FHA vs Conventional Loans: Key Differences

The main difference between FHA and conventional loans is that FHA loans are government-insured and allow credit scores as low as 500 with a 10% down payment, while conventional loans are not government-insured and typically require a 620 credit score with at least 3% down. FHA loans also require an upfront mortgage insurance premium and annual premiums for the life of the loan (if you put down less than 10%), whereas conventional loans with less than 20% down require private mortgage insurance that can be canceled once you reach 20% equity.

Formula

The monthly payment for a fixed-rate mortgage is calculated using the standard amortization formula:

M = P × [r(1 + r)^n] / [(1 + r)^n – 1]

• M = monthly payment (principal and interest only)
• P = loan principal (purchase price minus down payment)
• r = monthly interest rate (annual rate ÷ 12)
• n = total number of payments (loan term in years × 12)

Worked Example

Using the default values from the calculator: a $300,000 home, 10% down payment, 6.5% APR, 30-year term.

1. Down payment: $300,000 × 0.10 = $30,000
2. Loan amount: $300,000 – $30,000 = $270,000
3. Monthly interest rate: 6.5% ÷ 12 = 0.0054167
4. Number of payments: 30 × 12 = 360
5. Monthly payment: $270,000 × [0.0054167(1.0054167)^360] / [(1.0054167)^360 – 1] ≈ $1,706.58

The calculator gives $1,706.58, matching the manual calculation. Note this is only principal and interest; property taxes, homeowners insurance, and mortgage insurance are extra.

What Is an FHA Loan?

An FHA loan is a mortgage insured by the Federal Housing Administration (FHA), a government agency within the U.S. Department of Housing and Urban Development. Because the government backs the loan, lenders are willing to accept lower down payments and lower credit scores than they would for conventional loans. FHA loans are popular with first-time homebuyers and those with limited savings or credit history.

Key FHA features include:

• Minimum down payment of 3.5% for credit scores of 580 or higher
• Credit scores as low as 500 with a 10% down payment
• Upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount, which can be rolled into the loan
• Annual mortgage insurance premium (MIP) ranges from 0.15% to 0.75% of the loan amount, paid monthly
• If you put down less than 10%, MIP lasts for the entire loan term; if 10% or more, MIP lasts for 11 years

What Is a Conventional Loan?

A conventional loan is a mortgage not insured or guaranteed by a government agency. It can be conforming (meets Fannie Mae and Freddie Mac limits) or non-conforming (jumbo loans). Conventional loans typically require a higher credit score and a larger down payment, but they offer more flexibility and lower long-term costs for well-qualified borrowers.

Key conventional features:

• Minimum down payment of 3% for fixed-rate loans (some programs allow 3% with a 620 credit score)
• Credit score minimum typically 620, though 660+ gets better rates
• Private mortgage insurance (PMI) required if down payment is less than 20%
• PMI can be canceled once you reach 20% equity (or automatically at 22%)
• No upfront mortgage insurance premium

Key Differences at a Glance

Feature	FHA Loan	Conventional Loan
Government backing	Yes (FHA)	No
Minimum credit score	500 (10% down) or 580 (3.5% down)	620 (typical)
Minimum down payment	3.5%	3% (some programs)
Mortgage insurance	UFMIP + annual MIP	PMI if down payment <20%
Mortgage insurance cancellation	MIP lasts 11 years or life of loan	PMI cancels at 20% equity
Debt-to-income ratio limit	Up to 57% with compensating factors	Typically 43% max
Property standards	Must meet FHA minimum property requirements	Lender may have own standards
Loan limits	Set by county (e.g., $498,257 for most areas in 2025)	Conforming limits set by FHFA (same as FHA in most areas)

How to Choose Between FHA and Conventional

Your choice depends on your financial profile and long-term goals.

• Credit score below 620: FHA is likely your only option (unless you have a large down payment).
• Credit score 620–679: Conventional may be possible, but FHA often has lower rates for this range.
• Credit score 680+: Conventional usually wins because PMI is cheaper than FHA MIP, and you can cancel it.
• Down payment under 10%: FHA may be cheaper upfront, but conventional with PMI could be better long-term if you plan to build equity quickly.
• Planning to stay long-term: Conventional is often better because you can eliminate PMI, lowering total cost.

Common Misconceptions

“FHA loans are only for first-time buyers.� False. Anyone who meets the credit and down payment requirements can use an FHA loan, even repeat buyers.

“Conventional loans always require 20% down.� False. Many conventional loans allow 3% down, though you’ll pay PMI until you reach 20% equity.

“FHA mortgage insurance is the same as PMI.� Not exactly. FHA MIP has an upfront fee and annual premiums; PMI is only monthly (or paid upfront) and can be canceled.

Cost Comparison: FHA vs Conventional

Use the calculator above to compare monthly payments for the same loan amount and rate. Remember to add mortgage insurance:

• FHA: UFMIP 1.75% of loan amount (financed) + annual MIP 0.15–0.75% (divided by 12 for monthly)
• Conventional: PMI typically 0.5–1.5% of loan amount annually, depending on credit score and down payment

For a $300,000 home with 10% down and a 6.5% rate, the FHA monthly payment (P&I) is $1,706.58. Add MIP at 0.55% of the loan amount ($270,000 × 0.0055 / 12 = $123.75) for a total of $1,830.33. For conventional, PMI might be $100–$150/month, but it will drop off after you reach 20% equity, reducing your payment later.

Frequently Asked Questions

Can I get an FHA loan with a 500 credit score?

Yes, but you must make a 10% down payment. With a credit score of 580 or higher, you can put down as little as 3.5%.

Is FHA mortgage insurance permanent?

If you put down less than 10%, you pay MIP for the entire loan term. If you put down 10% or more, MIP lasts for 11 years. The only way to remove it earlier is to refinance into a conventional loan.

Can I cancel PMI on a conventional loan?

Yes. You can request cancellation once you have 20% equity (based on the original appraised value or a new appraisal). It is automatically removed at 22% equity if you are current on payments.

Which loan has lower closing costs?

FHA loans often have slightly lower closing costs because the upfront MIP can be financed, but the annual MIP adds to your monthly cost. Conventional loans may have higher upfront costs but no upfront mortgage insurance.

Can I use an FHA loan for an investment property?

No. FHA loans are for owner-occupied primary residences only. For investment properties, you must use a conventional loan (typically with at least 15-20% down).

What is the maximum loan amount for FHA in 2025?

The FHA loan limit for most counties in 2025 is $498,257 for a single-family home. In high-cost areas, it can be up to $1,149,825. Check the HUD website for your county.

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in loan_amt | Loan Amount | $ | 300000 | 0 | 10000000
in down_pct | Down Payment | % | 10 | 0 | 100
in int_rate | Interest Rate (APR) | % | 6.5 | 0 | 20
in term | Loan Term | years | 30 | 1 | 40
sel loan_type | Loan Type | FHA=1, Conventional=2
out monthly | Monthly Payment (P&I) | $ | loan_amt * (1 - down_pct/100) * (int_rate/100/12 * (1 + int_rate/100/12)^(term*12)) / ((1 + int_rate/100/12)^(term*12) - 1) | 2
out total_interest | Total Interest | $ | (loan_amt * (1 - down_pct/100) * (int_rate/100/12 * (1 + int_rate/100/12)^(term*12)) / ((1 + int_rate/100/12)^(term*12) - 1)) * term*12 - loan_amt * (1 - down_pct/100) | 2
out loan_amount | Loan Amount After Down Payment | $ | loan_amt * (1 - down_pct/100) | 0