An FHA loan is usually better if you have a lower credit score or a small down payment, while a conventional loan is better if you have strong credit and want to avoid lifetime mortgage insurance. FHA loans let you qualify with a credit score as low as 580 and 3.5% down, but they carry mortgage insurance for the life of the loan in most cases. Conventional loans require stronger credit but let you cancel mortgage insurance once you reach 20% equity. Here is how to decide in 2026.
The Quick Answer
- Choose FHA if: your credit score is below 620, your down payment is small, or your debt-to-income ratio is higher.
- Choose conventional if: your credit score is 620+ (ideally 700+), you can put down more, and you want to drop mortgage insurance later.
1. Credit Score Requirements
This is the biggest dividing line between the two.
- FHA: 580 minimum for 3.5% down (500–579 with 10% down)
- Conventional: 620 minimum, with the best rates at 740+
If your credit needs work, FHA is often the only realistic path to approval. If your score is strong, conventional usually rewards you with a better rate.
2. Down Payment
- FHA: As low as 3.5%
- Conventional: As low as 3% for many first-time buyers, though 5%–20% is common
FHA is famous for low down payments, but conventional 97% loans can actually require slightly less down. The difference is that conventional low-down loans demand stronger credit.
3. Mortgage Insurance — The Deciding Factor
This is where the long-term cost difference lives.
- FHA: Requires both an upfront premium (1.75%) and an annual premium that, with less than 10% down, lasts the entire loan term.
- Conventional: Private mortgage insurance (PMI) applies under 20% down but can be canceled once you reach 20% equity.
Over the life of a loan, FHA's non-cancelable insurance can cost tens of thousands more than conventional PMI — a key reason many borrowers refinance out of FHA later.
4. Interest Rates
FHA base rates are sometimes lower than conventional, especially for lower-credit borrowers. But once you add FHA's lifetime mortgage insurance, the effective cost often exceeds a conventional loan for buyers with good credit. Always compare the total monthly payment, not just the headline rate.
5. Property and Loan Limits
- FHA: Stricter property condition standards (the home must meet HUD requirements) and lower loan limits in most areas.
- Conventional: More flexible on property condition and higher conforming loan limits, making it the better fit for higher-priced homes.
6. Debt-to-Income (DTI) Flexibility
FHA tends to be more forgiving on DTI, sometimes allowing ratios above 50% with compensating factors. Conventional underwriting is generally stricter, typically preferring DTI under 45%.
Side-by-Side Summary
- Minimum credit: FHA 580 / Conventional 620
- Minimum down: FHA 3.5% / Conventional 3%
- Mortgage insurance: FHA usually for life of loan / Conventional cancelable at 20% equity
- Best for: FHA = lower credit, tighter budget / Conventional = strong credit, long-term savings
Which Should a First-Time Buyer Choose?
Many first-time buyers start with FHA because it is easier to qualify for, then refinance into a conventional loan once their credit and equity improve to shed mortgage insurance. If your credit is already strong, going conventional from the start usually saves the most money.
Frequently Asked Questions
Is an FHA loan bad? No — it is a valuable tool for buyers with lower credit or small down payments. The main drawback is long-term mortgage insurance.
Can I switch from FHA to conventional? Yes. Many borrowers refinance to conventional once they reach 20% equity to eliminate mortgage insurance.
Which has lower monthly payments? It depends on your credit and down payment. For strong-credit buyers, conventional usually wins after factoring in mortgage insurance.
The right loan comes down to your credit, your cash, and your timeline. Compare full monthly payments from a few lenders, and weigh the long-term cost of mortgage insurance before you decide. This is general information, not personalized financial advice — confirm the details with a licensed loan officer for your situation.
