A $320,000 townhouse, two buyers, two very different quotes. One has a 612 credit score and $14,000 in savings. The other has a 748 score and $70,000. Drop them both into a conventional loan and the first buyer probably gets turned down. Drop them both into an FHA loan and the second buyer pays mortgage insurance for years longer than necessary. Same house, opposite right answers.
That is the honest version of the FHA vs conventional loan question. There is no universal winner. There is a winner for your score, your savings, and how long you plan to keep the house.
How FHA and Conventional Loans Differ at the Core
How FHA loans work
An FHA loan is insured by the federal government through the Federal Housing Administration. That insurance protects the lender if you default, which is why lenders accept 580 credit scores and 3.5% down payments. FHA also allows a 500 score with 10% down, though few lenders write that.
How conventional loans work
A conventional loan is not government-insured. It either gets sold to Fannie Mae or Freddie Mac, or it stays in a bank’s portfolio. With no federal backstop, lenders price in more risk: higher score requirements, tighter debt limits, and larger down payments in most cases.
The differences show up in the details: insurance costs, loan limits, property rules, and how the lender reads your credit file.
FHA vs Conventional Loan Limits in 2025
FHA caps the loan amount by county. For 2025 the floor is $524,225 in low-cost areas and the ceiling reaches $1,209,750 in high-cost markets like parts of California, Colorado, and the New York metro.
Conforming conventional loans have a baseline limit of $806,500 for a single-family home in 2025, also rising to $1,209,750 in expensive counties. Above that you are in jumbo territory, where reserves and scores get stricter.
Practically speaking, FHA’s limit covers a typical home in most of the country. In a market where starter homes run $850,000, FHA may not stretch far enough, and a conventional or jumbo loan becomes the only path.
The Mortgage Insurance Math That Decides Most Cases
This is where the two loans really separate, and it is the part borrowers most often underestimate.
FHA charges an upfront mortgage insurance premium of 1.75% of the loan amount. On a $308,000 base loan, that is about $5,400, usually rolled into the balance rather than paid at closing. Then comes an annual premium of roughly 0.50% to 0.55% of the loan balance, billed monthly. On that same loan, expect around $140 a month.
The sting: if your down payment is under 10%, FHA mortgage insurance typically lasts the entire life of the loan. It never falls off at 20% equity. Put 3.5% down and keep the loan for 30 years, and you pay that premium for 30 years unless you refinance out of it.
Conventional private mortgage insurance works differently. It is charged when you put down less than 20%, costs roughly 0.3% to 1.5% of the loan annually depending on score and down payment, and it disappears. You can request cancellation at 20% equity, and it terminates automatically at 22% based on the original amortization schedule. Rising home values often get you there in five or six years.
- FHA: 1.75% upfront plus roughly 0.55% a year, often for the life of the loan
- Conventional with less than 20% down: no upfront fee, PMI that cancels
- Conventional with 20% down: no mortgage insurance at all
Credit Scores and Debt Ratios: Where FHA Is More Forgiving
FHA’s floor is 580 for a 3.5% down payment, and some lenders go to 500 with 10% down. Conventional loans generally start at 620, and the best pricing kicks in around 740. Between 620 and 700, conventional rates and PMI costs jump noticeably.
Debt-to-income ratios follow a similar pattern. FHA’s guideline sits at 43%, with approval possible up to about 50% when compensating factors exist, like a long employment history or cash reserves. Conventional underwriting often reaches 45% or 50% too, but it wants higher scores to get there.
Student loans are another split. FHA tends to count 1% of the outstanding balance on deferred loans when no fixed payment is documented, which can push your ratio over the line. Conventional rules are sometimes gentler. Carry six figures of student debt and it is worth asking your lender to run both scenarios before you assume anything.
Where Conventional Loans Quietly Win
Beyond the insurance savings, conventional loans come with fewer strings attached.
- Seller concessions: FHA allows up to 6% of the price in seller-paid closing costs. Conventional caps contributions at 3% once your down payment drops below 10%, which matters in a slow market.
- Property condition: FHA appraisals flag peeling paint, missing handrails, and exposed wiring. Conventional appraisals focus on value, not cosmetics. A fixer with chipped paint can sail through one and stall on the other.
- Condos and multi-unit buildings: FHA keeps its own condo approval list, and 3- to 4-unit purchases must pass a self-sufficiency test. Conventional financing is more flexible.
- Investment properties: FHA is for primary residences only. Conventional works for second homes and rentals.
One point in FHA’s favor that rarely gets mentioned: FHA loans are assumable, meaning a future buyer can take over your loan and your rate. In a market where rates hover near 7%, that is a genuine selling feature.
Two Buyers, One $320,000 House
Buyer one puts 3.5% down with FHA. That is $11,200, leaving a base loan of $308,800. The upfront premium adds about $5,400 to the balance. The monthly insurance bill lands near $145.
Buyer two puts 20% down on a conventional loan. That is $64,000, leaving a loan of $256,000 with no mortgage insurance at all. The payment is higher because the balance is larger, but none of it is insurance. Over seven years, buyer two pays tens of thousands less in interest and insurance combined, assuming similar rates.
Now flip it. If buyer two only had $22,000 saved, that 20% down payment is impossible. FHA, or a conventional loan with 3% down through HomeReady or Home Possible, becomes the realistic option. Those 3% conventional programs also beat FHA on long-term insurance cost for buyers with scores above 680.
Which Loan Should You Actually Apply For?
Run your own situation against these:
- Credit score under 620: FHA. Conventional pricing is brutal or unavailable.
- Score between 620 and 680 with a small down payment: Ask for both quotes. Conventional with 3% down often wins on total cost, but only if the rate is competitive.
- Score above 700 with 10% or more down: Conventional, almost every time. You avoid the life-of-loan insurance problem.
- 20% down available: Conventional. No mortgage insurance on either side of the comparison.
- High debt-to-income from student loans or a recent credit hiccup: FHA’s flexibility may be the difference between buying this year and waiting.
- Condo or duplex with quirks: Check the property rules before you fall in love with a loan program.
Questions to Ask Your Lender This Week
Ask any loan officer for a side-by-side Loan Estimate for both programs on the same property, at the same rate lock period. Then ask three specific things. How long will mortgage insurance last on each option, and what triggers it to end? How much would I save per month if I refinanced into the other program in three years? And what would it take to reach conventional pricing given my current score?
You do not have to choose a program before you talk to a lender. Get both, put the numbers next to each other, and pick the one that costs less over the time you actually plan to own the home. For a five-year stay, the cheapest monthly payment usually wins. For a fifteen-year stay, the loan without permanent mortgage insurance almost always does.