What's the Difference Between a Conventional and FHA Loan?
Credit requirements, mortgage insurance, loan limits, and total cost over time. A direct comparison of the two most common mortgage types.
FHA and conventional loans are the two most common mortgage types in the United States. Both can be used to purchase a primary residence, and both are available with down payments well below 20%. But they differ in credit requirements, mortgage insurance structure, loan limits, and total cost over time.
FHA Loans: The Basics
FHA loans are insured by the Federal Housing Administration, which means the government backs a portion of the loan if the borrower defaults. This insurance allows lenders to accept lower credit scores (as low as 580 with 3.5% down) and higher debt-to-income ratios. FHA loans require an upfront mortgage insurance premium of 1.75% of the loan amount (usually financed into the loan) and an annual premium paid monthly for the life of the loan in most cases.
Conventional Loans: The Basics
Conventional loans are not government-insured. They follow guidelines set by Fannie Mae and Freddie Mac. Minimum credit scores typically start at 620, though borrowers with scores above 740 get the best pricing. Down payments can be as low as 3%, and private mortgage insurance (PMI) is required with less than 20% down. The critical difference: PMI automatically drops off when the loan balance reaches 78% of the original appraised value.
The Mortgage Insurance Difference
This is where the comparison gets interesting. FHA mortgage insurance is permanent on most loans originated today (those with less than 10% down). PMI on a conventional loan is temporary. Over time, the cost of permanent FHA insurance can exceed the initial savings from a lower rate. For a borrower with a 680 credit score putting 5% down on a $400,000 home, the FHA loan might save $80 per month initially but cost $15,000 to $20,000 more in total mortgage insurance over the life of the loan compared to a conventional loan where PMI drops off.
When FHA Is the Better Choice
- Credit score below 680
- Limited savings for down payment and closing costs
- Higher debt-to-income ratio that conventional guidelines would not approve
- Planning to refinance into a conventional loan within a few years once credit improves
When Conventional Is the Better Choice
- Credit score above 700
- At least 5% to 10% available for a down payment
- Planning to stay in the home long enough for PMI to drop off
- Want to avoid the permanent mortgage insurance cost
Try It With Your Numbers
Enter your loan amount, credit score range, and down payment to compare monthly payments between conventional and FHA side by side.
Try the Mortgage Calculator →The Only Way to Know for Sure
The right loan type depends on your specific numbers. Ask your loan officer to run both options side by side, comparing the monthly payment, total mortgage insurance cost, and total amount paid over 5, 10, and 30 years. The answer is almost always clear once you see the full comparison.
Written by
The Katalyst Team
ETHOS Lending, Inc.
