such as Orange County, California.

The easiest way to determine the upper limit in your county is to visit the HUD website for FHA mortgage limits. If you choose to go with an FHA loan over a conventional loan, it’s important to remember that these loan limits might cap the amount of home you can purchase.

FHA vs. conventional loans: Mortgage insurance

Mortgage insurance protects the lender if you default on your loan. This type of coverage does not offer any protection to the borrower. Mortgage insurance is required for all FHA loans. Whether or not you’ll need to buy mortgage insurance for a conventional loan will depend on your down payment size.

Conventional loan mortgage insurance

If you put less than 20% toward a down payment, you’ll need to pay for PMI, which can come in several forms:

• Monthly premium: The most common is that you pay a monthly premium, which is an annual rate divided by 12.
• Single premium policy: Another option is a single premium policy, which involves an up-front payment.
• Split premium: Another option is a split premium, which is an up-front payment as well as a monthly premium. Ideally, the seller pays the up-front premium.
• Lender-paid PMI: With lender-paid PMI, the lender includes your mortgage insurance in your monthly principal and interest payment by giving you a slightly higher interest rate. This can have advantages for many borrowers, but keep in mind that you can’t cancel lender-paid PMI unless you refinance or sell your home.

FHA loan mortgage insurance

FHA loan mortgage insurance is similar to PMI, but it works a bit differently. This insurance has to be paid for the life of your loan unless you make a down payment of 10% or more, in which case MIP can be cancelled after 11 years. You’ll pay an up-front mortgage insurance premium (UFMIP), which normally amounts to 1.75% of your base loan amount.

You’ll also make MIP payments of approximately 0.15% - 0.75% of the base loan amount, all based on the term of your mortgage, your LTV ratio, your total mortgage amount, and the size of your down payment.

When a conventional loan makes sense

Conventional loans are the most common type of mortgage. Here are some cases where this might be the loan type for you.

Your credit score is at least 620

If you check your credit score and find it sitting comfortably at or above 620, you could get approved for a conventional loan. Each lender has their own specific requirements, so be sure to compare lenders to find the right one for you.

You have enough for a down payment

Conventional loans require a down payment of at least 3% – 5%. Government-backed mortgages like VA loans and USDA loans don’t require a down payment but are only available to certain types of borrowers. If you can’t meet the minimum down payment for a conventional loan, there are down payment assistance programs offered on the state and local level.

Your debt-to-income ratio is below 50%

If you have a low DTI, that means your income isn’t being eaten up by other debts. This indicates to a lender that you can comfortably afford a mortgage. Each lender has their own DTI requirements, but you’ll typically need a DTI of less than 50% to get approved for a conventional loan. You can use your home affordability calculator to figure out what kind of mortgage would fit into your budget.

When an FHA loan makes sense

FHA loans are designed to make homeownership more attainable for buyers who don’t meet conventional loan requirements. If the following apply to you, then an FHA loan might be the right fit.

You don’t have a high credit score

FHA loans have lower minimum credit score requirements than conventional loans. If your credit score is at least 580, you could be eligible for an FHA loan. You can also get an FHA loan with a credit score as low as 500 if you make a down payment of at least 10%. Keep in mind that your credit score will also impact the interest rate you have to pay.

You don’t have much money for a down payment

FHA loans are available for a down payment as low 3.5%, while many conventional loans require a down payment of at least 5%.

You have a higher debt-to-income ratio

DTI requirements are more relaxed for FHA loans. So if you have student loans and other debts you’re working to pay off, an FHA loan may be a better fit for you. In some cases, you can get an FHA loan with a DTI as high as 57%.

FAQ

Let’s take a look at some of the most frequently asked questions regarding conventional vs. FHA loans.

Which loan option is better – FHA or conventional?

Which loan option is better for you will depend on a variety of factors, including your credit score, the money you’ve saved for a down payment, and your DTI. If you have a high credit score, money saved for a decent down payment, and a low DTI, a conventional loan might be best for you. If you’re struggling with your credit score, DTI, and the funds for a down payment, you might prefer an FHA loan.

Why do sellers prefer conventional loans over FHA loans?

Home sellers sometimes prefer conventional loans because FHA loans have stricter appraisal requirements. An appraisal for an FHA loan might dig up more issues with the home, which in turn can delay the home sale process as the seller works to fix them. For sellers, a buyer with an FHA loan may not have great credit or much a down payment. The seller may consider a buyer with a conventional loan to be more likely to get approved for financing. 

Which loan is more expensive between a conventional and FHA loan?

If you have good credit and meet the stricter eligibility requirements, a conventional loan typically costs less. If you have a lower credit score and a smaller down payment, an FHA loan can be cheaper.

Keep in mind that you’ll have to pay mortgage insurance with an FHA loan, but you won’t if you make a down payment of at least 20% with a conventional loan. To get a better sense of what you can expect to pay per month, you can use our mortgage calculator.

The bottom line: You have two available paths to homeownership via loan

Conventional loans and FHA loans are the two most common types of mortgages. If you have good credit and enough savings to make a down payment above the minimum, a conventional loan might be the right choice for you. If your credit isn’t so great and you can only make a limited down payment, then an FHA loan might be cheaper.

Are you ready to get started on your home loan approval process? Apply online now and let us help you decide which option will work best for you.