BUYING A HOME

FHA vs. Conventional Loans: Which Fits Your Home Purchase?

White two-story house with a green lawn and covered porch under a blue sky.

Choosing between FHA and conventional financing starts with your budget, credit history and plans for the home. Both can offer a low down payment. The difference often comes down to qualification requirements and what you’ll pay upfront and over time.

Here’s how to compare them.

What’s the basic difference?

An FHA loan comes from a private lender and is insured by the Federal Housing Administration. It can be useful for buyers whose credit history makes conventional financing harder to qualify for. FHA financing is available to eligible repeat buyers as well as first-time buyers.

A conventional loan isn’t insured or guaranteed by a federal government agency. Many follow Fannie Mae or Freddie Mac guidelines. For buyers with stronger credit, conventional financing may offer a favorable combination of interest rate and mortgage insurance costs.

How much do you need down?

FHA financing allows down payments as low as 3.5% for qualified borrowers. Your credit profile and other eligibility requirements affect whether that minimum is available.

Some conventional programs allow as little as 3% down. Those options have specific requirements, which may include first-time-buyer status or income limits, depending on the program. Other conventional loans require more.

With either option, budget for closing costs and a cash cushion in addition to your down payment.

Learn more about FHA loans and conventional loans.

Mortgage insurance deserves a close look

Mortgage insurance protects the lender if you fail to repay the loan. Its cost can make a meaningful difference to your budget.

Standard FHA purchase loans have an upfront mortgage insurance premium and an annual premium paid monthly. Financing the upfront premium increases your loan balance and borrowing costs.

For new standard FHA loans, annual mortgage insurance generally lasts:

11 years with an original loan-to-value ratio of 90% or less, typically requiring at least 10% down
The mortgage term with an original loan-to-value ratio above 90%, typically when putting less than 10% down

Conventional loans generally require private mortgage insurance, or PMI, when you put less than 20% down. Borrower-paid PMI can usually be canceled later.

For many conventional mortgages on a primary residence, you can request cancellation when the balance reaches 80% of the home’s original value. Conditions include a written request, good payment history, current payments, no junior liens and evidence that the property’s value hasn’t declined. Automatic termination generally occurs when the balance is scheduled to reach 78%, provided payments are current.

Qualification involves more than a score

Lenders review income, debts, credit history, available funds and the property. They may apply additional requirements beyond a program’s minimum standards. Meeting a published credit or down payment minimum doesn’t guarantee approval.