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FHA vs Conventional Loan: Pros and Cons

FHA vs conventional loan pros and cons

FHA loans are good. Conventional loans are good. But one might suit you better than the other.

It’s a little like shopping for a car. A sports car and a minivan are both good vehicles. But one could be better for you depending on your life circumstances and goals.

Let’s see which loan might be better for you by looking at FHA vs conventional pros and cons.

FHA Loan Pros And Cons

The Federal Housing Administration, or FHA, insures lenders against borrower default. This allows lenders to offer low-cost loans to buyers with average to lower credit scores and incomes.

Many buyers can qualify for FHA when they don’t meet conventional lending criteria.

FHA Loan Pros

FHA Loan Cons

Interest rates and mortgage insurance are less expensive than conventional for most buyers

Mortgage insurance is usually permanent

Debt-to-income ratios up to 56%

Mortgage insurance required even with a 20%+ down payment

Credit scores down to 580

Upfront mortgage insurance fee of 1.75% of the loan amount

3.5% down payment

Home sellers may not accept an FHA offer

Gifts and down payment assistance allowed

More expensive than conventional for those with 5-10% down and excellent credit

No income limits, geographic restrictions, or first-time buyer requirement

Stricter property condition requirements than conventional

More About FHA

FHA was designed from the ground up as a loan choice for those who can’t qualify for a conventional loan. But they’ve evolved into more than that.

Many first-time buyers choose FHA because it’s cheaper monthly, even if they can qualify for a conventional loan.

For example, here’s the cost of mortgage insurance for both FHA and conventional (conventional rates provided by MGIC). FHA is typically less expensive except for those with very high credit scores.

Monthly Mortgage Insurance, $300,000 Loan

FHA 3.5% Down

Conventional 5% Down

640 Score



700 Score



760 Score



FHA loan rates are often lower for most credit tiers as well.

If you qualify for both FHA and conventional, it’s worth having your lender run both scenarios to see which one is less expensive overall.

Conventional Loan Pros and Cons

Conventional loans are backed by the government like FHA loans are. So, lenders charge more for borrowers with lower credit scores and down payments.

So conventional loans are usually more costly than FHA for first-time buyers who have less than 5-10% down and a credit score below 740.

Conventional Loan Pros

Conventional Loan Cons

Low rates and mortgage insurance costs for those with 5-10% down and 740+ credit

Stricter debt-to-income ratio limits

No upfront mortgage insurance premium

Minimum credit score of 620; need 740+ for the best rates

No monthly mortgage insurance with 20%+ down payment

Must meet income limits or be a first-time buyer for 3% down programs

3% down minimum for first-time buyers

High rates and mortgage insurance costs for lower-credit buyers

Gifts and down payment assistance allowed

Harder to qualify for overall

Discounted rates and mortgage insurance for moderate-income buyers for some programs

Home sellers may accept a conventional offer over FHA

More About Conventional Loans

FHA loans aren’t always less expensive. Conventional loans have made great strides in recent years to better accommodate a wider range of buyers.

For example, borrowers who make 80% or less of their area median income get reduced rates and mortgage insurance for some programs.

It’s worth getting a conventional loan quote alongside an FHA quote to compare costs. You might be surprised that conventional is a better value despite having lower credit or income.

FHA vs Conventional Side-By-Side Comparison

Loan Feature



Down payment



Credit score

580 (500 with 10% down)


Debt-to-income ratio

Up to 56%


Mortgage rates

Much lower for credit scores <740

High for lower-credit borrowers

First-time buyers only?


Some programs

Upfront mortgage insurance?

1.75% of loan


Monthly mortgage insurance

$46/month per $100k borrowed

$25-$200+/mo per $100k borrowed depending on credit & down payment

Is mortgage insurance cancelable without refinancing?



Loan limits

$498,257 in most areas

$766,550 in most areas

Income limits


80% of area median for some 3% down programs

Property requirements

Slightly stricter than conventional

Looser than FHA

2-4 units


Allowed; 25% down for 3-4 units


Must live in the property

Investment properties allowed with 15% down

FHA vs Conventional Cost

The biggest “pro” of FHA loans is a potentially lower monthly cost, especially for those without perfect credit.

Here’s a scenario of a buyer with a 670 credit score who is approved for both FHA and conventional. If this were you, which option would you choose?

*All figures are estimates and will depend on your scenario. Not a quote or commitment to lend. Contact a lender for an accurate quote. Payment example based on $350k FHA loan at 6.6% rate and conventional loan at 7.016%, the average from Optimal Blue as of May 23, 2023. Standard FHA mortgage insurance of 0.55% per year. Conventional mortgage insurance estimate of 1.54% per year from MGIC based on 670 credit score with 3% down.

While the above is based on a 670 credit score, buyers with higher credit may save with FHA as well. Even someone with 720 credit may find rates and mortgage insurance more affordable choosing FHA.

Getting An Accurate FHA and Conventional Quote

The next step is to check your eligibility for an FHA and conventional loan. If you only qualify for FHA, your choice is easy.

If you qualify for both, have your lender run an analysis like the one above to determine your personalized cost estimate. From there, choose which loan type benefits you more.

About The Author:

Tim Lucas spent 11 years in the mortgage industry and now leverages that real-world knowledge to give consumers reliable, actionable advice. Tim has been featured in national publications such as Time, U.S. News, MSN, The Mortgage Reports, and more.

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