FHA and conventional loans are two of the most common mortgage choices for homebuyers, but they are built for different borrower profiles.
A conventional loan is not part of a specific government program. The CFPB says conventional loans typically cost less than FHA loans but can be harder to get. FHA loans are made by private lenders but insured by the Federal Housing Administration, and the CFPB says they allow down payments as low as 3.5%, allow lower credit scores than most conventional loans and have county-based loan limits.
For buyers, the right choice depends on credit profile, down payment, mortgage insurance, loan amount and total cost.
Key takeaways
- FHA loans are insured by the Federal Housing Administration.
- Conventional loans are not part of a specific government program.
- FHA loans can allow down payments as low as 3.5%.
- Some conventional programs allow down payments as low as 3%.
- FHA mortgage insurance is required on all FHA loans.
- Conventional loans with less than 20% down typically require private mortgage insurance.
- Buyers should compare Loan Estimates for both options before choosing.
FHA loans: lower barriers, required mortgage insurance
FHA loans are often attractive to buyers with smaller down payments or less-than-perfect credit.
HUD says FHA loans can have down payments as low as 3.5% of the purchase price and are available on one- to four-unit properties.
The tradeoff is mortgage insurance. The CFPB says mortgage insurance is required for all FHA loans and includes both an upfront cost and a monthly cost. If the borrower does not have enough cash to pay the upfront fee, the fee may be rolled into the mortgage, increasing the loan amount and overall cost.
FHA loans also have maximum loan amounts that vary by county.
Conventional loans: potentially cheaper, often stricter
Conventional loans may work better for buyers with stronger credit, higher down payments or lower risk profiles.
The CFPB says conventional loans typically cost less than FHA loans but can be more difficult to get. Conventional loans may be conforming, meaning they meet Fannie Mae or Freddie Mac rules and loan limits, or non-conforming, such as jumbo loans.
Conventional loans with down payments below 20% typically require private mortgage insurance. The CFPB says borrowers making a down payment of less than 20% usually need mortgage insurance, and conventional borrowers may be able to cancel private mortgage insurance under certain circumstances.
Low-down-payment conventional options
A conventional loan does not always require 20% down.
Fannie Mae’s HomeReady program allows down payments as low as 3% for eligible borrowers, and Fannie Mae notes that HomeReady can include flexible funding sources and reduced mortgage insurance requirements.
Freddie Mac’s Home Possible program also offers down payment options as low as 3% for eligible low- and very low-income borrowers, with flexible sources of funding.
That means some buyers should compare FHA with low-down-payment conventional programs instead of assuming FHA is the only low-cash option.
FHA vs. conventional: quick comparison
| Feature | FHA loan | Conventional loan |
|---|---|---|
| Backing | FHA-insured | Not government-program loan |
| Down payment | As low as 3.5% | Some programs as low as 3% |
| Credit flexibility | Generally more flexible | Often stricter |
| Mortgage insurance | Required on all FHA loans | Typically required below 20% down |
| Loan limits | County-based FHA limits | Conforming limits set by FHFA |
| Best fit | Smaller down payment or lower credit profile | Stronger credit or lower total cost |
What this means
FHA may be the better fit for buyers who need more credit flexibility or who cannot qualify for a conventional loan on good terms. Conventional may be better for buyers with stronger credit, higher down payments or access to low-down-payment programs with cancelable PMI.
The best way to compare is to ask lenders for official Loan Estimates for both FHA and conventional options using the same purchase price, down payment and expected closing date.
This article is general information, not individualized mortgage advice.
FAQ
Is FHA better than conventional?
Not always. FHA can be better for buyers with lower credit scores or smaller down payments, while conventional loans may be cheaper for stronger borrowers.
What is the minimum FHA down payment?
HUD says FHA down payments can be as low as 3.5% of the purchase price.
Can a conventional loan have 3% down?
Yes. Fannie Mae HomeReady and Freddie Mac Home Possible both offer eligible borrowers down payment options as low as 3%.
Does FHA require mortgage insurance?
Yes. The CFPB says mortgage insurance is required for all FHA loans.
Can conventional PMI be canceled?
In some cases, yes. The CFPB says borrowers can request PMI cancellation when the loan balance is scheduled to reach 80% of the home’s original value, subject to requirements.
Sources
- CFPB FHA Loans
- CFPB Conventional Loans
- HUD FHA Loans
- HUD FHA Mortgage Limits
- FHFA Conforming Loan Limits
- Fannie Mae HomeReady Mortgage
- Freddie Mac Home Possible
- CFPB Mortgage Insurance
- CFPB PMI Cancellation
