FHA vs. Conventional Loans: Which Is Right for You?

Buying your first home is an exciting milestone, and choosing the mortgage is a big part of it. The two most common paths for first-time buyers are a Conventional loan and an FHA loan. There's no universal right answer. It depends on your credit history, your savings and your debts. This guide isn't a list of rigid rules; it's a roadmap so you can make an informed choice and do this thing the right way.

The core difference: who stands behind the loan

Conventional loans are private mortgages that aren't backed by the government. They follow guidelines set by Fannie Mae and Freddie Mac. Because they carry private-market risk, they typically ask more of the borrower, and they reward a strong financial profile.

FHA loans are insured by the Federal Housing Administration, a government agency created to expand homeownership. That insurance protects lenders if a borrower defaults, which allows more lenient requirements, especially for buyers with limited savings or lower credit scores.

That's why FHA is often the more forgiving option, while Conventional can reward borrowers with strong finances.

Credit score: the first hurdle

• Conventional: Since November 2025, Fannie Mae's automated underwriting no longer sets a hard minimum credit score. Manually underwritten loans still need at least 620 (640 for ARMs), and many lenders set their own minimum, often around 620. Higher scores generally qualify for better pricing; Fannie Mae prices loans in score bands that run up to 780 and above.
• FHA: FHA allows scores as low as 580 with just 3.5% down, though individual lenders may set higher minimums. With a score between 500 and 579, FHA is still possible with 10% down.

The down payment: busting the 20% myth

You don't need 20% down. Both loans offer low down payment options. Twenty percent only matters if you want to skip mortgage insurance entirely.

Conventional: as little as 3%

• First-time buyers, any income: standard 3%-down loans (Fannie Mae's 97% loan, Freddie Mac's HomeOne).
• Income-qualified buyers, first-time or not: HomeReady and Home Possible allow 3% down for buyers earning up to 80% of the area median income.
• Everyone else: typically 5% minimum.

FHA: 3.5% minimum

3.5% down with a credit score of 580 or higher; 10% down with a score between 500 and 579. Some Conventional loans allow a lower minimum (3%) than FHA (3.5%), a nuance a lot of buyers miss.

Buying in Colorado? The Colorado Housing and Finance Authority (CHFA) offers down payment assistance as a grant or a deferred second mortgage, with income limits (and purchase price limits on some programs). Ask whether you qualify before you assume you need to save more.

Mortgage insurance: the biggest long-term difference

Conventional: private mortgage insurance (PMI)

Required with less than 20% down, usually paid monthly, and priced by your credit score and down payment. The big advantage: it can come off. You can ask to cancel it once your balance reaches 80% of the home's original value with a good payment history, and it ends automatically when your balance is scheduled to reach 78%. If your home gains value, servicers may remove it sooner based on a new appraisal, generally after at least two years of payments.

FHA: mortgage insurance premium (MIP)

Required on every FHA loan, whatever the down payment, in two parts:

• Upfront (UFMIP): 1.75% of the base loan amount (current HUD rate as of 2026; see Mortgagee Letter 2023-05), usually financed into the loan.
• Annual (MIP): paid monthly. With less than 10% down, it lasts for the life of the loan. With 10% or more down, it lasts 11 years.

FHA's long-lasting mortgage insurance is the long-term price of its upfront flexibility.

Loan limits and debt-to-income

Loan limits. Both loans have maximum loan amounts. In most of the country, Conventional limits are higher than FHA limits, which matters in higher-cost markets. Limits are set every year and vary by county: look up conforming limits on the FHFA website and FHA limits with HUD's loan limit lookup.

Debt-to-income (DTI) is the share of your gross monthly income that goes to monthly debt payments. Fannie Mae's automated underwriting allows up to 50% on conventional loans. FHA automated (TOTAL Scorecard) approvals have no fixed published DTI cap. Manually underwritten FHA loans are limited to 31/43, rising to as high as 40/50 with compensating factors. Manual underwriting is tighter on both.

No single number decides the loan. A high DTI and a modest credit score may point to FHA, while the same DTI with strong credit may qualify just as well with Conventional, often with cheaper mortgage insurance.

Quick reference: the key differences

• Backing: FHA is insured by the Federal Housing Administration. Conventional isn't government-backed and follows Fannie Mae / Freddie Mac guidelines.
• Credit score: FHA needs 580 for 3.5% down (500–579 with 10% down). Conventional has no hard minimum in Fannie Mae's automated underwriting; many lenders set their own minimum, often around 620.
• Down payment: FHA 3.5% minimum. Conventional 3% for first-time or income-qualified buyers, typically 5% otherwise.
• Mortgage insurance: FHA always, upfront plus annual. Conventional only under 20% down, and cancellable.
• Loan limits: FHA generally lower; Conventional generally higher.
• Ideal buyer: FHA fits buyers who want lower barriers to entry. Conventional fits buyers with solid credit who want to build equity and drop PMI.

Appraisals: two different approaches

Conventional appraisals focus mainly on market value: the appraiser confirms the value supports the price by looking at the home's condition and comparing recent sales nearby. Even so, conditions that affect safety, soundness or structural integrity still have to be repaired. Cosmetic and minor items usually aren't required repairs.

FHA appraisals put special emphasis on the home's safety, security, and soundness. An appraiser on FHA's Appraiser Roster does a more rigorous review, including a "head and shoulders" look at attics and crawl spaces and a check for peeling paint in homes built before 1978. Safety issues must be fixed before closing.

That stricter FHA appraisal cuts both ways. It adds protection, because the home has to be safe and livable. But in a competitive market, some sellers prefer a Conventional offer, which they see as faster and less likely to hit repair hurdles.

Which loan fits you?

An FHA loan might be your best choice if…

• Your credit score is on the lower side. Many lenders set their own Conventional minimum, often around 620; below that, FHA's 580 minimum for 3.5% down is often the most workable option.
• Your debt-to-income is high. Significant student loan, car or credit card debt plus a moderate score can be easier to work with on FHA.
• Your savings are limited. FHA's 3.5% down is a strong advantage if you haven't had time to save a large down payment.

A Conventional loan might fit better if…

• You have strong credit. Higher scores generally qualify for better pricing; Fannie Mae prices loans in score bands that run up to 780 and above.
• You can put 20% or more down. You'll avoid mortgage insurance altogether.
• You want mortgage insurance to go away. You can request PMI removal once your balance reaches 80% of the home's original value, and it ends automatically at 78%. Servicers may also remove it sooner based on appreciation and a new appraisal.
• You're buying in a competitive market. Some sellers see a Conventional offer as a faster, cleaner close.
• The home may not pass a strict FHA appraisal. Older homes with minor issues often close more smoothly with Conventional.

Get pre-approved first

Pre-approval isn't a formality. It defines your buying power, keeps your home search realistic, and it's the best way to have an informed conversation about whether FHA or Conventional fits you best.

Do

• Be completely honest on the application
• Keep paying bills on time
• Have W-2s, pay stubs and bank statements ready
• Ask questions if anything is unclear
• Stay in regular contact with your loan team

Don't

• Make big purchases like furniture, cars or boats
• Apply for new credit or close existing accounts
• Spend the down payment money
• Change jobs if you can avoid it
• Co-sign loans for anyone else

"The fastest way to delay closing? Buying a Tesla while we're reviewing your tax returns." — The Everetts Lending Team

Meet the team

Jimmy Everetts, Senior Loan Officer. The architect of your home financing game plan. A Navy veteran with a knack for solving tough problems, he breaks down your options, answers your toughest questions, and steers you from first call to closing, always with straight talk and solutions, not sales pitches.

Brandon Gonzales, Loan Processing Expert. The detail-obsessed pro keeping your file accurate and moving. He handles the paperwork, timelines and lender communication, so your loan stays on schedule and you avoid last-minute surprises.

Rachel Holden, Client Experience Expert. Makes sure every client feels supported at every stage, from first introduction to long after closing. The creative force behind our client appreciation events, she keeps communication personal, so you always know you're more than a file.