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Difference Between FHA and Conventional Loans

Are you looking to buy a house but don’t have all the money upfront? That’s where a mortgage comes in. It’s like a loan to help you finance the purchase. Instead of paying the whole price at once, you pay back the loan over time in smaller, manageable chunks. Now, there are various types of mortgages available, with FHA loans and conventional loans being two excellent options.

Let’s simplify it for you. We break down the key differences between FHA and conventional loans to assist you in making an informed decision.

What is an FHA loan?

An FHA loan is a special kind of mortgage backed by the U.S. government through the Federal Housing Administration. It makes it easier for people with limited funds or lower credit scores to buy a home. The best thing is FHA loans require a lower minimum down payment than other conventional loans.

If your credit score is at least 580, you can borrow up to 96.5% of a home’s value with an FHA loan, as of 2022. This means you only need a 3.5% down payment. For credit scores between 500 and 579, an FHA loan is still possible with a 10% down payment.

In an FHA loan, a bank or approved financial institution issues the loan, not the FHA directly. The FHA guarantees the loan, making it easier to get bank approval since the bank isn’t taking on the default risk. Some call it an FHA-insured loan for this reason.

What is a conventional loan?

A conventional mortgage is a homebuyer’s loan from a private lender. Unlike an FHA loan, you usually need a better credit score for a conventional loan.

Conventional loans aren’t backed by the government. Instead, they come from private lenders like banks, credit unions, and mortgage companies. Yet, some conventional mortgages can be backed by government-sponsored groups like the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac). 

These loans are often ideal for those with a solid financial standing and the ability to manage a larger upfront payment. You must have a lower debt-to-income ratio and a higher credit score to qualify for this loan.

Difference between FHA and Conventional Loans

Credit Score

FHA loans are often more lenient and allow borrowers with lower credit scores to qualify. You might get the nod with a credit score as low as 500, but a score of 580 is preferable. Many lenders demand a minimum credit score of 580 for an FHA loan.

Generally, conventional loans require a higher credit score. You need a credit score of 620 or higher to be qualified for a conventional loan.

Minimum Down Payment

FHA loans are known for their friendliness in this department. You could be looking at a down payment as low as 3.5% if you have a credit score of 580 or higher. However, you have to pay 10% if your credit score is in the range of 500 to 579.

Conventional loans often demand a more substantial down payment, usually around 5%. Some lenders offer a minimum down payment of at least 3% for first-time homebuyers.

Debt-to-Income Ratio

The debt-to-income ratio is like a financial health check. It’s the percentage of your monthly income that goes towards paying debts. The lower, the better—it means you have more money to cover everyday expenses and save.

FHA loans may be more forgiving when it comes to your debt-to-income ratio. You can qualify for an FHA loan with a DTI ratio of 50% or less, but some lenders may demand over 50%. Conventional loans typically require a DTI of 36% or less in most cases.

Mortgage Insurance

FHA loans often come with mortgage insurance, both upfront and as part of your monthly payments. If you throw down 10% or more, you’re in for these premiums for 11 years. Drop below that 10%, and you’re stuck with these premium payments for the whole mortgage.

When it comes to conventional loans, you have to pay private mortgage insurance (PMI) if your down payment is less than 20%. You can request your lender to drop the PMI when your mortgage balance hits 80% of your home’s original value. This value is based on what you paid for the home or its appraised value when you bought it.

Loan Limit

Both conventional and FHA loans have a cap on the amount you can borrow, and these maximum loan sizes differ from one county to another. In 2024, the FHA loan limit stands at $498,257 in low-cost areas and rises to $1,149,825 in pricier markets.

Conventional loans adhere to the conforming loan limit established by the Federal Housing Finance Agency. In 2024, the loan limit is $766,550 for most areas in the U.S. If your mortgage exceeds this threshold, it falls into the category of jumbo loans, which come with stricter underwriting standards.

FHA Loans vs. Conventional Loans: Comparison Chart


If you have a lower credit score, limited savings for a down payment, or a higher DTI ratio, an FHA loan might be the best option for you. However, if you have a strong credit score, a healthy down payment, and a low DTI ratio, a conventional loan might offer you lower interest rates and lower closing costs. Also, FHA loan limits vary by location, while conventional loan limits are the same nationwide. Remember, the best loan for you depends on your individual financial situation and goals.


What is the difference between a conventional and a FHA loan?

  • FHA: Easier to qualify for with lower credit scores and smaller down payments (3.5%). Government-backed, so lenders take less risk. Requires mortgage insurance. 
  • Conventional: Harder to qualify for, needing higher credit scores and down payments (typically 20%). No government backing, potentially lower interest rates, and closing costs.

Can you turn a FHA loan into a conventional loan?

Yes, it is possible to refinance an FHA loan into a conventional loan. This process is known as an FHA to conventional refinance.

Is a conventional mortgage better?

It depends on your situation. Conventional is “better” for those with strong finances and lower interest rates.

What is the difference between a conventional and non-conventional mortgage?

Conventional loans conform to specific standards set by Fannie Mae and Freddie Mac. Non-conforming loans exceed those limits or have other differences. They might offer more options but could have higher interest rates.

Why would someone switch from conventional to FHA?

It is rare but possible if your financial situation changes and you need easier repayment terms. It’s not ideal due to extra fees and paperwork.

Why is a conventional loan better?

Conventional loans lower interest rates and closing costs, and there is no mortgage insurance after reaching 20% equity.

What are the disadvantages of a conventional loan?

  • Harder to qualify for.
  • Higher upfront costs (down payment and closing costs).
  • Potential for PMI payments.

Who should use a conventional loan?

Individuals with a strong credit score and income can opt for a conventional loan. 

Which mortgage type is best?

There is no one-size-fits-all type when it comes to choosing the right mortgage. It depends on your individual needs and financial situation.

What do I do when the interest rate goes up?

Reassess your budget and adjust spending to accommodate higher payments. Consider refinancing if rates drop significantly. Consult a financial advisor for personalized advice.

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References :

[0]Image credit: https://www.canva.com/photos/MADCRf-7U7o-paper-with-words-fha-loan-on-a-wooden-background-/

[1]Image credit: https://www.canva.com/photos/MADwOmOspaI-manager-holds-conventional-loan-agreement-form-/

[2]Green, Dan. “Conventional Loan vs. FHA Loan: 2024 Rates and Guidelines.” The Mortgage Reports, 16 Jan. 2024, themortgagereports.com/17168/fha-conventional-97-low-downpayment-comparison#fha.

[3]Kielar, Hanna. “FHA Vs. Conventional Loans: Definition And Differences.” Rocket Mortgage, 22 Apr. 2023, www.rocketmortgage.com/learn/fha-vs-conventional.

[4]Bundrick, Hal M. and Kate Wood. “FHA vs. Conventional Loans: Pros, Cons and Differences.” NerdWallet, 19 Dec. 2023, www.nerdwallet.com/article/mortgages/fha-loan-vs-conventional-mortgage.

[5]Folger, Jean. “FHA Loans vs. Conventional Loans: What’s the Difference?” Investopedia, 20 May 2023, www.investopedia.com/ask/answers/082616/whats-difference-between-fha-and-conventional-loans.asp.

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