The core difference
FHA loans are insured by the Federal Housing Administration and designed for buyers with lower credit scores or smaller down payments. Conventional loans are not government-backed — they meet standards set by Fannie Mae and Freddie Mac and are funded by private lenders. Both can be used to buy a primary residence, but they serve different borrower profiles and carry meaningfully different costs over the life of the loan.
The choice is rarely obvious upfront. FHA minimum program standards can accommodate some borrowers who do not fit conventional requirements, but lender overlays still apply. FHA annual MIP generally lasts for the mortgage term when original LTV exceeds 90%, while eligible conventional PMI can be cancelled under federal and investor rules. Compare complete offers rather than one headline rate.
Side-by-side comparison
| Factor | FHA loan | Conventional loan |
|---|---|---|
| Min. down payment | 3.5% (580+ score) 10% (500–579) | 3% (first-time buyer programs) 5% standard |
| Credit framework | HUD permits 500–579 with at least 10% down and 580+ with 3.5%; lender overlays may be higher | Investor and lender requirements apply; pricing changes with the complete borrower profile |
| Mortgage insurance | Upfront MIP + annual MIP Permanent if <10% down | PMI only if <20% down Cancellable at 80% LTV |
| Debt-to-income assessment | Manual or automated underwriting and lender rules | Automated/manual underwriting and lender rules; no universal 43% ceiling |
| One-unit limits (2026) | $541,287 floor $1,249,125 ceiling | $832,750 baseline $1,249,125 ceiling |
| Property condition | Strict appraisal standards — must meet HUD minimum property requirements | Standard appraisal only |
| Occupancy | Principal residence; qualifying 2–4 unit owner-occupied properties are possible | Primary, second-home, and investment options depend on product and underwriting |
MIP vs PMI — the hidden cost gap
The structures are different. For many eligible conventional mortgages, borrowers may request PMI cancellation at 80% of original value and automatic termination generally occurs at 78% if statutory conditions are met. FHA charges upfront and annual MIP; annual MIP rate and duration depend on term, base loan amount, and original LTV.
(rolled into loan)
Conventional: cancellation rules apply
FHA upfront MIP can be financed, which increases the balance and interest paid. Conventional PMI is individually priced, so the example's 0.45% is only an illustration. Compare APR, cash to close, monthly payment, insurance duration, and expected holding period using quotes issued on the same day.
How borrower factors shift the equation
Credit score matters, but it is not a live rate card. Lenders price and underwrite using the complete file, including LTV, property, occupancy, reserves, debts, points, credits, and market conditions. FHA insurance pricing is program-based, while the lender's note rate and overlays can still differ. Conventional rate and PMI pricing are also risk-based.
| Factor | FHA effect | Conventional effect | What to compare |
|---|---|---|---|
| Lower credit profile | Program minimums may be more accommodating | Approval or pricing can be less favorable | Actual approval and APR |
| Higher credit profile | MIP schedule remains program-based | Rate and PMI can improve | Total insurance cost |
| Small down payment | 3.5% may be permitted at 580+ | Some 3% products have eligibility rules | Cash to close and reserves |
| Long holding period | Annual MIP may last for the term | Eligible PMI may terminate | Five-, seven-, and ten-year cost |
| Property condition | HUD minimum property standards apply | Product-specific appraisal rules apply | Repairs and appraisal conditions |
2026 loan limits
For 2026, the one-unit conforming baseline is $832,750 and the high-cost ceiling is $1,249,125. The FHA one-unit floor is $541,287 and the FHA ceiling is also $1,249,125. Limits vary by county and by number of units.
A purchase above the local conforming limit may require a non-conforming product; that does not automatically mean one fixed down payment or underwriting rule. FHA eligibility likewise depends on the county-specific FHA limit rather than the national floor alone.
FHA vs conventional — which fits your situation
Choose FHA if…
- Credit score below 620
- Limited savings — need 3.5% down
- Your lender approves the complete FHA file
- The property meets FHA eligibility and condition rules
- Gift funds covering full down payment
- The base loan fits the county FHA limit
Choose conventional if…
- Your conventional quote has the lower total cost
- Can put 10–20% down
- Want PMI to eventually cancel
- Buying above FHA loan limits
- Purchasing a second home or investment property
- The property and occupancy fit the selected product
Neither program wins from credit score alone. Request FHA and conventional Loan Estimates for the same property, loan size, lock period, and points. Compare cash to close, APR, monthly payment, mortgage-insurance duration, and cost over your realistic holding period. Annual FHA MIP duration can be decisive for a long hold, while FHA eligibility can be decisive for a borrower who does not fit a conventional offer.