FHA vs. conventional loan: Which should you choose?

What is an FHA loan?

An FHA loan is a mortgage insured by the Federal Housing Administration. Government-backed loans reduce lenders' risk by reimbursing them if the borrower defaults. This allows lenders to offer these loans with less restrictive eligibility requirements.

FHA loans are designed to help more people afford to buy a home with low down payment and credit score requirements, and affordable closing costs.

What is a conventional loan?

Conventional loans are the most common type of mortgage. Lenders can sell conventional loans that conform to federal guidelines to Fannie Mae or Freddie Mac. This reduces their risk and frees up capital to make additional loans.

Conventional loans that don't meet those requirements are called nonconforming loans. The most common type is the jumbo loan, which exceeds the federal limit on conforming loans.

Conforming loans have stricter requirements than FHA loans, but are more flexible.

FHA vs. conventional loans: Credit score

One of the biggest differences between qualifying for an FHA or conventional loan is the credit score expectations. Credit scores typically fall into 5 categories: poor, fair, good, very good, and excellent.

A poor credit score is usually below 579, while an excellent score is above 800. Typically, lenders use your FICO^® Score, but some may also use VantageScore^®.

Conventional loan credit requirements

Conforming conventional loans no longer have minimum credit score requirements in favor of a holistic picture of all your risk factors. Keep in mind that lenders may have their own policies, and some may still prefer a credit score of at least 620.

As a result, credit score requirements for a conventional loan vary from lender to lender, with lenders using several factors to determine if you qualify.

FHA loan credit score requirements

Lenders such as Rocket Mortgage require borrowers to have a minimum credit score of 580 and a minimum down payment of 3.5%. Other lenders allow borrowers with a credit score between 500 and 579 to get an FHA loan with a 10% minimum down payment.

FHA vs. conventional loans: Down payment

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

Conventional loan down payment

The minimum down payment on a fixed-rate conventional loan is 3%.¹ That goes up to 5% when you get an adjustable-rate mortgage (ARM). If you put down less than 20% on a conventional mortgage, you'll have to pay for private mortgage insurance (PMI), which adds to the cost of your monthly payment.

FHA down payment

FHA loan down payment requirements allow you to pay 3.5% 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. FHA loans always require mortgage insurance premiums (MIP), which you pay with both an up-front fee and an annual fee.

FHA vs. conventional loans: Interest rates

The interest rate you’re offered depends on your finances and broad economic indicators such as the federal funds rate. Mortgage interest rates also are influenced by your loan type, such as fixed rate versus an ARM.

Conventional loan interest rates

For conventional loans, your interest rate depends on your credit history, loan size, and loan-to-value ratio (LTV). A larger down payment reduces your LTV and is more likely to get you a lower mortgage interest rate. Expect to pay a higher interest rate if your loan is particularly small or large. Additionally, loans with shorter terms typically have lower interest rates, while longer terms have higher rates.

FHA loan interest rates

FHA loans typically offer more competitive interest rates than conventional loans because government backing reduces lenders' risk. FHA loans require mortgage insurance, no matter your down payment amount. The money you save with a lower interest rate may offset the cost of mortgage insurance.

FHA vs. conventional loans: The appraisal process

During the home appraisal, a licensed appraiser assesses the property and determines its fair market value. The appraisal process is one of the biggest differences between an FHA and a conventional loan.

Conventional appraisals

Lenders usually require an appraisal to ensure the home value matches the loan amount. Lenders won't let you borrow more than the home is worth.

FHA appraisals

FHA appraisal standards are more stringent. The property must meet the requirements set by the U.S. Department of Housing and Urban Development (HUD) to confirm that 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

Some sellers won’t accept FHA loan offers because these requirements can delay the closing process. Should the sale fall through, sellers will have to disclose to future home buyers any conditions identified during the FHA appraisal.

FHA vs. conventional loans: Loan limits

Conventional and FHA loans have different loan limits.

Conventional loan limits

The Federal Housing Finance Agency (FHFA) sets conventional conforming loan limits each year. For 2026, the limit is $832,750 for a one-unit home in most places in the United States, and $1,249,125 in high-cost counties, Alaska, Hawaii, Guam, and the U.S. Virgin Islands. The limits are higher for properties with two to four units.

If you need to borrow more than the conventional loan limit, you’ll need a jumbo loan. Jumbo loans are nonconforming mortgages, which means individual lenders can set their own requirements. Jumbo loans usually have stricter underwriting guidelines, such as a higher minimum credit score and larger down payment requirements.

FHA loan limits

FHA loan limits are set using conventional loan limits. Again, limits vary by location. For example, the limit for Jefferson County, Missouri, is $541,287, compared with $1,249,125 in Orange County, California. The easiest way to determine the limit in your county is to visit the HUD website for FHA mortgage limits.

FHA vs. conventional loans: Mortgage insurance

Mortgage insurance protects the lender if you default on the loan. FHA loans require all borrowers to pay for mortgage insurance, while conventional loans require it only if you have less than 20% equity in your home.

Conventional loan PMI

If your down payment on a conventional loan is less than 20% of the purchase price, you’ll need to pay for PMI. Most commonly, you'll pay a monthly premium, which is an annual rate divided by 12 and added to your mortgage payment. Once you have 20% home equity, you can ask your lender to cancel PMI. Your lender will cancel it automatically once you pay down your balance enough to have 22% equity.

FHA loan MIP

FHA mortgage insurance premiums work differently. You’ll pay an up-front mortgage insurance premium (UFMIP), which is 1.75% of your base loan amount.

You’ll also pay an annual MIP payment of 0.15% – 0.75% of the loan amount. You must pay the annual MIP for the life of the loan if your down payment was less than 10% of the purchase price. If your down payment was more than 10%, you can cancel MIP after 11 years.

Choosing between conventional and FHA loans

Now that we’ve covered the differences between FHA and conventional loans, let’s see a side-by-side comparison to help you decide.

FAQ

Let’s look at some of the most asked questions about conventional vs. FHA loans.

Which loan option is better: FHA or conventional?

A conventional loan may be better if you have a higher credit score, more down payment savings, and a low DTI. An FHA loan may be right if you have a lower credit score, higher DTI, and fewer down payment savings.

Why do sellers prefer conventional loans over FHA loans?

FHA loans have stricter appraisal requirements that may delay or derail a sale. An FHA appraisal could uncover more issues with the house that need to be addressed before closing. There may be additional risk that the borrower's financing will not be approved, which could deter some sellers.

Which loan is more expensive, a conventional or an FHA loan?

It depends on your credit score and down payment savings. If you have good credit and more funds available, a conventional loan is typically less expensive. If you have a lower credit score and a smaller down payment, an FHA loan can be more affordable. Keep in mind, FHA loans always require mortgage insurance, while conventional loans don't if your down payment is at least 20%.

The bottom line: Conventional and FHA loans can both offer competitive rates

FHA and conventional loans appeal to different types of borrowers, allowing lenders to help a wide range of borrowers afford a home. An FHA loan may be a good idea if you have less down payment funds and a low credit score. A conventional loan can be the right choice if you have a better credit score and more down payment savings.

If you’ve decided on a loan option, you can apply for a mortgage today with Rocket Mortgage.

¹ The 3% down payment option is only available on certain conventional loan products and is not available in all states. Additional terms and conditions may apply