Last updated: September 2026. This guide compares conventional and FHA mortgages in the United States, including 2026 loan limits. It is educational content, not financial advice.
If you are buying a home in the US with less than 20% down, you will probably choose between two loan types: a conventional loan or an FHA loan. Both allow small down payments, but they differ in credit requirements, mortgage insurance, loan limits and long term cost.
The right choice depends mostly on your credit score and down payment. In this guide we compare the two side by side, run the numbers for different borrowers, explain how mortgage insurance works on each and help you decide which loan fits your situation.
The Short Answer
- Choose a conventional loan if your credit score is around 700 or higher, because you will usually pay less in mortgage insurance and can remove it later.
- Choose an FHA loan if your score is below about 680, you have a higher debt to income ratio or you need more flexible approval rules.
- Compare both if your score is in the high 600s, because the cheaper option depends on your exact rate and insurance quotes.
What Is a Conventional Loan?
A conventional loan is any mortgage not insured or guaranteed by a government agency. Most conventional loans are conforming loans, which follow rules set by Fannie Mae and Freddie Mac. For 2026, the conforming loan limit for a one unit home is $832,750 in most of the country, and higher in high cost areas.
Conventional loans are available from banks, credit unions and mortgage companies, with down payments from 3% for eligible first time buyers.
What Is an FHA Loan?
An FHA loan is insured by the Federal Housing Administration, part of the Department of Housing and Urban Development (HUD). The government insurance protects lenders if a borrower defaults, which allows them to accept lower credit scores and higher debt levels.
FHA loans require a down payment of 3.5% with a credit score of 580 or higher, or 10% with a score between 500 and 579. For 2026, FHA loan limits for a one unit home range from $541,287 in most areas to $1,249,125 in high cost areas.
Conventional vs FHA at a Glance
| Feature | Conventional loan | FHA loan |
|---|---|---|
| Minimum down payment | 3% for eligible first time buyers; 5% for many others | 3.5% (score 580+); 10% (score 500 to 579) |
| Minimum credit score | Often 620 at most lenders | 580, or 500 with 10% down |
| Mortgage insurance | PMI if down payment is under 20% | Upfront MIP (1.75%) plus annual MIP (usually 0.55%) |
| Removing mortgage insurance | Can be cancelled at 20% equity; ends automatically at 22% | Lasts for the life of the loan with under 10% down; 11 years with 10% or more |
| Effect of credit score on cost | Large; rates and PMI rise as scores fall | Smaller; pricing is less sensitive to credit |
| Debt to income ratio | Usually up to 45%, sometimes 50% | Often up to 50% or more with strong compensating factors |
| 2026 loan limits (one unit) | $832,750 in most areas | $541,287 to $1,249,125 depending on area |
| Property types | Primary homes, second homes and investment properties | Primary residence only |
| Property standards | Standard appraisal | Stricter FHA appraisal and property standards |
| Waiting period after bankruptcy | Usually 4 years (Chapter 7) | Usually 2 years (Chapter 7) |
| Waiting period after foreclosure | Usually 7 years | Usually 3 years |
A Change to Conventional Credit Rules
In November 2025, Fannie Mae removed the 620 minimum credit score for loans approved through its Desktop Underwriter system, replacing it with a broader assessment of the whole application. Many lenders still apply their own 620 minimum, but some borrowers with lower scores and strong finances may now qualify for conventional loans. Ask each lender about its policy.
How Mortgage Insurance Works
Mortgage insurance is usually the biggest cost difference between the two loans.
Conventional loans: PMI
If you put down less than 20%, you will usually pay private mortgage insurance (PMI). The cost depends heavily on your credit score and down payment, and often ranges from around 0.3% to 1.5% of the loan amount a year.
The big advantage is that PMI is not permanent. You can ask to cancel it once your loan balance reaches 80% of the home’s original value, and it ends automatically at 78%, as long as you are current on payments.
FHA loans: MIP
FHA loans have two types of mortgage insurance premium:
- Upfront MIP: 1.75% of the base loan amount, usually added to the loan.
- Annual MIP: usually 0.55% a year for most borrowers, paid monthly.
FHA pricing does not change with your credit score, which is why FHA loans are often cheaper for borrowers with lower scores. But with less than 10% down, annual MIP lasts for the life of the loan. The main way to remove it is to refinance into a conventional loan.
Running the Numbers: Three Borrowers
Let’s compare the monthly cost of buying a $350,000 home with a 30 year fixed loan. Rates are illustrative and reflect typical pricing in September 2026, when the national average 30 year fixed rate was 7.03%.
Borrower A: FHA loan, 3.5% down
| Item | Amount |
|---|---|
| Down payment | $12,250 |
| Base loan | $337,750 |
| Upfront MIP (1.75%, financed) | $5,911 |
| Total loan | $343,661 |
| Rate | 6.75% |
| Principal and interest | $2,229 |
| Annual MIP (0.55%) | $155 a month |
| Monthly total | $2,384 |
Borrower B: Conventional loan, 5% down, 640 credit score
| Item | Amount |
|---|---|
| Down payment | $17,500 |
| Loan | $332,500 |
| Rate | 7.125% |
| Principal and interest | $2,240 |
| PMI (about 1.1% a year) | $305 a month |
| Monthly total | $2,545 |
Borrower C: Conventional loan, 5% down, 740 credit score
| Item | Amount |
|---|---|
| Down payment | $17,500 |
| Loan | $332,500 |
| Rate | 6.95% |
| Principal and interest | $2,201 |
| PMI (about 0.45% a year) | $125 a month |
| Monthly total | $2,326 |
Payments exclude property taxes and homeowners insurance. Illustrative figures only; your rate and insurance will depend on your lender and profile.
What the numbers show
| FHA (any score) | Conventional (640) | Conventional (740) | |
|---|---|---|---|
| Monthly payment | $2,384 | $2,545 | $2,326 |
| Total paid over 5 years | about $143,000 | about $152,700 | about $139,500 |
| Loan balance after 5 years | about $322,600 | about $313,400 | about $312,800 |
| When mortgage insurance ends | Never, unless you refinance | About 12 years (78% of original value) | About 12 years (78% of original value) |
- With a 640 score, FHA is cheaper each month. Borrower A pays about $161 less than Borrower B, mainly because FHA insurance does not rise for lower credit scores.
- With a 740 score, conventional wins. Borrower C pays about $58 less each month than an FHA borrower and can remove PMI later, so the gap widens over time.
- Conventional builds equity faster. The conventional borrowers start with a larger down payment and no upfront fee added to the loan, so they owe less after five years.
- Home price growth can help. If your home rises in value, you may be able to remove PMI earlier by getting a new appraisal, which helps conventional borrowers even more.
When an FHA Loan Makes Sense
- Your credit score is below about 680.
- You have a recent bankruptcy or foreclosure, and the shorter FHA waiting periods help.
- Your debt to income ratio is high.
- You have a small down payment and a lower score.
- You plan to refinance later once your credit and equity improve.
Our full guide to FHA loan requirements explains every FHA rule, from credit and down payment to property standards.
When a Conventional Loan Makes Sense
- Your credit score is around 700 or higher.
- You can put down 5% or more, or qualify for a 3% down program.
- You want to remove mortgage insurance in the future.
- You are buying a second home or investment property.
- The home is more expensive than the FHA limit in your area.
- The home needs repairs that might not pass an FHA appraisal.
Upfront Costs Compared
The down payment is not the only cash you need at closing. Here is a rough comparison for the $350,000 home in our example:
| Upfront cost | FHA (3.5% down) | Conventional (5% down) |
|---|---|---|
| Down payment | $12,250 | $17,500 |
| Upfront mortgage insurance | $5,911, usually financed | None |
| Typical closing costs (2% to 5%) | about $7,000 to $17,500 | about $7,000 to $17,500 |
FHA needs less cash upfront, but the financed upfront premium means you start with a larger loan balance and pay interest on it for as long as you keep the loan.
Refinancing From FHA to Conventional Later
Many FHA borrowers plan to refinance into a conventional loan once their credit improves and they reach about 20% equity, which removes mortgage insurance entirely. Using our example, if Borrower A refinanced and dropped the $155 monthly MIP, they would save about $1,860 a year, before considering any change in rate.
Whether this works depends on rates at the time. If rates are higher when you want to refinance, the saving on mortgage insurance may not outweigh a higher interest rate and new closing costs. Do not buy with an FHA loan counting on a future refinance that may not be worthwhile.
Loan Limits in High Cost Areas
Loan limits can decide the question for you. In most of the country, conventional conforming loans go up to $832,750 in 2026, while the standard FHA limit is $541,287. If you are buying a home above the FHA limit for your county, a conventional loan, or a jumbo loan above the conforming limit, may be your only option. In high cost areas, both limits are higher, so check the figures for your county.
Other Differences to Consider
Property condition
FHA appraisals check that the home meets HUD’s minimum property standards for safety, security and soundness. Issues such as peeling paint in older homes, broken systems or safety hazards may need to be fixed before closing, which can complicate the purchase of homes that need work.
Seller concessions
Both loans allow sellers to contribute toward closing costs. FHA allows up to 6% of the price. Conventional limits range from 3% to 9%, depending on your down payment and the type of property.
Competing offers
In competitive markets, some sellers prefer buyers using conventional loans, because they see FHA appraisal requirements as a potential delay. A strong preapproval and a responsive lender can help either type of buyer compete.
Assumability
FHA loans can often be assumed by a qualified buyer when you sell, which can be an attraction if your rate is lower than market rates at the time. Most conventional loans are not assumable.
How to Decide
- Check your credit score. It is the most important factor in this decision.
- Get quotes for both loans from at least three lenders.
- Compare the total monthly payment, including mortgage insurance.
- Look at the long term. Consider how long you expect to keep the loan and whether you could remove PMI.
- Compare the Loan Estimates line by line, including fees and upfront costs.
Frequently Asked Questions
Is an FHA loan easier to get than a conventional loan?
Generally, yes. FHA loans accept lower credit scores, higher debt levels and shorter waiting periods after major credit events.
Are FHA interest rates lower than conventional rates?
FHA rates are often slightly lower, especially for borrowers with lower credit scores. But FHA mortgage insurance can make the overall cost higher, particularly for borrowers with strong credit.
Can I switch from FHA to conventional later?
Yes. Many borrowers refinance from an FHA loan into a conventional loan once they have about 20% equity, which removes mortgage insurance. Whether it makes sense depends on the rates available at the time.
Which is better for first time buyers?
It depends on credit and savings. First time buyers with good credit often save money with a conventional 3% down program, while those with lower scores may find FHA more affordable.
Can I use an FHA loan for an investment property?
No. FHA loans are for primary residences only, although you can buy a two to four unit property with an FHA loan if you live in one of the units.
Do FHA and conventional loans have different closing costs?
Standard closing costs, such as lender fees, title insurance and appraisal fees, are similar. The main difference is FHA’s upfront mortgage insurance premium of 1.75%, which conventional loans do not have.
The Bottom Line
Conventional and FHA loans both make homeownership possible with a small down payment. FHA loans are usually better for borrowers with credit scores below about 680 or higher debts, thanks to flexible rules and insurance that does not rise for lower scores. Conventional loans are usually cheaper for borrowers with good credit, and their mortgage insurance can be removed once you build enough equity.
The best way to decide is to get quotes for both from several lenders and compare the full monthly cost, not just the rate.
Disclaimer: This article is for general educational purposes only and does not constitute financial advice. Loan limits, mortgage insurance premiums and credit rules are set by HUD, Fannie Mae, Freddie Mac and individual lenders and may change. Examples are illustrative. Always confirm current terms with a licensed lender.