FHA vs. Conventional Loans
One of the biggest decisions you'll make as a homebuyer — and it's not as complicated as your lender makes it sound. Let's break it down.
Cal says: Don't let anyone tell you FHA is 'worse.' It helped millions of first-time buyers get into homes. The best loan is the one that fits YOUR situation.
Backed by the Federal Housing Administration. Designed for buyers who might not have perfect credit or a massive savings account. Think of it as the government saying, "We got you."
Best for: First-time buyers, lower credit scores, smaller down payments
Not backed by the government. Offered by private lenders, credit unions, and banks. More flexibility, but typically wants you to bring better credit to the table.
Best for: Good credit (680+), larger down payments, wanting to drop PMI eventually
Side-by-Side Comparison
| Feature | FHA | Conventional |
|---|---|---|
| Minimum Down Payment | 3.5% | 3% (some programs) |
| Credit Score Minimum | 580 (3.5% down) or 500 (10% down) | 620+ |
| Mortgage Insurance | Required for life of loan (unless you refinance) | Removable at 80% LTV |
| Upfront Insurance Fee | 1.75% of loan amount | None |
| Monthly Insurance Cost | 0.45%–1.05% annually | 0.15%–1.95% annually (varies more by credit) |
| Debt-to-Income Ratio | Up to 57% (with compensating factors) | Up to 50% |
| Loan Limits (2024) | $498,257 (most areas) | $766,550 (most areas) |
| Property Requirements | Stricter — must be primary residence | More flexible — investment properties OK |
| Interest Rates | Often slightly lower | Competitive (depends on credit) |
| Assumability | Yes — transferable to buyer | Generally no |
Here's the thing nobody tells you at the closing table: FHA mortgage insurance never goes away (on loans with less than 10% down). With a conventional loan, once you've built 20% equity, you can kiss PMI goodbye.
With FHA? That insurance premium follows you like a lost puppy — for the entire life of the loan. The only escape is refinancing into a conventional loan once you've built enough equity and credit. It's not a dealbreaker, but it's definitely worth knowing upfront.
Learn more about PMI and how to avoid itWhich Loan is Right for You?
Real scenarios, real recommendations. (Spoiler: there's no universally "better" loan — it depends on your situation.)
→ Go with: FHA
Lower credit requirements and the 3.5% down payment make FHA the easier path. Yes, you'll pay mortgage insurance forever (or until you refinance), but you'll get in the door sooner.
→ Go with: Conventional
With great credit, you'll get competitive rates and your PMI will be cheap. Once you hit 80% LTV, that PMI vanishes — something FHA can't offer.
→ Go with: FHA
FHA allows up to 57% DTI with compensating factors. If you've got student loans or car payments eating into your income, FHA gives you more breathing room.
→ Go with: Conventional
FHA has strict property requirements and requires it to be your primary residence. Conventional loans offer more flexibility for properties that need work or aren't your main home.
Common Myths, Busted
Myth: "FHA loans are only for first-time buyers"
Reality: Nope! Anyone can get an FHA loan. First-time buyers just tend to use them more because of the lower requirements.
Myth: "Conventional loans always require 20% down"
Reality: Not true. Many conventional programs allow as little as 3% down. The 20% threshold just lets you avoid PMI.
Myth: "FHA loans have lower interest rates"
Reality: Sometimes, but not always. The difference is usually small, and when you factor in FHA's mandatory mortgage insurance, conventional can end up cheaper overall.
Myth: "You can't switch from FHA to conventional later"
Reality: You absolutely can — it's called refinancing. Many buyers start with FHA and refinance to conventional once their credit improves or they hit 20% equity.
Ready to Run the Numbers?
Now that you know the difference, see what your actual payment would look like.