Buying your first home is exciting, emotional, and, well, overwhelming. Between scrolling through listings, figuring out monthly payments and trying to understand mortgages, it can feel like you’re learning a new language altogether.
Thank you for reading this post, don't forget to subscribe!One of the biggest questions first-time buyers have is:
FHA loan or conventional loan? What to choose?
They may appear to be the same on the surface. Both can help you get into a home. Both have monthly payments. Both can unlock the doors of your dream house.
But the differences can impact your down payment, credit requirements, monthly costs, and even how much house you can afford.
What is an FHA Loan?
Federal Housing Administration loans are mortgages that are guaranteed by the Federal Housing Administration, which is a branch of the United States Department of Housing and Urban Development (HUD). Lenders take on less risk when the government insures the loan, allowing them to provide funding to buyers who might not otherwise qualify for a conventional mortgage. According to the FHA’s most recent Annual Report to Congress, more than 82% of FHA-insured purchase mortgages went to first-time homebuyers, compared with about 50% in the broader market.
FHA loans were created specifically to help people with limited savings or less-than-perfect credit achieve homeownership. People who are still getting back on their feet financially, younger borrowers, and first-time purchasers tend to gravitate toward these.
Key characteristics of FHA loans:
- Minimum credit score of 580 for a 3.5% down payment
- Credit scores between 500–579 may still qualify with a 10% down payment
- Available through FHA-approved lenders (banks, credit unions, mortgage companies)
- Requires mortgage insurance regardless of down payment size
Mortgage insurance is necessary regardless of the size of the down payment.
Please be aware that the FHA is not a lending institution. It protects the lender from loss and streamlines the approval process for eligible applicants by insuring the loan.
What Is a Conventional Loan?
Mortgages that are not guaranteed by the federal government are known as conventional loans. Rather, private lenders sell it to government-sponsored enterprises like Fannie Mae and Freddie Mac after a closing. Lenders enforce more stringent standards to protect themselves in the absence of a government guarantee.
Conventional loans come in two main types:
- Conforming loans — These meet the loan limits set by Fannie Mae and Freddie Mac. For most of the country in 2024, the conforming loan limit is $766,550 for a single-family home.
- Non-conforming loans — These exceed those limits, often called jumbo loans.
For first-time buyers, conforming conventional loans are the most common route. They typically require stronger credit and a larger down payment than FHA loans, but they offer more flexibility and lower long-term costs for well-qualified borrowers.
FHA Loan vs Conventional Loan: Key Differences
According to the National Association of Realtors’ 2024 Profile of Home Buyers and Sellers, the median down payment for first-time buyers was just 9%, compared to 18% for all buyers. So if you’ve been stressing about saving the “traditional” 20%, you’re definitely not alone in starting smaller. Here is a side-by-side breakdown of the most important factors to consider:
Down Payment
| Loan Type | Minimum Down Payment |
| FHA Loan | 3.5% (with 580+ credit score) |
| Conventional Loan | 3% (with strong credit, specific programs) |
Low down payments are a hallmark of FHA loans, but conventional loan programs such as HomeReady and Home Possible can allow for down payments as low as 3% with certain income limitations and other restrictions. When it comes down to it, most purchasers can more easily meet the FHA’s 3.5% requirement.
Credit Score Requirements
Compared with conventional loans, FHA loans are much more lenient with credit scores. You might be eligible with a score as low as 580 or even 500, depending on the situation. Borrowers with credit scores above 740 are eligible for the highest conventional loan rates, which typically require a minimum score of 620. An FHA loan could be a better option for you if you’ve had some problems with your credit in the past.
Mortgage Insurance
This is a key distinction between the two loan types, and it will significantly affect your overall cost in the long run.
FHA loans require two types of mortgage insurance:
- Upfront MIP (Mortgage Insurance Premium): 1.75% of the loan amount, paid at closing or rolled into the loan
- Annual MIP: Typically 0.55% of the loan amount, divided into monthly payments
However, if your down payment is below 10%, you will likely be required to pay mortgage insurance premiums (MIP) for the duration of your FHA loan. The only way to get rid of it, even if your home’s worth goes up and your equity goes up, is to refinance into a more traditional loan.
Conventional loans use Private Mortgage Insurance (PMI):
- PMI is only required if your down payment is less than 20%
- Permanent mortgage insurance (PMI) prices can be automatically canceled after you reach 20% equity in your house.
- Prices might vary by lender and credit score, but typically range from 0.2% to 2% per year.
For buyers who plan to stay in their home long-term, a conventional loan with cancellable PMI can be meaningfully cheaper over time.
Loan Limits
The annual FHA loan limits are determined by HUD and differ by county. In most counties in the US, the maximum FHA loan amount for a single-family house in 2024 is $498,257. Upper limits of $1,149,825 are possible in more expensive locations such as New York City and San Francisco.
In most 2024 locations, conventional conforming loans will follow the restrictions set by Fannie Mae and Freddie Mac, which are $766,550. A jumbo loan is required for amounts over a certain threshold, and there are additional requirements for approval.
Property Requirements
Higher property condition standards are associated with FHA loans. As part of the home’s appraisal process, the appraiser will look for problems such as peeling paint, roof damage, or structural concerns to ensure the property meets the FHA’s Minimum Property Requirements (MPRs). This could be problematic in highly competitive marketplaces when vendors favor buyers who are willing to accept fewer criteria.
As long as the house remains habitable and safe, conventional loans are often a better fit than renovation loans because of their more lenient property requirements.
Long Term Cost
Since private mortgage insurance (PMI) can be eliminated once equity is built, conventional loans tend to be the more cost-effective option for buyers with less than 20% down who want to remain in the property for an extended period. Over the course of a 30-year FHA loan, the continuing MIP can increase your total payback by tens of thousands of dollars.
Having said that, FHA loans are a great option for buyers who are currently unable to get a conventional loan due to the lower approval barrier.
| FHA Loans | Conventional Loans | |
| Credit score | 500+ | 620+ |
| Down payment | 3.5% or 10% of purchase price, depending on credit scores | 3% or 5% |
| Debt-to-income ratio | 31% or less for mortgage-related expenses43% or less total | 45% or less |
| Interest rates | May be lower | May be higher |
| Mortgage insurance | Required on all loans | Required if down payment is less than 20% of the purchase price |
When You Need an FHA Loan
FHA loans are designed for borrowers with poorer credit ratings or less savings. They require mortgage insurance, which might drive up the overall cost, but they’re worth considering if you don’t think you’d be approved for a traditional loan.
- A high credit score is out of reach for you. Getting a loan with a 500 or 580 credit score is possible in some situations.
- You are short on funds for a down payment. A minimum down payment of 3.5% is required to qualify for an FHA loan.
- Your debt-to-income ratio is higher. The debt-to-income (DTI) ratio limitations for FHA loans are sometimes more lenient than those for conventional loans.
When You Need a Conventional Loan
For those with solid credit and solid financial situations, conventional loans are the superior option. They may not necessitate mortgage insurance, which makes them less expensive, but the standards are more stringent. If you satisfy the following criteria, you may want to apply for a traditional loan and compare rates from other lenders:
- The minimum required credit score is 620. You can have a reduced rate if your score is high enough.
- A lower interest rate is possible with a larger down payment. Mortgage insurance is not required if a 20% down payment is made.
- You have a debt-to-income ratio lower than 50%. When aiming for a low rate, a lower DTI ratio is preferable.
Common Mistakes First-Time Buyers Should Avoid
- Assuming that FHA is frequently less expensive. Mortgage insurance premiums for Federal Housing Administration loans can be somewhat expensive, both initially and over time. Get the grand sum for both choices before you make a final decision.
- Neglecting to verify your credit history before the application. Your loan options and rates can be affected by a score that is just slightly below a threshold. Before you apply, give yourself time to fix any mistakes or pay off any balances.
- Forgoing the pre-approval process completely. Homebuyers often begin their search without first obtaining a mortgage. If your finances are still up in the air, you run the risk of being disappointed or, worse, losing the house to another buyer.
- Not paying attention to credit constraints in your desired area. The maximum amount you can borrow through an FHA loan might not be enough to cover the home you want to buy in a high-priced market. Be familiar with your county’s boundaries before getting attached to a particular listing.
- Concentrating solely on the payment terms. A reduced overall cost is not necessarily the result of a lower interest rate. When comparing offers, make sure to account for closing costs, mortgage insurance, and loan fees.
Final Thoughts
There’s no single “best” loan for all first-time homebuyers. FHA loans are often more accessible to buyers with lower credit scores or less money saved, while conventional loans are usually cheaper for buyers with higher credit scores and more money saved, who can eventually eliminate the need for mortgage insurance.
The ideal one for you depends on your credit score, your funds, the price of the home you want, and how long you want to remain. The most critical step is to speak with a HUD-approved housing counsellor or a certified mortgage specialist who can crunch real data for your specific situation. Taking the time to understand your options now can mean real savings and real peace of mind for years to come.