Quick overview

First-time buyers often face two main choices: an FHA mortgage or a Conventional mortgage. FHA loans (backed by the Federal Housing Administration) lower the entry barriers through smaller down payments and relaxed credit standards. Conventional loans (made by private lenders and often sold to Fannie Mae or Freddie Mac) typically reward stronger credit and larger down payments with lower long-term costs and more flexibility.

This guide compares the two across qualifications, costs, mortgage insurance rules, property requirements, and practical steps to choose the best fit for your situation.

Key differences at a glance

  • Down payment: FHA requires as little as 3.5% (with a 580+ credit score) or 10% if credit is between 500–579; Conventional loans can accept 3%–5% for program-specific products but generally you’ll avoid mortgage insurance only with 20% down. (See HUD on FHA guidelines: https://www.hud.gov/program_offices/housing)
  • Credit score: FHA is more forgiving (500–579 with 10% down; 580+ for 3.5% down). Conventional loans typically require a minimum ~620 to qualify through Fannie/Freddie guidelines.
  • Mortgage insurance: FHA requires an upfront mortgage insurance premium (UFMIP) plus annual MIP; Conventional loans require Private Mortgage Insurance (PMI) when down payment <20% and PMI can be cancelled at/near 80% LTV per the Homeowners Protection Act. (CFPB overview: https://www.consumerfinance.gov/)
  • Underwriting and debt ratios: Conventional underwriting often expects stronger credit history, lower debt-to-income (DTI) ratios, and more reserves than FHA loans.
  • Property standards: FHA appraisals/inspections can be stricter about habitability and safety; Conventional loans may accept a broader set of property conditions depending on investor overlays.

Sources: HUD (FHA program), Consumer Financial Protection Bureau (mortgage insurance), and Fannie Mae underwriting guidance.

How credit score and down payment affect your choice

If your credit score is under 620 or you have limited savings for a down payment, an FHA loan can let you buy sooner. For example, buyers with a 580+ score can qualify with 3.5% down; those with scores 500–579 must put 10% down (HUD guidance).

If your credit is 680+ and you can put 10%–20% down, a Conventional loan often produces a lower total cost over time because PMI may be avoidable or removable, and interest rates can be more competitive for higher-credit borrowers.

In my practice I’ve seen buyers with borderline credit buy sooner with FHA and later refinance to Conventional once they have more equity and improved credit — that strategy can reduce lifetime mortgage costs.

Mortgage insurance: how the two programs differ

FHA mortgage insurance:

  • Upfront mortgage insurance premium (UFMIP) typically 1.75% of loan amount (paid at closing or rolled into the loan amount).
  • Annual MIP charged monthly; the MIP duration depends on your original LTV and loan term. For many FHA loans originated after 2013, MIP may remain for the life of the loan unless you refinance into a Conventional mortgage. (HUD FHA Mortgage Insurance rules: https://www.hud.gov/program_offices/housing)

Conventional mortgage insurance (PMI):

  • PMI varies by insurer and borrower risk profile. It can be cancelled automatically when LTV reaches 78% and may be requested to be cancelled at 80% LTV under the Homeowners Protection Act. (See CFPB: https://www.consumerfinance.gov/consumer-tools/mortgages/)
  • PMI premiums and structures (monthly, annual, or single-upfront) differ, and some lenders offer lender-paid PMI with a higher interest rate instead of monthly PMI.

Practical implication: FHA’s MIP is generally non-cancellable while the loan is FHA-owned, so the faster route to removing MIP is to refinance to a Conventional loan once you have sufficient equity and credit.

Further reading on removing PMI: Strategies to Remove Private Mortgage Insurance (PMI) Early.

Underwriting differences and qualifying ratios

  • Debt-to-income (DTI): FHA programs often accept higher DTI ratios (depending on compensating factors), while Conventional guidelines typically prefer lower DTI, especially for borrowers with minimum credit.
  • Reserves and documentation: Conventional loans can require more documentation and may ask for mortgage reserves (months of payment saved) for investment or higher-risk profiles. FHA borrowers may use non-traditional credit sources in some cases.
  • Gift funds: Both programs allow gift funds for down payments, but FHA has specific rules about donor letters and documentation.

If you have variable income (self-employed or commission-based), both loan types allow qualifying but documentation standards and acceptable income rules vary — talk to a lender who specializes in your employment type.

Property condition and appraisal considerations

FHA appraisals include minimum property requirements (safety, soundness, structural integrity). If the appraisal identifies issues, sellers or buyers may need to make repairs before FHA will insure the loan. Conventional appraisals typically focus on fair market value and may be less prescriptive on minor repairs, though investor overlays can change that.

If you’re considering an older home or a fixer-upper, a Conventional loan or a renovation product may be more practical. See our guide on how mortgage insurance works for low-down-payment loans: How Mortgage Insurance Works for Low-Down-Payment Loans.

Costs beyond the interest rate

When comparing loan offers, look beyond the interest rate to these costs:

  • Upfront fees (UFMIP for FHA, lender fees)
  • Monthly mortgage insurance (MIP vs PMI)
  • Loan-level price adjustments and discount points
  • Closing costs and prepaid items
  • Potential seller concessions and allowable seller-paid closing costs (FHA has limits on seller contributions that differ from Conventional rules)

I advise clients to request a Loan Estimate from multiple lenders and compare the annual percentage rate (APR) and total cost over several ownership timelines (3, 5, 10 years). That reveals whether lower upfront cost (FHA) or lower ongoing cost (Conventional) wins.

Real-world scenarios and who benefits most

  • Best fit for low credit or small down payment: FHA. Example: a buyer with a 580 score and 3.5% saved can qualify for FHA and move in sooner.
  • Best fit for strong credit and ability to avoid PMI: Conventional. Example: a buyer with 700+ credit and 20% down avoids PMI and may get a lower overall monthly payment.
  • Bridge strategy: Start with FHA to buy now, then refinance to Conventional once credit and equity improve to remove MIP.

Budgeting for new homeowners often requires planning for more than the monthly mortgage — property taxes, insurance, maintenance, and possible HOA fees. See our primer: Budgeting for New Homeowners: From Mortgage to Maintenance.

Step-by-step decision checklist for first-time buyers

  1. Check your credit score and correct errors on your report.
  2. Estimate how much you can put down today and whether you can reach 20% with reasonable delay.
  3. Get prequalified with both FHA and Conventional lenders to compare rates, fees, and resilience of underwriting.
  4. Compare Loan Estimates focusing on APR, mortgage insurance costs, and total 5–10 year costs.
  5. Factor in property type and expected repairs (FHA may require repairs).
  6. Plan an exit: if choosing FHA, have a path to refinance to Conventional to remove MIP when feasible.

Common misconceptions

  • “FHA loans are only for low-income borrowers.” False — FHA is a tool for a range of buyers who need lower down payments or more flexible credit rules.
  • “Conventional loans are always cheaper.” Not always. If you must pay high PMI or have weaker credit, FHA can be cheaper in the short run.

Refinancing and switching loan types

Refinancing from FHA to Conventional is a common strategy to drop MIP and lower monthly payments once you have sufficient equity and improved credit. Conventional refinancing requires meeting the lender’s credit and equity thresholds; many borrowers refinance when their LTV reaches 80% or better.

FAQs (brief)

  • Can I use FHA for investment properties? No, FHA loans require owner-occupancy for primary residences.
  • Can I roll closing costs into my FHA loan? Yes, within limits — but rolling costs increases your loan balance and may raise MIP.
  • How long does PMI last? For Conventional loans, PMI can end once you reach 80% LTV; FHA MIP is generally for the life of the loan unless refinanced.

For more on PMI removal strategies, see: Strategies to Remove Private Mortgage Insurance (PMI) Early.

Final professional tips

  • Start with a credit review and simple fixes (remove errors, pay down high-rate debt) — a modest credit score bump can shift you from FHA to a better Conventional rate.
  • Always compare Loan Estimates from at least three lenders and run the numbers for different ownership horizons.
  • If property condition is a concern, get bids for likely repairs before choosing FHA vs Conventional. FHA’s repair requirements can add closing delays.

In my 15+ years advising buyers, I’ve seen both loan types enable successful homeownership. The right choice depends on timing, credit, available cash, and your plan for staying or refinancing.

Sources and further reading

Professional disclaimer: This article is educational and does not substitute for personalized financial or mortgage advice. Consult a licensed mortgage lender or financial advisor for recommendations tailored to your circumstances.