FHA vs. Conventional: Which Loan is Actually Better for You?

The FHA vs. conventional loan debate has dominated homebuyer discussions for decades. But the "right" choice depends on your specific situation, not general rules of thumb.

The Real Differences Explained

Down Payment Requirements

**FHA**: 3.5% minimum with 580+ credit score

**Conventional**: 3% minimum with strong credit profile

**Winner**: Tie for most buyers

Credit Score Flexibility

**FHA**: Accepts scores as low as 500 (with 10% down)

**Conventional**: Typically requires 620+ for best terms

**Winner**: FHA for lower credit scores

Mortgage Insurance Costs

**FHA**: 0.85% annual premium that typically lasts loan lifetime

**Conventional**: 0.25-2.25% annual, can be removed at 20% equity

**Winner**: Conventional for most long-term scenarios

When FHA Makes Sense

Scenario 1: Lower Credit Scores

If your score is under 640:

Scenario 2: Limited Down Payment

When you have exactly 3.5% down:

Scenario 3: High Debt-to-Income Ratios

FHA allows up to 57% DTI in some cases:

When Conventional Wins

Scenario 1: Strong Credit Profile

With 740+ credit scores:

Scenario 2: Higher Down Payments

With 10%+ down payment:

Scenario 3: Jumbo Loan Amounts

Above FHA limits (varies by area):

The Hidden Considerations

Property Type Restrictions

**FHA Limitations**:

**Conventional Advantages**:

Future Refinancing

**FHA Streamline**: Easy rate/term refinances

**Conventional**: More cash-out options and fewer restrictions

Loan Limits by Area

FHA limits are lower than conventional in expensive markets:

The Math: Real Examples

Example 1: $400K Home, 5% Down, 680 Credit

**FHA**: 6.5% rate, $314/month MI = $2,067 total payment

**Conventional**: 6.25% rate, $167/month MI = $1,953 total payment

**Savings**: $114/month with conventional

Example 2: $300K Home, 3.5% Down, 620 Credit

**FHA**: 6.75% rate, $213/month MI = $1,581 total payment

**Conventional**: 7.25% rate, $143/month MI = $1,594 total payment

**Savings**: $13/month with FHA

Advanced Strategies

FHA-to-Conventional Refinance

Many buyers start with FHA, then refinance to conventional when:

Combination Approaches

Some situations benefit from:

Making Your Decision

Choose FHA If:

Choose Conventional If:

Get Professional Analysis

Your loan officer should compare:

The Bottom Line

Neither FHA nor conventional is universally "better." The right choice depends on your credit, finances, and long-term plans.

Most importantly: focus on getting into the right home rather than the "perfect" loan. You can always refinance later when your situation improves.

Work with a loan officer who offers both products and can run detailed comparisons based on current rates and your specific situation.