Comparing FHA and Conventional Loans

Buying a home, especially if it’s your first home, involves asking a lot of questions. One of the biggest question marks — how are you going to pay for it? 

The number of choices for loans to buy a home can be overwhelming, but it’s important to understand all your options and borrow with confidence. Whether you’re working with a tight budget, limited credit history, or just want to make the smartest choice, weighing FHA vs. conventional loans could help you get closer to your goal: owning a home you love without stretching beyond your means. 

Key takeaways 

• FHA loans are designed for home buyers with lower credit scores and smaller savings, making homeownership more accessible. 
• Conventional loans offer lower rates — leading to more long-term savings — if you have strong credit and can afford a bigger down payment. 
• The best loan option for you depends on your financial profile, including your credit score, income, savings for a down payment, and future goals. 
• Mortgage insurance is required for the life of an FHA loan, while conventional loans allow you to remove it when you reach 20% equity. 

What is an FHA loan? 

Backed by the Federal Housing Authority, an FHA loan is a type of mortgage specifically designed to make homeownership more accessible, especially for first-time home buyers and those with less-than-perfect credit. 

You can qualify for an FHA loan with a credit score as low as 580 and a down payment as little as 3.5%. If you can pay a 10% down payment, the credit score requirement is flexible to as low as 500. This makes FHA loans a great option if you’re still building your credit or growing your savings and worry about your ability to meet the stricter requirements of more traditional mortgages. 

What is a conventional loan? 

Most mortgages are conventional loans, which means they aren’t part of a government program like FHA loans or VA loans. Offered instead through private lenders, conventional loans are most suitable if you have strong credit and a steady income. They’re even better if you can put 20% down to avoid private mortgage insurance (PMI), saving you money in the long run. 

There are two types of conventional mortgages:  

• Conforming loans are the most common loan type and have maximum amounts set by the government. 
• Non-conforming loans, such as jumbo loans, are less standardized and terms and requirements vary by lender.  

Compared to FHA loans, conventional mortgage options offer more flexibility and better rates to those who qualify. Home buyers with stronger credit and savings are rewarded with potentially lower long-term costs. 

Breakdown of FHA vs. conventional loans 

When comparing conventional loans vs. FHA loans, it helps to see the differences side by side.  

Here’s a quick snapshot of how they compare: 

	FHA Loan	Conventional Loan
Credit Score Requirement	As low as 580 (or 500 with 10% down)	Typically, 620 or higher
Minimum Down Payment	3.5% down	3%-20%, depending on qualifications
Interest Rates	Often slightly higher	Competitive for buyers with strong credit
Mortgage Insurance	Required for the life of the loan, with a premium paid at closing	Required if less than 20% down, but can be removed later
Loan Limits	Varies by county; lower than conventional	Higher loan limits in many areas
Property Standards	Strict FHA appraisal and condition guidelines	Standard appraisal with fewer condition requirements

Credit score requirements

Your credit score will play a huge role in which type of home loan works best for you. Taking the time to get your credit mortgage-ready before you buy could influence your choice of conventional vs. FHA loan. 

FHA loans are more lenient, with credit score requirements as low as 580 (or 500 with 10% down), because they’re designed to help people with lower credit scores or limited credit history to still buy a home. They also allow you to have a higher debt-to-income (DTI) ratio, which can be helpful if you’re managing other financial obligations. 

Conventional loans usually require a minimum credit score of 620, and they may reward higher scores with better interest rates and lower mortgage insurance costs.  

If your credit is in good shape, a conventional loan will likely offer you more long-term savings. 

Down payment requirements 

Down payment rules differ when comparing FHA vs. conventional loans. FHA loans require a minimum down payment of 3.5%. This requirement increases to 10% if your credit is between 500-579. 

If you’re a qualified first-time home buyer on a conventional loan, your down payment could be as low as 3%. Any down payment below 20% would require PMI.  

For both loan options, a higher down payment amount could balance out a less-than-perfect credit score and improve your chances of approval. 

Differences in rates and terms 

Another key consideration in deciding between a conventional loan or FHA loan: interest rates. 

FHA loans often come with slightly higher base rates, and as a buyer, you may face additional fees and upfront mortgage insurance that cause you to pay more over time. 

In comparison, conventional loans often reward stronger credit with more favorable interest rates and fewer fees — especially if you avoid mortgage insurance by putting 20% down. They also offer a wide variety of loan terms (10-, 15-, or 30-year options), giving you more control over how your payments are structured. 

Mortgage insurance requirements

No matter how much you borrow for an FHA or conventional loan, lenders want to balance out their own risk. That’s why they sometimes require you to buy mortgage insurance — a policy that protects them in case you stop making loan payments.  

With FHA loans, mortgage insurance is required upfront and is paid monthly throughout the life of the loan. The one exception is if you put 10% or more down on the home, you can remove mortgage insurance after 11 years. 

If you get a conventional loan, private mortgage insurance (PMI) is required if you put less than 20% down. Unlike an FHA loan, however, conventional loans allow you to remove PMI once you reach 20% equity on your home, giving you a long-term savings advantage. 

Loan limits 

FHA loans have lower loan limits that vary by county and are established by the federal government. For example, in 2025, FHA’s nationwide forward mortgage limit “floor” is $524,225 and the “ceiling” is $1,209,750 for a one-unit property. These limits are designed so FHA loans remain focused on affordable housing. 

If you’re looking at homes with a higher price tag, however, a conventional loan may offer you more flexibility. That’s because these loans typically offer higher loan limits, especially when you’re buying in high-cost areas. 

Property requirements 

If you’re eyeing a move-in ready home or are willing to take on a renovation project, understanding property requirements can help you plan ahead.  

FHA loans have stricter appraisal and property standards compared to conventional loans. This means your home must meet specific safety and livability criteria, which can make it more difficult to finance fixer-uppers. 

Conventional loans use standard appraisals and usually don’t require the same level of scrutiny during inspections. This may give you more freedom to choose the type or condition of home you want. 

How to choose: FHA vs. conventional loans 

When choosing a mortgage, there’s no universal “best” option — there’s only the one that best fits your financial situation and home buying goals. If you’re weighing a conventional loan vs. FHA, consider the following scenarios: 

An FHA loan might be a better fit if: 

• Your credit score is under 620 
• You have less than 5% saved for a down payment 
• You’re a first-time home buyer or recovering your credit from past financial setbacks 
• You have a higher debt-to-income ratio 

A conventional loan might make more sense if: 

• Your credit score is 680 or higher 
• You want to avoid long-term mortgage insurance 
• You’re buying a higher-priced home or want more flexibility in property condition 

Find the right mortgage for you with AmeriSave

The choice between an FHA or conventional loan will depend on your unique financial picture. FHA loans can provide a solid foundation on which new buyers can build their futures, while conventional loans offer greater long-term savings — if you qualify. 

No matter where you are in the process, AmeriSave is here to help you compare your options, score competitive rates, and move forward in the home buying process with confidence. Ready to take the next step? Get preapproved today and find the right loan for your new home. 

Frequently asked questions 

What are the main differences between FHA and conventional loans? 

FHA loans are government-backed and designed to help buyers with lower credit scores and smaller down payments. Offered through private lenders, conventional loans tend to reward those who have stronger financial profiles with better rates and lower long-term costs. 

How does the down payment differ from FHA and conventional loans?

FHA loans require a minimum of 3.5% down if your credit score is 580 or higher. Conventional loans can require as little as 3% down, but a 20% down payment helps you avoid having to purchase mortgage insurance. 

Are FHA loans easier to qualify for compared to conventional loans? 

Yes. FHA loans are generally easier to get because the credit score requirements are more flexible than conventional loans. If you have a lower credit score or a higher debt-to-income ratio, an FHA loan may be easier to qualify for. 

What credit score is required for an FHA vs. conventional loan?

Those with credit scores as low as 580 may qualify for an FHA loan. Someone with a score as low as 500 may qualify if they’re willing to pay a 10% down payment. In contrast, conventional loans typically require a credit score of 620 or higher, with better rates available for those in the upper 600s and above.