The main difference between FHA and conventional loans for first-time homebuyers is credit flexibility and mortgage insurance.
FHA loans allow 3.5% down with a 580 credit score and typically require mortgage insurance for the life of the loan. Conventional loans allow as little as 3% down for qualifying buyers, offer credit–based mortgage insurance rates, and let borrowers cancel PMI as equity builds.
FHA may suit buyers with lower credit or higher debt, while conventional may benefit buyers with stronger credit. Comparing both options based on your finances can help you find the better fit.
What is the difference between an FHA loan and a conventional loan?
An FHA loan is a mortgage insured by the Federal Housing Administration, part of the U.S. Department of Housing and Urban Development (HUD). A conventional loan has no government insurance; most follow rules set by Fannie Mae or Freddie Mac.
That single difference drives almost every trade-off below: FHA’s insurance lets lenders accept more credit risk, and borrowers pay for that insurance through mortgage insurance premiums.
Both programs are offered by private lenders, both offer 15-year and 30-year fixed terms, and both allow low down payments.
How do FHA and conventional credit score requirements compare?
FHA credit rules are more forgiving: HUD allows 3.5% down with a credit score of 580 or higher, and 10% down with a score from 500 to 579. Conventional loans no longer carry a hard 620 floor in Fannie Mae’s automated system, but many lenders still apply a 620 minimum through overlays, which are extra requirements a lender adds on top of program rules.
The bigger difference is how credit affects price. Conventional pricing and private mortgage insurance both move with your score, so a 660 score can cost noticeably more each month than a 760 score on the same home. FHA’s annual mortgage insurance rate does not change with your score.
- Credit score below 620: FHA is usually the more realistic path
- Credit score from 620 to roughly 700: Price both; the answer varies by file
- Credit score above roughly 740: Conventional often prices well, especially with 5% or more down
“Credit score is the first thing I look at when a first-time buyer asks FHA or conventional. Above the low 700s, conventional usually starts to win on monthly cost. Below that, FHA often wins, but we still run both because the file decides.”
— Charlie Cooper, President, Austin Capital Mortgage
What if I have a past bankruptcy or late payments?
FHA generally allows a new loan two years after a Chapter 7 bankruptcy discharge, while Fannie Mae generally requires four years. Shorter periods may apply when a borrower documents extenuating circumstances. If your credit history includes a recent major event, FHA is often the only one of the two programs available to you right now.
How do FHA and conventional down payment requirements compare?
Conventional loans can require slightly less cash than FHA: qualifying first-time buyers can put 3% down through programs such as Conventional 97, Fannie Mae HomeReady, and Freddie Mac Home Possible or HomeOne. FHA requires a 3.5% minimum. Standard conventional loans outside those programs typically require 5% down.
On a $350,000 purchase, those minimums work out as follows. These figures are for illustration only and are not an offer of credit.
- Conventional at 3% down: $10,500
- FHA at 3.5% down: $12,250
- Conventional at 5% down: $17,500
Both programs accept gift funds from family members, and both can pair with many down payment assistance programs. HomeReady and Home Possible have income limits, generally 80% of the area median income, so not every first-time buyer is eligible for them. Availability varies by lender, program, and location.
How does FHA mortgage insurance compare with conventional PMI?
Mortgage insurance is the biggest long-term cost difference between FHA and conventional loans. FHA charges mortgage insurance premiums (MIP) on every loan: an upfront premium of 1.75% of the base loan amount, usually rolled into the loan, plus an annual premium that is 0.55% for most 30-year loans with less than 5% down. Conventional loans charge private mortgage insurance (PMI) only when you put less than 20% down.
The key question is how long each premium lasts:
- FHA with less than 10% down: Annual MIP lasts for the life of the loan
- FHA with 10% or more down: Annual MIP ends after 11 years
- Conventional: Borrowers can request PMI cancellation once the balance reaches 80% of the home’s original value, and PMI ends automatically at 78% if payments are current
Loan-to-value ratio (LTV) is your loan balance divided by the home’s value. Because conventional PMI is priced by credit score and LTV, a buyer with a lower score may pay more for PMI than for FHA’s MIP in the early years. The trade-off is that PMI eventually ends on its own, while FHA MIP with a small down payment usually ends only if you refinance or sell.
“First-time buyers tend to compare the monthly payment on day one. I ask them to compare year seven, too. That is usually when the mortgage insurance difference between FHA and conventional becomes obvious.”
— Charlie Cooper, President, Austin Capital Mortgage
How do debt-to-income limits compare?
FHA generally allows higher debt-to-income ratios than conventional loans. Debt-to-income ratio (DTI) is your total monthly debt payments, including the new mortgage, divided by your gross monthly income. Fannie Mae’s automated underwriting can approve conventional loans with DTI up to 50%.
FHA’s automated system can approve ratios above 50% when the rest of the file is strong, such as solid cash reserves or steady job history. Manually underwritten FHA loans start from tighter limits of 31% for housing costs and 43% for total debt, with higher ratios allowed when compensating factors are documented. If student loans or a car payment push your DTI into the mid-40s or higher, FHA may give you more room. Final approval depends on underwriting review.
How do property rules and loan limits compare?
FHA has stricter property rules and lower loan limits, while conventional loans offer more room on price and fewer property-condition requirements. Every FHA loan must be for a primary residence, and the home must meet HUD’s minimum property standards for safety, security, and soundness. Conventional appraisals focus mainly on value and marketability, though homes with serious safety issues can still be ineligible.
- Loan limits: FHA’s 2026 one-unit limit starts at $541,287 in most counties and reaches $1,249,125 in high-cost areas. The 2026 baseline conforming limit for conventional loans is $832,750. Check your county’s limit before choosing a price range.
- Condos: FHA requires the condo project to be FHA-approved or to receive a single-unit approval; conventional loans use their own project review.
- Seller concessions: FHA allows sellers to contribute up to 6% of the sales price toward your costs. Conventional loans allow 3% when you put less than 10% down.
- Assumability: FHA loans can be assumed by a qualified buyer when you sell, which can matter if rates rise; most conventional loans cannot.
For a related comparison, see FHA vs USDA loans for first-time homebuyers.
Which first-time buyers fit each option?
FHA usually fits first-time buyers who need credit or debt flexibility today, while conventional usually fits buyers whose credit already qualifies them for strong pricing. Here is how the fit tends to break down.
When does an FHA loan make more sense?
- Your credit score is below about 680, or you have a bankruptcy or collection in the past few years
- Your DTI sits in the mid-40s or higher
- You need a seller to cover more than 3% of the price in closing costs
- You expect to refinance within a few years once your credit improves
When does a conventional loan make more sense?
- Your credit score is in the low 700s or higher
- You can put 5% or more down, or you qualify for a 3% down first-time buyer program
- You plan to stay in the home long enough for PMI to drop off
- The home is a condo that is not FHA-approved, or the price is above your county’s FHA limit
Veterans and active-duty buyers should also compare a VA loan before deciding.
“No program is better across the board. The right loan is the one that fits your credit, your cash, and how long you plan to keep the house.”
— Charlie Cooper, President, Austin Capital Mortgage
How do FHA and conventional loans compare side by side?
FHA and conventional loans differ most on credit flexibility, how long mortgage insurance lasts, and property rules. The table below summarizes typical program guidelines as of 2026; lender requirements vary.
| Factor | FHA loan | Conventional loan |
|---|---|---|
| Minimum down payment | 3.5% with 580+ score; 10% with 500 to 579 | 3% for qualifying first-time buyers; 5% standard |
| Credit score | 580+ for 3.5% down; lender minimums vary | No hard floor in Fannie Mae DU; many lenders require 620+ |
| Mortgage insurance | 1.75% upfront plus annual MIP (0.55% for most 30-year loans under 5% down) | PMI only when under 20% down; priced by credit and LTV |
| Mortgage insurance removal | Life of loan under 10% down; 11 years with 10%+ down | Request at 80% of original value; automatic at 78% |
| DTI | Can exceed 50% with automated approval and a strong file | Up to 50% with Fannie Mae automated approval |
| Bankruptcy waiting period | Generally 2 years after Chapter 7 discharge | Generally 4 years after Chapter 7 discharge |
| Property | Primary residence; must meet HUD property standards | Primary, second home, or investment; appraisal focuses on value |
| 2026 one-unit loan limit | $541,287 to $1,249,125 by county | $832,750 baseline; higher in high-cost areas |
| Seller concessions | Up to 6% | 3% with under 10% down |
| Assumable | Yes, with a qualified buyer | Generally no |
When Conventional Beats FHA: A First-Time Buyer’s Choice
A first-time buyer came to Austin Capital Mortgage with a 680 credit score, about 5% saved, and a target price in the mid-$300,000s. Friends had told her FHA was the only option for first-time buyers. She qualified for both programs, so her loan officer priced them side by side.
At a 680 score, the conventional PMI quote was higher than FHA’s annual premium, so FHA looked cheaper on day one. But with 5% down, FHA’s annual MIP would last the life of the loan, and FHA also added the 1.75% upfront premium.
Her conventional PMI could be cancelled once her balance reached 80% of the original value. She planned to stay at least eight years, so the conventional loan came out ahead of her expected time in the home, and she chose it.
A first-time buyer with a 680 credit score and 5% down may qualify for both FHA and conventional loans, and the better choice often depends on how long each mortgage insurance premium lasts compared with how long she expects to keep the loan.
Case study attributed to Charlie Cooper, President, Austin Capital Mortgage. Borrower details are fictionalized.
Your Next Steps
- Check your credit scores from all three bureaus and note the middle score
- Add up your monthly debt payments to estimate your DTI
- Confirm how much you have saved and whether any funds will be gifted
- Look up your county’s FHA and conforming loan limits
- Decide roughly how long you expect to stay in the home
- Ask a loan officer to price FHA and conventional side by side with your real numbers
Ready to move forward? A loan officer can review your full scenario and show you both options in one conversation.
Not Sure Which Loan Fits Your File?
Austin Capital Mortgage can price your file across FHA and conventional programs through access to 100+ lenders, with a dedicated loan officer from start to finish. Pre-approval can be completed in as little as 24 hours with no credit impact.
Austin Capital Mortgage works with 100+ lenders, a hybrid banker and broker model, which means more program access and more flexibility to find the path that fits the borrower’s actual file.
Approval is subject to underwriting review and program eligibility. Rates and payments vary. Austin Capital Mortgage is a DBA of Aspire Home Loans, LLC, NMLS #1955132. Equal Housing Lender.
