Buying a home comes with a lot of moving parts, and financing is often where things start to feel overwhelming. You might hear different loan types tossed around and wonder which one actually makes sense for you. Maybe you’ve talked to a lender or started budgeting, only to realize there’s more to learn. That’s usually when one big question comes up: what is the difference between FHA and conventional loan?
Understanding the nuances can make the entire homebuying process feel a whole lot more manageable. In a nutshell, FHA loans have a few benefits for first-time homebuyers that conventional loans don’t. You can get an FHA loan with a lower credit score, for example.
However, conventional loans come with their own set of benefits, like the ability to eliminate private mortgage insurance if you have a low down payment. If you’re torn between these two types of mortgages, here are the big differences between an FHA and a conventional loan.
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Backing type
FHA loans are loans that are backed by the Federal Housing Administration, and they must be issued by an FHA-approved lender. Meanwhile, conventional loans are not backed by the FHA but are insured by private lenders, and therefore, they can be issued by a wider selection of lenders.
So what does it mean when the FHA insures a loan? If the buyer defaults on the mortgage and the home forecloses, the lender is protected from a certain degree of loss by the FHA. This extra layer of protection encourages lenders to extend loans to borrowers with lower down payments and credit scores, expanding the opportunity of homeownership to borrowers that may otherwise be ineligible under traditional conventional loans.
Credit scores
In terms of credit scores, an FHA loan is more flexible than a conventional loan. Conventional loans typically require a credit score of 620 or higher, while an FHA loan can be secured with a credit score below 580 if you have a 10% down payment, or as low as 580 if you have a 3.5% down payment.
With FHA loans, “usually the credit score is a little bit less. They’re much more forgiving,” says Phoenix-based agent Andrew Monaghan, who has over two decades of experience placing buyers in their dream homes. “It provides a different opportunity for homeownership.”
Down payments
While conventional loans typically require a higher credit score than an FHA loan, if your credit score is high, you can still secure a conventional loan with a 3% down payment. However, most conventional loans typically require a down payment of between 5% and 20%.
The minimum down payment for an FHA loan is 3.5%, making FHA loans more accessible to first-time homebuyers who might not have a large amount saved for a down payment.
Also, for FHA loans, there are down payment assistance programs available that can help ease the burden of coming up with a down payment. FHA loans will allow 100% of the down payment amount to be a gift, while conventional loans only allow a portion of the down payment to be a gift.
»Learn more: Take the guesswork out of saving for a home. Our average down payment calculator gives you a clear snapshot of what’s required.
Mortgage insurance, private or otherwise
Mortgage insurance is insurance that lenders require for certain loans that the lender considers riskier. Private mortgage insurance, or PMI, is issued for conventional loans. Government-backed loans also require mortgage insurance, but that insurance is coming from the FHA, not a private institution.
If a buyer defaults on their loan and the home goes into foreclosure, the price the house will get at auction may not cover the balance of the loan. In a situation like this, mortgage insurance makes up the difference to the lender.
If you have less than a 20% down payment on a conventional loan, you’ll have to pay PMI. The good news is, you can arrange to have PMI removed once you have 20% equity built up in your home. However, the lender will not automatically remove PMI once you hit your 20% equity threshold, so be sure to keep an eye on it and contact your lender when you know you have 20% equity built up.
With an FHA loan, buyers are required to pay a 1.75% upfront mortgage insurance premium (MIP) at closing, regardless of the size of the down payment. And if you don’t have at least a 10% down payment, you will have to pay mortgage insurance for the lifetime of the loan, until you refinance the loan or sell the home. If you have a 10% down payment or higher, the FHA requires you to pay MI for 11 years.
Debt-to-income ratio
Your debt-to-income ratio is exactly what it sounds like: the amount of debt you have divided by your income. Debt includes anything that would appear on your credit report, including:
- Credit cards
- Auto loans
- Student loans
- Alimony or child support payments
- Installment loans
- Business debt
DTI ratio calculations do not include:
- Medical debts
- Taxes
- Utilities
- Child care
- Union dues
- Insurance
- Commuting costs
The FHA’s maximum qualifying debt ratio is 43%. That means your total debt should not exceed 43% of your income.
Conventional loans, on the other hand, have a maximum qualifying DTI ratio of 45% to 50%. In this case, your total debt payments generally shouldn’t exceed 45% of your income, but in some cases, lenders will allow up to 50% debt to income.
Loan limits
Loan limits are the amount of money an institution will lend to a buyer under a given program and generally vary based on where the subject property is located. In 2026, Fannie Mae’s limit for a single-family conventional loan is $832,750, with higher limits in certain high-cost areas.
Meanwhile, FHA loan limits for 2026 are $541,287 in low-cost areas for single-family homes, and $1,249,125 in high-cost areas. If you’re thinking about an FHA loan, the mortgage limits calculator by county is a good way to gauge whether or not an FHA loan will work for you. Below are some examples run through the mortgage limits calculator for different counties.
| County | FHA Loan Limit |
| San Francisco County, California | $1,249,125 |
| Anne Arundel County, Maryland | $747,500 |
| Marion County, Indiana | $541,287 |
| Grand Forks County, North Dakota | $541,287 |
| Tarrant County, Texas | $563,500 |
Refinancing
FHA loans have what they call a streamline refinance option. They’re called streamline refinances because there is not as much documentation required by the lender. They don’t require an additional credit check, income verification, or re-appraisal of the property. This refinance option is only available to borrowers who currently have an FHA loan.
Streamline refinances have a few criteria:
- The loan must be FHA-insured
- Payments must be current
- The refinance must result in a net tangible benefit for the borrower
- Cash out must not exceed $500
If you have an FHA loan and are looking to refinance, a conventional loan may be an option if you have enough equity built up in the house. If you have 20% equity built up, refinancing into a conventional loan will get rid of mortgage insurance on your FHA loan, which can save you hundreds of dollars a month.
On the other hand, refinancing a conventional loan does require a credit check, income verification, and often a second appraisal.
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Waiting periods
After a foreclosure or bankruptcy, lenders require a certain amount of time before they will consider lending to you. These periods differ for FHA and conventional loans and depend on the type of bankruptcy. The table below outlines the different waiting periods and conditions for each loan.
| FHA | Conventional | |
| Chapter 7 Bankruptcy | Two years | Two years with extenuating circumstances, four years otherwise |
| Chapter 11 | Two years | Two years with extenuating circumstances, four years otherwise |
| Chapter 13 | No waiting period, as long as the payments have been made for a period of at least a year | Two years from the discharge date, or four years from the dismissal date |
| Foreclosure | Three years | Three years with extenuating circumstances, seven years otherwise |
Loan application
While FHA loans are popular because of their lower credit score and down payment requirements, they do have some specific qualifications that buyers need to meet. FHA-backed lender requirements include:
- FHA loans can only be used on owner-occupied residences, so they cannot be used for investment or vacation properties
- Down payment: 10% for credit scores 500-579; 3.5% over 580
- 43% maximum DTI ratio
- Proof of employment
- Proof of steady income verified by paystubs, W-2s, and tax returns
- No non-occupying co-borrowers
- Bankruptcy or foreclosure requirements as listed above
Meanwhile, applying for a conventional loan involves stricter requirements, especially when it comes to credit and documentation. Preparing everything in advance can help you move through the process more smoothly and avoid delays. These are the application requirements:
- Typically 620 or higher credit score (higher scores get better rates)
- Below 43% DTI ratio, though some lenders allow more
- Down payment: As low as 3% for some programs, but 5% to 20% is more common
- Proof of steady income verified by paystubs, W-2s, and tax returns (usually last 2 years)
- Stable work history, typically at least 2 years
- Bank statements and proof of savings and reserves for asset documentation
- Property appraisal
- PMI for those putting down less than 20%
- Valid ID and Social Security number for identity and credit checks
Appraisals
Conventional loan appraisals and FHA loan appraisals are different as well. In a nutshell, FHA loan appraisals have more conditions that need to be met in order to meet the minimum property standards set by the Department of Housing and Urban Development.
A conventional appraisal will appraise the house as-is, while an FHA appraisal often leads to certain things needing to be repaired or completed before the lender will finance the house.
“For instance, you’ve got a home that needs paint. Whereas in a conventional financing, they’ll say, ‘Okay, it needs paint, here’s your value based on the condition of the house,’ on an FHA loan, they’ll say, ‘You need paint, it’s a habitability issue, you need to get the house painted before we’ll finance you,’” explains Monaghan.
Side-by-side comparison: FHA vs. conventional loan
Choosing between an FHA and a conventional loan can feel overwhelming, especially with so many factors to consider. This side-by-side comparison breaks down the key differences to help you quickly see which option best fits your needs.
| FHA loan | Conventional loan | |
| Backing type | Government-insured by the FHA | Not government-insured |
| Credit score | More flexible; as low as 500 to 580, depending on down payment | Typically 620+ required |
| Down payment | As low as 3.5%; can be fully gifted or use assistance programs | As low as 3%, but often 5% to 20%; gift funds may be limited |
| Mortgage insurance | 1.75% upfront + ongoing MIP; lasts 11 years or life of loan | PMI required under 20% down; removable at 20% equity |
| Debt-to-Income ratio | Up to 43% | Typically 45% to 50% max |
| Loan limits | Vary by county; generally lower than conventional in many areas | Higher conforming limits set by Fannie Mae |
| Refinancing | Streamline refinance option with less documentation | Full refinance with standard documentation |
| Waiting periods | Shorter after bankruptcy or foreclosure | Longer waiting periods required |
| Appraisal standards | Stricter property requirements (must meet livability standards) | More flexible; home appraised “as-is” |
Ready to buy your dream home?
For many buyers, choosing between an FHA and a conventional loan feels like standing at a fork in the road, each path offering different trade-offs. One may make homeownership more accessible right now, while the other could save you more over time, depending on your financial situation.
The challenge is figuring out which option fits not just your budget, but your long-term plans and peace of mind. Find a top agent through HomeLight to compare loan scenarios, connect with the right lenders, and make confident decisions every step of the way.
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