Choosing the right mortgage can save you thousands—not just upfront, but over the life of your loan. It can also make or break your ability to qualify for the home you want.
Two of the most common options are FHA loans and conventional loans. Both have their pros and cons, and the better choice depends on your credit score, savings, income, and the type of property you want to buy.
This guide explains how FHA and conventional loans work, how they compare, and how to figure out which one is the better fit for your situation.
FHA Loan Requirements and How They Work
An FHA loan is a government-backed mortgage designed to help first-time homebuyers and those with lower credit scores. The Federal Housing Administration (FHA) insures the loan, but it is issued by an approved private lender.
FHA loans have more flexible qualification standards than conventional loans. They are available with 15-year or 30-year fixed interest rates.
To qualify for an FHA loan, you must meet these requirements:
- Credit score: Minimum of 500
- Mortgage insurance: Required upfront and ongoing
- Debt-to-income ratio: Must be below 43% in most cases
- Primary residence: The home must be your primary residence
- Employment: You must provide proof of employment and income
Conventional Loan Requirements and How They Work
A conventional loan is a mortgage that is not backed by a government agency. Instead, it is offered through private mortgage lenders and typically follows guidelines set by Fannie Mae and Freddie Mac. Conventional loans account for about two-thirds of all mortgages in the United States.
Conventional loans generally have stricter requirements than FHA loans but offer more flexibility if you qualify.
To get a conventional loan, you will need to:
- Submit a mortgage application: Complete the lender’s required forms
- Provide documentation: This includes income verification and asset statements
- Have your credit report reviewed: Minimum credit score requirements typically apply
- Provide proof of employment: Steady income and job history are required
Conforming vs. Non-Conforming Conventional Loans
There are two main types of conventional loans:
Conforming loans: These loans meet the guidelines set by Fannie Mae and Freddie Mac. Individual lenders may impose stricter standards. To qualify, you must meet requirements for:
- Credit score
- Down payment
- Debt-to-income ratio
- Loan limit (varies by county)
Non-conforming loans: Also known as jumbo loans, these exceed the maximum loan limits set by Fannie Mae and Freddie Mac. They often come with higher interest rates and stricter qualification requirements. Non-conforming loans are less common and are typically used to finance more expensive homes.
FHA vs. Conventional Loan: Key Differences
FHA loans are generally easier to qualify for. Conventional loans require a higher credit score and a larger down payment.
That does not mean an FHA loan is always the better choice. FHA loans come with extra costs and restrictions that may not make sense for every buyer. Here is how the two options compare on key factors:
Credit Scores
- FHA loans: You can qualify for an FHA loan with a minimum credit score of 500 if you can put down 10%. If your credit score is 580 or higher, you can qualify with a 3.5% down payment.
- Conventional loans: Most conventional loans require a minimum credit score of 620, though individual lenders may set higher requirements.
Down Payment
- FHA loans: You will need a down payment of at least 3.5% if your credit score is 580 or higher. If your credit score is between 500 and 579, you will need a 10% down payment. FHA loans allow the full down payment to come from gift funds.
- Conventional loans: Some conventional loans allow down payments as low as 3%, but you typically need a good credit score to qualify. Conventional loans also allow part of the down payment to come from gift funds.
Borrowing Limits
- FHA loans: Loan limits depend on location. In 2025, most U.S. counties have a floor limit of $524,225 for single-family homes and a high-cost ceiling of $1,209,750. In Alaska, Hawaii, Guam, and the U.S. Virgin Islands, special exemption areas allow up to $1,814,625.
- Conventional loans: If your loan conforms to Fannie Mae and Freddie Mac standards, the baseline limit is $806,500 nationwide. In high-cost counties, the cap rises to $1,209,750.
Debt-to-Income Ratio
- FHA loans: The standard maximum debt-to-income (DTI) ratio is 43%. Your total housing debt should not exceed 31%. However, with compensating factors, DTI ratios of up to 56.9% may be accepted.
- Conventional loans: Most lenders prefer a DTI ratio below 36% for conventional loans. Some lenders may approve higher DTIs, but the guidelines are less flexible than those for FHA loans.
Closing Costs
Both FHA and conventional loans have closing costs, but FHA loans typically cost more upfront.
- FHA loans: You must pay an upfront mortgage insurance premium (MIP) of 1.75% of the loan amount. This is in addition to regular closing costs, such as lender fees, title fees, and prepaid expenses.
- Conventional loans: Conventional loans do not require an upfront mortgage insurance premium. If your down payment is less than 20%, you will pay private mortgage insurance, but it is usually paid monthly instead of at closing.
In most cases, FHA loans will have higher upfront closing costs than conventional loans.
Eligible Properties
- FHA loans: You can use an FHA loan to purchase a single-family home, an approved condo or townhome, a detached or semi-detached home, or a manufactured home. The property must be your primary residence. You cannot use an FHA loan for a vacation home or rental property.
- Conventional loans: Conventional loans allow more flexibility. You can use them to buy a primary residence, a vacation home, or a rental property. Eligible properties include single-family homes, condos, townhomes, and fixer-uppers.
Private Mortgage Insurance
- FHA loans: You must pay an upfront mortgage insurance premium, plus ongoing monthly premiums. If your down payment is less than 10%, the monthly premiums last for the life of the loan. You can remove this insurance by refinancing into a conventional loan.
- Conventional loans: Private mortgage insurance is only required if your down payment is less than 20%. Once you reach 80% equity in your home, your mortgage insurance is automatically removed.
Long-Term Cost Comparison
The total cost of your loan matters just as much as the upfront requirements. Over time, FHA loans often end up costing more than conventional loans—even though they are easier to qualify for.
- FHA loans: You must pay an upfront mortgage insurance premium and ongoing monthly mortgage insurance for the life of the loan if your down payment is less than 10 percent. Even if you refinance later, this can add thousands of dollars in extra costs.
- Conventional loans: You can avoid mortgage insurance entirely by putting down 20 percent. If you pay less than 20 percent upfront, you will pay private mortgage insurance temporarily—but it automatically drops once you reach 80 percent equity. This can make a conventional loan more affordable in the long run.
If you expect to stay in your home for many years, it is important to compare the long-term costs carefully. In many cases, a conventional loan saves you more money over time if you can qualify.
Refinancing
- FHA loans: You can refinance an FHA loan through the FHA streamline refinance program, which does not require a home appraisal and involves less paperwork. To qualify, you must be current on your mortgage payments.
- Conventional loans: You can refinance a conventional loan if you meet your lender’s requirements. Options include rate-and-term refinancing or cash-out refinancing. If you have limited home equity, some lenders may offer high loan-to-value (LTV) refinance programs.
FHA vs. Conventional Loans: The Pros & Cons
If you’re still unsure whether an FHA loan or conventional loan is the right choice for you, here are some of the pros and cons of each.
Pros of FHA Loans
- These loans are easier to qualify for
- Better for borrowers with lower credit scores
- Low down payment requirements
- Comes with better refinancing options
Cons of FHA Loans
- Requires mortgage insurance
- If your down payment is less than 10%, the mortgage insurance is required for the life of the loan
- Puts limits on certain types of properties
- May come with high interest rates
- It usually takes longer to process FHA loans
Pros of Conventional Loans
- Offers higher borrowing limits than FHA loans
- Mortgage insurance isn’t required with a 20% down payment
- You can take out loans for investment properties
- Some loans accept down payments as low as 3%
Cons of Conventional Loans
- To apply, borrowers need at least a 620 credit score
- It may be harder for low-income borrowers to qualify
- A higher down payment is required to avoid mortgage insurance
How to Decide Between the Two
Choosing between an FHA loan and a conventional loan depends on your credit score, savings, and financial goals.
An FHA loan may be the better fit if you have a lower credit score or a smaller down payment. Just be prepared to pay mortgage insurance, which can add to your monthly cost.
A conventional loan is often the better option if your credit score is 620 or higher and you can put down more money. If your credit score is 720 or higher, a conventional loan usually offers the most affordable terms.
The smartest way to decide is to talk with a mortgage broker. They can run the numbers for your situation and help you compare loan options side by side.
Frequently Asked Questions
Can I use gift funds to cover closing costs?
Yes, both FHA and conventional loans allow you to use gift funds to help cover closing costs. FHA loans permit all of your closing costs and down payment to come from gift funds, as long as the donor is an eligible relative or approved source. Conventional loans also allow gift funds, but the rules can vary by lender and loan type—check with your lender to confirm what is allowed.
Can I get an FHA or conventional loan if I am self-employed?
Yes. You can qualify for either loan type if you are self-employed, but you will need to provide extra documentation. Most lenders require at least two years of consistent self-employment income, along with tax returns and other proof of income stability. If your income fluctuates or has declined recently, qualifying may be more challenging.
How long does it take to close on an FHA or conventional loan?
The typical timeline to close on either loan is 30 to 45 days. However, FHA loans can sometimes take longer because of additional appraisal and inspection requirements. Conventional loans may close slightly faster if your application is straightforward and all documents are in order.
Can I use an FHA or conventional loan to buy a fixer-upper?
Yes, but your options vary. FHA loans offer a special product called the FHA 203(k) loan, which allows you to finance both the home purchase and necessary repairs. Conventional loans can also be used to buy fixer-uppers, but you may need a renovation loan or to cover repair costs separately. Conventional loans tend to offer more flexibility for properties in poor condition.
How many FHA or conventional loans can I have at one time?
For FHA loans, you can typically have only one active FHA loan at a time, because the property must be your primary residence. Conventional loans do not have this restriction—you can hold multiple conventional mortgages if you qualify, which makes them a better choice for second homes and investment properties.
