FHA vs. conventional loan: which is better?

What is the difference between an FHA loan and a conventional loan?

An FHA loan is insured by the Federal Housing Administration, part of HUD. If you default, FHA pays the lender's claim. That insurance is what lets lenders accept smaller down payments and lower credit scores.

A conventional loan has no government insurance. Most conventional loans are sold to Fannie Mae or Freddie Mac, so they follow those companies' rules and loan limits. When you put down less than 20%, a private mortgage insurance (PMI) company covers part of the lender's risk instead.

Both are offered by the same banks, credit unions and mortgage brokers. You can ask a loan officer to price both for the same home and compare.

How much do you need to put down, and what credit score do you need?

FHA. HUD sets the floor by your decision credit score:

• 580 or higher: eligible for maximum financing, which means 3.5% down on a purchase (96.5% loan-to-value).
• 500 to 579: loan-to-value is capped at 90%, so you need at least 10% down.
• Below 500: not eligible for FHA financing.

These are HUD minimums. Individual lenders can set stricter requirements. HUD's Mortgagee Letter 2026-11 adds FICO 10T and VantageScore 4.0 as accepted score models for case numbers assigned on or after January 1, 2027, but it keeps the same 500 and 580 thresholds.

Conventional. The lowest down payment is 3% (97% loan-to-value) on specific programs. Fannie Mae's standard 97% LTV option requires at least one first-time homebuyer. Its HomeReady option has income limits of 80% of area median income. Freddie Mac's HomeOne allows 97% LTV for qualified first-time buyers with no income limits.

On credit, Fannie Mae's Selling Guide says a minimum credit score is not required for loans underwritten through its Desktop Underwriter system. That change applied to loan files created on or after November 16, 2025. Manually underwritten Fannie Mae loans still need at least 620 for fixed-rate loans and 640 for ARMs. In practice, your score still drives your approval and your price, and lenders may apply their own minimums.

How does FHA mortgage insurance (MIP) work?

Most standard FHA purchase loans pay two premiums:

• Upfront MIP: 1.75% of the base loan amount. Most borrowers finance it into the loan.
• Annual MIP: billed monthly with your payment. The rate depends on the base loan amount, the term and the loan-to-value ratio.

For loans with terms over 15 years, HUD's current rates are:

Loans of 15 years or less pay lower annual rates, from 0.15% to 0.65%. The key point: if you put down less than 10%, FHA's annual premium lasts as long as the loan does. The usual way out is to refinance into a different loan later.

When can you cancel PMI on a conventional loan?

The federal Homeowners Protection Act sets three dates for conventional PMI, all based on your home's original value:

• 80%: you can ask in writing to cancel PMI once your principal reaches 80% of the original value, either on schedule or through extra payments. You need a good payment history, must be current, must certify that there are no junior liens, and may need evidence that the home has not lost value.
• 78%: PMI must end automatically when your scheduled balance reaches 78% of the original value, as long as you are current.
• Midpoint: if PMI has not ended by then, it must end after the midpoint of the loan term once you are current on payments. On a 30-year loan, that is the month after payment 180.

PMI pricing is set by private insurers and varies with your credit score and down payment. Depending on your score and down payment, PMI can cost more or less than FHA's annual premium. Unlike FHA's premium on a low-down-payment loan, it eventually goes away.

What are the 2026 loan limits?

FHA and conventional limits are set by county. For a one-unit home in 2026:

• FHA: $541,287 in low-cost areas (the floor) up to $1,249,125 in high-cost areas (the ceiling). These apply to case numbers assigned on or after January 1, 2026.
• Conventional (conforming): $832,750 in most of the country, up to $1,249,125 in high-cost areas.

Notice that the FHA floor is lower than the conforming baseline. In many counties, the most you can borrow with FHA is well below what a conventional loan allows. A loan above the conforming limit is a jumbo loan, which follows different rules. Higher limits apply to two- to four-unit homes and in Alaska, Hawaii, Guam and the U.S. Virgin Islands.

Do FHA loans have stricter property standards?

Yes. The FHA appraiser checks the home against HUD's minimum property requirements, often summed up as safety, security and soundness. Defects that affect the safety, security or soundness of the home can be flagged as required repairs before closing.

That protects you, but required repairs can complicate the purchase of a home that needs work. An appraisal is not a home inspection either way. HUD encourages buyers to get a separate inspection.

Who is each loan a good fit for?

FHA often fits you if:

• Your credit score is below the range where conventional pricing is competitive.
• You have a smaller down payment and a higher debt load.
• You plan to refinance later, so lifetime MIP matters less.

Conventional often fits you if:

• You have solid credit and want mortgage insurance that can be canceled.
• You can put down 20%, which avoids mortgage insurance entirely.
• You need a loan amount above your county's FHA limit, or the home may not meet FHA property standards.

Through a brokerage, you can see FHA and conventional quotes from multiple lenders side by side. If you already own a home and want to tap equity instead, see helochq.com for HELOC basics.