FHA vs. Conventional Loan: Which Mortgage Fits You?

Short answer: FHA vs. conventional comes down to credit, down payment and mortgage insurance. An FHA loan is insured by the federal government, allows down payments as low as 3.5% and accepts lower credit scores, but it typically charges an upfront mortgage insurance premium and an annual premium that can last as long as the loan. A conventional loan isn't part of a government program; the CFPB says it typically costs less but can be harder to get, and its private mortgage insurance (PMI) can be removed once you build enough equity.

What Is the Difference Between an FHA Loan and a Conventional Loan?

The Consumer Financial Protection Bureau (CFPB) explains that FHA loans are made by private lenders and are regulated and insured by the Federal Housing Administration, a government agency that is part of the Department of Housing and Urban Development (HUD). Mortgage insurance is required on all FHA loans. A conventional loan, the CFPB says, is simply one that "is not part of a specific government program." Conventional loans that follow Fannie Mae and Freddie Mac rules and stay under the government-set maximum are called conforming loans.

	FHA loan	Conventional loan
Who backs it	Insured by FHA (HUD)	No government program; conforming loans follow Fannie Mae and Freddie Mac rules
Minimum down payment	3.5% with a 580+ credit score; 10% with 500–579	The CFPB says less than 20% down typically means you need mortgage insurance
Credit scores	FHA rules allow scores as low as 500	The CFPB says FHA allows lower scores than most conventional loans
Mortgage insurance	Required on all FHA loans; most pay 1.75% upfront plus an annual premium	Typically required if you put down less than 20%
Removing mortgage insurance	Annual premium lasts 11 years or the full loan term, depending on down payment	Can be canceled at 80% of original value; ends automatically at 78%
2026 one-unit loan limit	$541,287 to $1,249,125 in most areas, depending on the county; higher in Alaska, Hawaii, Guam and the U.S. Virgin Islands	$832,750 baseline; up to $1,249,125 in high-cost areas

What Is an FHA Loan?

An FHA loan is a mortgage made by a private lender and insured by FHA. The CFPB says FHA loans allow down payments as low as 3.5 percent and lower credit scores than most conventional loans. The tradeoff: mortgage insurance is required on every FHA loan, no matter how much you put down, and FHA has a maximum loan amount that varies by county.

What Are the FHA Down Payment and Credit Score Requirements?

FHA's credit score floors date to a 2010 HUD notice in the Federal Register that set two tiers:

1. Credit score of 580 or higher. You're eligible for FHA's maximum financing, which the notice says is typically 96.5% of the price for a purchase. That's a 3.5% down payment.
2. Credit score of 500 to 579. Financing is limited to 90% of the price, so you'd need 10% down.
3. Credit score below 500. You aren't eligible for FHA financing.

These are FHA's minimums. A lender can add its own stricter requirements, so it's worth asking each lender you talk to what score it accepts. If your credit needs work before you apply, our guide on how to rebuild credit covers the basics.

How Does FHA Mortgage Insurance (MIP) Compare With PMI?

Both add to your cost of borrowing, but they work differently.

FHA mortgage insurance premium (MIP). HUD Mortgagee Letter 2023-05, effective for loans endorsed on or after March 20, 2023, set FHA's current premiums. Most FHA loans pay an upfront premium of 1.75% of the base loan amount (the letter lists a few exceptions, such as certain older streamline refinances). Then there's an annual premium, paid in monthly installments. For loans longer than 15 years with a base loan amount of $726,200 or less, the annual rates are:

• 0.50% if your loan-to-value ratio (LTV) is 95% or less (at least 5% down)
• 0.55% if your LTV is above 95% (less than 5% down)

Larger loans and loans of 15 years or less have different rates in the same letter, from 0.15% to 0.75%.

Hypothetical example. Say you buy a $300,000 home with 3.5% down, so your base loan is $289,500. The upfront premium is 1.75% of that, or $5,066.25. At the 0.55% annual rate, the first year's annual premium works out to roughly $1,592, or about $133 a month. These figures are for illustration only; your lender's disclosures show your actual costs.

Private mortgage insurance (PMI). On a conventional loan, the CFPB says you'll typically need mortgage insurance if your down payment is less than 20%. Our guide to what PMI is explains how it's priced and paid.

Can You Remove FHA Mortgage Insurance?

Sometimes, and this is one of the biggest differences between the two loans. Under Mortgagee Letter 2023-05, how long you pay FHA's annual premium depends on your LTV when the loan starts:

• LTV of 90% or less (10% or more down): the annual premium lasts 11 years.
• LTV above 90% (less than 10% down): the annual premium lasts for the full mortgage term.

So if you put down the 3.5% minimum, you'd pay the annual premium for as long as you have that FHA loan. If you later weigh replacing the loan, our guide on when to refinance covers the costs to compare.

Conventional PMI is easier to drop. For loans on a primary home that closed on or after July 29, 1999, the CFPB explains the federal rules:

• At 80%, you can ask. Your servicer must cancel PMI at your written request once your balance reaches 80% of the home's original value, if you're current on payments, have a good payment history, have no junior liens and can show the home's value hasn't dropped below its original value. "Original value" generally means the lower of the sales price or the appraised value.
• At 78%, it ends automatically. Your servicer must end PMI on the date your balance is scheduled to reach 78% of the original value, as long as you're current.
• At the midpoint, it ends regardless. PMI must end the month after you reach the halfway point of your loan's original term (15 years on a 30-year loan).

The CFPB also says you can ask to cancel PMI ahead of schedule if extra payments bring your balance to 80% of the original value. The CFPB notes that FHA and VA loans have different requirements, so these rules don't apply to them. Our guide on paying off your mortgage faster covers ways to make extra payments.

What Are the Loan Limits for 2026?

Both loan types cap how much you can borrow, and the caps are set each year.

Conventional (conforming) limits. The Federal Housing Finance Agency (FHFA) set the 2026 baseline conforming loan limit for a one-unit property at $832,750, up $26,250 from 2025. In high-cost areas, the limit can reach $1,249,125, which is 150% of the baseline. Alaska, Hawaii, Guam and the U.S. Virgin Islands have a baseline of $1,249,125.

FHA limits. For FHA case numbers assigned on or after January 1, 2026, HUD set the one-unit limit at $541,287 in low-cost areas and $1,249,125 in high-cost areas. HUD adjusts limits higher in Alaska, Hawaii, Guam and the U.S. Virgin Islands to account for higher construction costs, and HUD's announcement says the limits are tied to the national conforming loan limit.

If you're buying in 2027, check FHFA and HUD for the new limits once they're announced.

Which Is Better: FHA or Conventional?

It depends on your credit, your savings and how long you plan to keep the loan. The CFPB puts it this way: "For borrowers with good credit and a medium (10-15 percent) down payment, FHA loans tend to be more expensive than conventional loans. For borrowers with lower credit scores or a smaller down payment, FHA loans can often be the cheapest option." It adds that there are no hard-and-fast rules and a lot depends on the current market.

Questions that help sort it out:

• What's your credit score? The CFPB says FHA allows lower credit scores than most conventional loans. FHA's floors are 580 for 3.5% down and 500 for 10% down.
• How much can you put down? The CFPB says a conventional loan with less than 20% down typically needs mortgage insurance. If that's you, compare FHA's MIP with the PMI quotes you get.
• How long will you keep the loan? With less than 10% down, FHA's annual premium lasts the life of the loan, while PMI ends once you reach the equity thresholds above.
• How much are you borrowing? Make sure the amount fits under your county's limit for the loan type you choose.
• Will you still have cash left after closing? A smaller down payment can leave room for an emergency fund, which matters when you own a home.

The CFPB's advice is to ask lenders for quotes on both options and compare total costs. Our mortgage payment calculator can help you estimate what each monthly payment might look like.

The Bottom Line

An FHA loan can open the door to homeownership with a 3.5% down payment and a credit score as low as 580, but most borrowers pay a 1.75% upfront premium and an annual premium that lasts the life of the loan if you put down less than 10%. A conventional loan is typically cheaper for borrowers with good credit and a larger down payment, and its PMI goes away as you build equity. Get quotes for both, compare the total cost over the time you expect to keep the loan, and borrow only what you're confident you can repay.

This article is general education, not individualized financial, tax or legal advice.

Frequently asked questions

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

Who backs it. FHA loans are made by private lenders and are regulated and insured by the Federal Housing Administration, a government agency. The CFPB says they allow down payments as low as 3.5 percent and lower credit scores than most conventional loans. A conventional loan isn't part of a specific government program. The two also differ in down payment rules, mortgage insurance and loan limits.

Is an FHA loan or a conventional loan better?

Neither is better for everyone. The CFPB says that for borrowers with good credit and a 10 to 15 percent down payment, FHA loans tend to be more expensive than conventional loans, while for borrowers with lower credit scores or a smaller down payment, FHA loans can often be the cheapest option. It suggests asking lenders for quotes on both and comparing total costs.

What credit score do you need for an FHA loan?

Under FHA rules set in 2010, borrowers with a credit score of 580 or higher can get maximum financing, typically 96.5% of the purchase price (3.5% down). Scores from 500 to 579 are limited to 90% financing (10% down), and scores below 500 aren't eligible. Individual lenders can set their own, higher minimums.

Can you remove FHA mortgage insurance?

It depends on your down payment. Under HUD Mortgagee Letter 2023-05, the annual premium on most FHA purchase loans lasts 11 years if the loan-to-value ratio is 90% or less (10% or more down), and for the full mortgage term if it's higher. The federal PMI cancellation rules don't apply to FHA loans; the CFPB says to contact your servicer about FHA mortgage insurance.

What is the conventional loan limit for 2026?

FHFA set the 2026 baseline conforming loan limit for one-unit properties at $832,750 in most of the U.S., with a ceiling of $1,249,125 in high-cost areas.

Sources

1. CFPB: FHA Loans (Owning a Home)
2. CFPB: When Can I Remove Private Mortgage Insurance (PMI) From My Loan?
3. HUD: Mortgagee Letter 2023-05, Reduction of FHA Annual Mortgage Insurance Premium Rates
4. HUD: FHA Announces 2026 Loan Limits
5. FHFA: Conforming Loan Limit Values for 2026

This guide is general information, not personal advice. Your situation may differ, so consider talking with a qualified professional, such as a fiduciary financial adviser, CPA or licensed agent, before making a decision.