FHA vs. Conventional Loan: Which Should I Choose?

This is one of the most asked questions in mortgage lending, and the answer is genuinely different for every borrower. The choice between an FHA and a conventional loan comes down to four variables: your credit score, your down payment, how long you plan to keep the loan, and your debt-to-income ratio.

Credit Score: The Biggest Factor

At credit scores below 680, FHA pricing tends to be more favorable. Conventional loans use risk-based pricing adjustments (called LLPAs), and those adjustments can be steep for lower credit scores. At 740 and above, conventional pricing is almost always better. Between 680 and 740 is the gray zone where you need to compare both options side by side.

Down Payment

FHA requires a minimum of 3.5% down. Conventional loans are available at 3% down (through programs like Fannie Mae HomeReady and Freddie Mac Home Possible) or 5% down for standard options. The down payment amount affects the mortgage insurance cost on both sides, so the comparison changes depending on how much you put down.

Mortgage Insurance: The Hidden Cost

This is where most borrowers underestimate the difference. FHA charges an upfront premium of 1.75% plus an annual premium that, for loans with less than 10% down, lasts the full 30-year term. Conventional PMI drops off automatically at 78% loan-to-value. On a $350,000 loan, the cumulative mortgage insurance savings from choosing conventional can be $10,000 to $25,000 over the life of the loan, assuming you hold it long enough for PMI to drop.

Loan Limits

Both loan types have limits that vary by county. In high-cost areas like Southern California, FHA limits may cap out below the price of many homes. Conventional conforming limits are typically higher, and jumbo loans extend conventional borrowing power further. If the home you want exceeds FHA limits, conventional is your path.

Property Conditions

FHA has stricter property condition requirements. The appraisal for an FHA loan includes a property inspection component that can flag issues like peeling paint, missing handrails, or non-functional systems. Conventional appraisals are generally less strict about property condition, which can matter if you are buying an older home or a fixer-upper.

The Decision Framework

Choose FHA if your credit score is below 680, you have a higher debt-to-income ratio, you plan to refinance into conventional within a few years, or you need maximum flexibility on qualification. Choose conventional if your credit score is 700 or above, you want to eliminate mortgage insurance as quickly as possible, the property does not meet FHA condition standards, or you need a loan amount above FHA limits. In the gray zone between 680 and 720, the only reliable way to decide is a full side-by-side cost comparison from your loan officer.