What Is the Difference Between a Conventional and FHA Loan?

Home financing often involves navigating various loan options, each designed to meet different borrower needs and financial situations. Among the most common choices for individuals looking to purchase a home are conventional loans and those backed by the Federal Housing Administration (FHA). Understanding their fundamental characteristics is crucial for making informed decisions about which financing path aligns best with your homeownership goals.

Borrower Eligibility and Financial Criteria

Conventional loans require more stringent financial qualifications, with a credit score of at least 620, and higher scores (740+) yielding better rates. While down payments can be as low as 3-5%, 20% or more helps avoid private mortgage insurance (PMI). Lenders assess debt-to-income (DTI) ratios, usually capping at 43-50%.

FHA loans are more accessible for those with lower credit. Minimum credit scores can be 500 (10% down) or 580 (3.5% down). FHA guidelines are also more lenient on DTI ratios, sometimes allowing higher percentages than conventional loans.

The primary financial distinction is FHA’s government backing, which reduces lender risk and allows flexible underwriting. Conventional loans, lacking government insurance, emphasize borrower creditworthiness and financial stability.

Mortgage Insurance Requirements

Mortgage insurance is a financial consideration for both conventional and FHA loans, differing in structure, cost, and duration.

Conventional loans typically require private mortgage insurance (PMI) for down payments under 20%. PMI is paid monthly, with costs varying by credit score, LTV, and DTI. PMI is cancellable once sufficient equity is built, usually at 80% LTV, and lenders must automatically cancel it at 78% LTV.

FHA loans require Mortgage Insurance Premium (MIP), with both an upfront (UFMIP) and annual component. UFMIP is a one-time fee that can be paid at closing or financed. The annual MIP is charged monthly, varying by loan amount, term, and LTV. For most FHA loans with an LTV over 90%, annual MIP is required for the loan’s life; if LTV was 90% or less, it may be removed after 11 years.

The key distinction is insurance removability and duration. Conventional PMI can be canceled, but FHA MIP often remains for the entire loan term. This impacts long-term costs, as UFMIP also means a higher initial cost or larger financed amount.

Property Standards and Loan Limits

Property standards and loan limits also differ, influencing which homes qualify for each loan type.

Conventional loans require properties to be safe, sound, and marketable, focusing on appraisal value and habitability. These loans are used for various property types, including single-family homes, condos, and multi-unit dwellings.

FHA loans are subject to more stringent Minimum Property Requirements (MPRs) and Minimum Property Standards (MPS). An FHA appraisal verifies the property meets these standards, including checks for roof condition, heating, and absence of health or safety hazards. FHA loans are primarily for primary residences.

Conventional loan limits, set by the Federal Housing Finance Agency (FHFA), vary annually and are higher in high-cost areas. For 2025, the baseline for a single-unit property is $806,500, up to $1,209,750 in high-cost areas. FHA loan limits, set by HUD, are generally lower and also vary by county, ranging from $524,225 to $1,209,750 for a single-unit property in 2025.

Differing property standards mean homes needing significant repairs might not qualify for FHA financing without improvements, while a conventional loan might be possible. Conventional loans often finance more expensive properties, especially in high-cost markets, compared to FHA loans.