By the CalcLedger editorial team · Updated September 2026 · Examples use illustrative rates · How we calculate
Most U.S. homebuyers end up choosing between two kinds of mortgage: an FHA loan, insured by the Federal Housing Administration, and a conventional loan, which follows guidelines set by Fannie Mae and Freddie Mac. Both can work with a small down payment. The difference is in who qualifies easily, how mortgage insurance works, and what you pay over time.
The key differences at a glance
| FHA loan | Conventional loan | |
|---|---|---|
| Minimum down payment | 3.5% (with a 580+ score) | 3% for some first-time buyer programs, often 5% |
| Typical minimum credit score | 580 (500–579 with 10% down) | About 620 |
| Upfront mortgage insurance | 1.75% of the loan, usually financed | None |
| Monthly mortgage insurance | Annual MIP, commonly 0.50%–0.55% | PMI, roughly 0.3%–1.5%, based on credit |
| When insurance ends | After 11 years with 10%+ down; otherwise, the life of the loan | Can be removed at 80% loan-to-value; ends automatically at 78% |
| 2026 one-unit loan limit | $541,287 in most counties, up to $1,249,125 in high-cost areas | $832,750 in most counties, up to $1,249,125 in high-cost areas |
Why FHA is easier to qualify for
Because the government insures FHA loans against default, lenders are willing to accept lower credit scores and higher debt-to-income ratios. A buyer with a 600 credit score, or with past credit problems, may get approved for an FHA loan at a reasonable rate when a conventional loan would be expensive or out of reach. FHA also allows the entire down payment to come from a gift from family.
Why conventional often costs less over time
The biggest difference is mortgage insurance. On most FHA loans with less than 10% down, the annual premium lasts for the life of the loan. The only way to drop it is to refinance into a conventional loan. Conventional PMI, by contrast, goes away once you've paid the balance down to 80% of the home's original value, and it's cheaper for borrowers with strong credit. Our PMI guide covers the removal rules in detail.
Side by side: a $350,000 home
This example uses illustrative rates. FHA rates often run a little lower than conventional rates, so we assume 6.25% for FHA and 6.5% for conventional, both 30-year fixed.
| Loan | Loan amount | Principal & interest | Mortgage insurance | Total monthly |
|---|---|---|---|---|
| FHA, 3.5% down | $343,661* | $2,116 | $155 | $2,271 |
| Conventional, 5% down, excellent credit (0.4% PMI) | $332,500 | $2,102 | $111 | $2,212 |
| Conventional, 5% down, fair credit (0.9% PMI) | $332,500 | $2,102 | $249 | $2,351 |
*Includes the 1.75% upfront premium ($5,911) added to the $337,750 base loan. Taxes and homeowners insurance not included.
Look at what happens over time. With 5% down, the conventional loan's balance is scheduled to reach 80% of the original value after about 10 years and 4 months. At that point you can ask to remove the PMI, and your payment drops. The FHA borrower keeps paying MIP until the loan is paid off or refinanced.
So the pattern is:
- Excellent credit (roughly 740+): conventional is usually cheaper from day one, and much cheaper in the long run.
- Fair credit (roughly 620–680): FHA often has the lower monthly payment at first, because PMI is expensive for these borrowers. But MIP never goes away, so the advantage shrinks the longer you keep the loan.
- Below 620: FHA may be the only realistic option.
A common strategy: start with FHA, refinance later
Many buyers use FHA to get into a home sooner, then build their credit and equity. Once they reach 20% equity, through payments and appreciation, they refinance into a conventional loan with no mortgage insurance at all. This can work well, but it isn't guaranteed. Refinancing costs money, and it only makes sense if rates at that time are reasonable. Our refinance break-even guide shows how to check.
Other differences to know
- Property standards: FHA appraisals include health and safety requirements. A home with a damaged roof, peeling paint in an older house, or missing handrails may need repairs before closing. That can make FHA harder for fixer-uppers.
- Occupancy: FHA loans are for your primary residence. Conventional loans can also be used for second homes and investment properties.
- Seller perception: in competitive markets, some sellers prefer conventional offers because of the FHA appraisal requirements. A strong pre-approval letter helps either way.
- Loan limits: FHA limits are lower in most counties. In 2026 the FHA floor is $541,287, compared with $832,750 for a conventional conforming loan. Check your county's limits if you're buying above those amounts.
How to decide
- Check your credit score. Many banks and card issuers show it for free.
- Get quotes for both loan types from at least two or three lenders. Ask each for a Loan Estimate that shows mortgage insurance separately.
- Compare the total monthly payment and how long the mortgage insurance lasts.
- Think about how long you'll keep the loan. The longer you plan to stay, the more conventional's removable PMI is worth.
Enter the home price, down payment, and rate for each option in the mortgage calculator, and add the mortgage insurance to see your real monthly cost. For how the down payment affects the price you can afford, see how much house can I afford.