FHA vs. Conventional Loans: What’s the Difference?

What Is an FHA Loan?

FHA loans are mortgages backed by the U.S. government, specifically the Federal Housing Administration. Anyone who qualifies can take out an FHA loan, but they are especially attractive to buyers with lower credit scores and smaller down payments because they're easier to qualify for than conventional loans.

Learn more: The Different Types of FHA Loans

What Is a Conventional Loan?

Conventional loans, known as traditional mortgages, aren't backed by a government agency. As a result, they're more difficult to qualify for and generally have stricter credit and down payment requirements than FHA loans.

Conventional loans can either be conforming or non-conforming. Conforming loans are guaranteed by Fannie Mae or Freddie Mac and must adhere to certain guidelines. Non-conforming loans aren't guaranteed by Fannie Mae or Freddie Mac; loan criteria are determined by individual lenders.

FHA Loans vs. Conventional Loans: What's the Difference?

FHA loans and conventional loans are provided by mortgage lenders and require an application that outlines the buyer's credit and financial picture so they can determine eligibility. Specific requirements vary, however.

Credit Scores

Lenders use credit scores to help predict how likely a potential borrower is to repay their loan on time. No matter what type of loan you apply for, people with higher scores typically qualify for lower rates than people with lower scores because they represent less of a risk to the lender. However, minimum credit criteria vary by loan type.

• FHA Loans: FHA loans have less stringent credit criteria than conventional loans because they're backed by the government, which reduces the risk for lenders. FHA guidelines require borrowers to have minimum credit scores of 500 if they have a down payment of at least 10% and 580 if they have a down payment of at least 3%.

  Ultimately, lenders establish their own credit criteria and may require borrowers to have higher credit scores than those established by the FHA.

• Conventional Loans: Lenders are generally willing to assume less risk for conventional loans because they're not backed by the government. You typically need credit scores of at least 620 to qualify for a conventional loan, and having higher scores generally improves your chances of qualifying.

Down Payment

There are good reasons for having a sizable down payment. It can improve your chances of qualifying, help you get a lower rate and make your monthly payments more affordable. But not everyone has the ability to save up the often recommended 20% while also covering their routine expenses. Fortunately, you don't need a 20% down payment to buy a home. Here's what you do need.

• FHA Loans: Minimum down payment requirements vary based on credit scores. Borrowers with scores of 500 to 579 need at least 10% of the home's purchase price, and those with scores of 580 or higher may be able to qualify with a down payment as low as 3.5%.
• Conventional Loans: You may be able to get a conventional loan with a down payment as low as 3%. However, you're more likely to need at least 5%.

Debt-to-Income Ratio

Your debt-to-income ratio (DTI) is a comparison of your monthly debt payments to your monthly income. Lenders review your DTI to determine whether you have the capacity to take on additional debt without stretching your budget too thin. Here's how requirements stack up for FHA and conventional loans.

• FHA Loans: To qualify for an FHA loan, your total DTI typically must be 43% or less. However, lenders usually limit mortgage-related expenses such as principal, property taxes and homeowner's insurance to 31% of your income. You may be able to qualify with a higher DTI in certain situations.
• Conventional Loans: Lenders usually require a DTI of 36% or less to qualify for a conventional loan. However, borrowers may qualify with a DTI of up to 45% if they meet certain credit requirements and have enough cash reserves.

Loan Limits

A loan limit is the maximum amount you can borrow. Limits are put in place to protect borrowers from getting loans they can't afford to repay and minimize risk to lenders. Limits vary based on the type of loan you get.

• FHA Loans: For 2025, the standard FHA loan limit is $524,225 and applies to most of the country. However, high-cost areas have an increased limit of $1,209,750; Alaska and Hawaii have a limit of $1,814,625; and some places have limits in between.
• Conventional Loans: The standard conforming conventional loan limit for 2025 is $806,500. The limit in high cost areas is $1,209,750, and in Alaska and Hawaii, the limit is $1,814,625. Conventional non-conforming loan limits vary by lender.

Interest Rates

Lenders review many factors when determining a borrower's interest rate, including their credit profile, loan amount, down payment and loan term. The type of loan may also play a role in your interest rate. Here's how:

• FHA Loans: FHA loans tend to have slightly lower interest rates than conventional loans due their government backing, especially for borrowers with lower credit scores and down payments.
• Conventional Loans: Conventional loans may have higher interest rates than FHA loans, but they usually have a lower total cost for borrowers with a 10% to 15% down payment and good credit. For that reason, it's important to compare the total cost of potential loan offers and not just their interest rates.

Mortgage Insurance

Mortgage insurance helps protect lenders if you're unable to make your payments; it won't protect you if you run into financial difficulty. Whether you need mortgage insurance varies by loan type and down payment amount.

• FHA Loans: Mortgage insurance is required on all FHA loans. Borrowers must pay an upfront fee at closing (typically 1.75% of the loan amount) and make monthly mortgage insurance payments totaling 0.15% to 0.75% of the loan amount annually. Ongoing payments are determined based on your loan amount, down payment and loan term.

  If you put 10% or more down when you take out the loan, you can stop paying for mortgage insurance after 11 years. Borrowers with smaller down payments must have mortgage insurance for the entire loan term.

• Conventional Loans: Lenders don't require borrowers to maintain mortgage insurance on all conventional loans, only those with a loan-to-value (LTV) ratio of more than 80%. In other words, you only need it if you put less than 20% down, and you can cancel it once you've accumulated more than 20% equity in your property.

  The cost of mortgage insurance on a conventional loan generally ranges from 0.5% to 1.5% of the original loan amount each year. Payments are typically rolled into your monthly mortgage payment.

Should You Get an FHA Loan or a Conventional Loan?

The type of loan that's right for you varies based on your individual situation. Getting an FHA loan may make sense if:

• You're a first-time homebuyer. With less stringent credit requirements and low down payments, an FHA loan may be a good option for first-time buyers who may not have a lengthy credit history or a significant sum of cash in the bank.
• You have limited savings. With down payment requirements as low as 3.5%, FHA loans may make sense for would-be homeowners who don't have a lot of cash set aside, regardless of whether they've previously owned a home.
• You have lower credit scores. The FHA loan program's lenient credit criteria make it worth exploring if your credit history is less than stellar.

However, FHA loans aren't right for everyone. A conventional loan might be a better option if:

• You have good credit. You may receive more favorable terms with a conventional loan if you have a good credit score.
• You want to be able to cancel mortgage insurance. If you don't want mortgage insurance payments hanging over your head for the entire life of the loan, a conventional mortgage may be a better choice.
• You have a sizable down payment. Conventional loans tend to be cheaper than FHA loans if you can put at least 10% to 15% down and have good credit.

How to Get a Mortgage

Getting a mortgage can be a somewhat lengthy process. Here is a basic overview of the steps you'll need to take.

1. Check your credit. Before starting the application process, check your credit reports and scores. You can check your credit reports from all three consumer credit bureaus (Experian, TransUnion and Equifax) for free once a week at AnnualCreditReport.com or for free from Experian anytime.
2. Save for a down payment. For the vast majority of loans, you'll likely need a down payment. Start saving as soon as possible so you have the cash you need when you're ready to make an offer.
3. Compare rates. Shop around and get quotes from multiple lenders before you start your housing search. Having an idea of the interest rate and loan amount you may qualify for can help you set a reasonable budget for your home.
4. Get preapproved. Getting preapproved shows sellers that you're serious about buying and can secure the financing you need, which may improve your chances of having your offer accepted.
5. Make an offer. Once you find the home of your dreams, send in your offer.
6. Submit your application. If your offer is accepted, submit a formal loan application, which will generate a hard credit inquiry that may temporarily lower your credit scores by a few points.
7. Close on the loan. Closing typically takes about 30 to 60 days from the time your offer is accepted. Ensure you've got your closing costs together and have met all other lender requirements.

Frequently Asked Questions

Conventional vs. FHA: Which Is Right for Me?

The type of home loan that's best for you depends on multiple factors, including your credit profile, down payment and loan amount. If you're ready to take the next step, getting preapproved can help you determine your chances of qualifying and what rate you might receive, so you can decide which loan type is the best option for you.