FHA vs Conventional Program: Understanding the Pros, Cons, and Differences

You’ve decided you want to switch from renting to buying a house. Or, you are looking to move to your dream home. Before you start attending open houses or reaching out to local real estate agents, you should take some time to consider the types of loans you may qualify for. 

While several mortgage programs are available in the market, FHA loans and Conventional loans are two common types of loans you are likely to encounter. And if you’re a first-time homebuyer, understanding the pros, cons, and differences between these loans can help you make the right home financing decision. 

Here is all you need to know about FHA vs Conventional loan programs.

What is an FHA Loan 

An FHA loan is a mortgage that is insured by the Federal Housing Administration (FHA). FHA loans are usually designed to help make homeownership more accessible for borrowers, especially first-time homebuyers or those with lower incomes or credit scores. 

Pros of FHA Loans 

  • Low 3.5% down payment
  • Flexible credit requirements (credit scores as low as 500)
  • Higher debt-to-income ratios allowed (up to 43%)
  • Assumable mortgages
  • Sellers can contribute up to 6% of home price towards closing costs

Cons of FHA Loans

  • Require mortgage insurance premiums (upfront and annual)
  • Lower loan limits compared to conventional mortgages
  • Strict property requirements
  • Lifetime mortgage insurance for low down payments (less than 10%)

What is a Conventional Loan 

When people think of mortgages, conventional loans are what comes to mind. A conventional loan is a type of mortgage that is not guaranteed by a government agency, such as the Federal Housing Administration (FHA). Instead, conventional loans are backed by private lenders and available in a range of terms, commonly 15 or 30 years, with a fixed or adjustable interest rate.

Pros of Conventional Loans

  • No mortgage insurance with 20% or more down
  • Higher loan limits than government-backed loans
  • Flexibility in property types
  • Potential for lower interest rates
  • No upfront mortgage insurance premiums

Cons of Conventional Loans

  • Higher down payment requirements (typically 20% or more)
  • Stricter credit score and income requirements
  • Require private mortgage insurance with less than 20% down
  • Potentially longer approval process
  • Limited options for low-income or first-time buyers

Differences Between FHA vs Conventional Loan Program 

Thinking of which mortgage loan program to choose? Here are the key differences between FHA loans and conventional loan programs:

  1. Down Payment Requirements

If you opt for an FHA loan, you’ll only need a minimum 3.5% down payment on the home’s purchase price. This can be a significant advantage if you don’t have a large cash reserve for a down payment. In contrast, conventional loans typically require a minimum 20% down payment, which can be quite expensive for most first-time or low-to-moderate income buyers.

  1. Credit Score Standards

FHA loans are more lenient when it comes to credit score requirements. You may qualify for an FHA loan with a credit score as low as 500 if you can make a 10% down payment or 580 with a 3.5% down payment. Conventional loans, on the other hand, require a minimum credit score of 620-640, which could price some first-time borrowers out of the conventional loan market.

  1. Mortgage Insurance

One of the key differences is the mortgage insurance requirements. FHA loans require mortgage insurance premiums for the life of the loan. With a conventional loan, you’ll only need to pay private mortgage insurance (PMI) if your down payment is less than 20% of the home’s value. And the good news is you can request to have the PMI removed once you’ve built up 20% equity in your home.

  1. Loan Limits

FHA loan limits are tied to the median home prices in your local area, meaning the maximum you can borrow may be lower than a conventional loan. Conventional loan limits are higher and determined by county-level median prices, giving you more flexibility when buying a home in an expensive real estate market.

  1. Occupancy Requirements

FHA loans offer more freedom when it comes to the type of property you can finance. You can use an FHA loan to purchase a primary residence, investment property, or even a second home. Conventional loans, on the other hand, are primarily used for financing your primary residence, with more restrictions on investment and vacation properties.

  1. Costs

Finally, FHA loans require an upfront mortgage insurance premium as well as an ongoing annual premium which are likely to increase your overall loan costs. Conventional loans may have slightly lower interest rates and fewer fees, leading to lower long-term costs if you qualify.


When financing your next home purchase, choosing the right mortgage program can either make or mar your home financing experience. The best loan program for you will depend on your financial situation, goals, and home-buying needs. As a guide, be sure to consider all of these factors when deciding between an FHA loan and a conventional loan to find the option that suits your homeownership dream.