How FHA and Conventional Loans Are Structured
FHA loans are insured by the Federal Housing Administration, a branch of the U.S. Department of Housing and Urban Development. This government backing reduces lender risk, which allows more flexible qualification standards. Conventional loans, by contrast, are not government-insured and must conform to guidelines set by Fannie Mae or Freddie Mac if they are to be sold on the secondary market.
For a broader overview of how these and other loan types work together, see Mortgage Types Explained, which covers fixed-rate, ARM, VA, and USDA options as well.
| Criteria | FHA Loan | Conventional Loan | |
|---|---|---|---|
| Minimum Credit Score | 500 (10% down) / 580 (3.5% down) | Typically 620+ | |
| Minimum Down Payment | 3.5% (score 580+) | 3% for qualifying buyers | |
| Mortgage Insurance | Required for life of loan (most cases) | Required until 20% equity; cancellable | |
| Upfront Insurance Cost | 1.75% UFMIP at closing | None | |
| Loan Limits | County-based HUD limits (lower) | Higher FHFA conforming limits | |
| Property Standards | Strict FHA appraisal requirements | More flexible condition standards | |
| Best For | Lower credit, limited savings | Strong credit, larger down payment |
Credit Score and Down Payment Requirements
Credit requirements are one of the most significant differences between these two loan types. FHA loans accept credit scores as low as 500, though borrowers in the 500–579 range must put down at least 10%. Those with a score of 580 or higher can qualify for the minimum 3.5% down payment. Conventional loans generally require a minimum score of 620, and the most competitive interest rates are reserved for borrowers at 740 or above.
Down payment requirements also differ. Conventional loans offer 3% down options for qualifying first-time buyers, but most borrowers put down more to avoid private mortgage insurance (PMI) or secure better terms. Borrowers who can put down 20% or more on a conventional loan avoid PMI entirely from the start.
Check Your Credit Before Applying
Pulling your credit report before applying gives you time to identify and dispute any errors that could be dragging down your score. Even a modest score improvement — say, from 619 to 620 — can open access to conventional loan programs. Free credit reports are available annually from each of the three major bureaus through AnnualCreditReport.com.
Mortgage Insurance: A Key Cost Difference
Mortgage insurance is where the two loan types diverge most sharply in terms of long-term cost. FHA loans require two forms of mortgage insurance: an upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount, paid at closing or rolled into the loan, and an annual mortgage insurance premium (MIP) collected in monthly installments. For most FHA borrowers who put down less than 10%, MIP lasts for the entire life of the loan.
Conventional loans require PMI only when the down payment is less than 20%, and PMI can be canceled once the borrower reaches 20% equity in the home — either through payments, appreciation, or a combination of both. This structural difference means a conventional loan can become significantly less expensive over time for borrowers who start with a small down payment but build equity quickly.
3.5%
Minimum FHA down payment
FHA guidelines set by HUD allow a 3.5% down payment for borrowers with a credit score of 580 or higher.
1.75%
FHA upfront mortgage insurance premium
HUD requires an upfront MIP of 1.75% of the loan amount on all FHA-insured mortgages at closing.
620
Typical minimum credit score for conventional loans
Most conventional lenders following Fannie Mae and Freddie Mac guidelines require at least a 620 credit score.
Loan Limits, Property Standards, and Flexibility
FHA loans are subject to county-level loan limits set annually by HUD. In lower-cost markets, these limits can be substantially below conforming conventional loan ceilings, potentially excluding higher-priced properties. FHA loans also impose minimum property condition standards; appraisers must flag safety or structural issues that could delay or derail a purchase if the seller is unwilling to make repairs.
Conventional loans offer more flexibility on property type and condition in many cases, and they conform to higher loan limits set by the Federal Housing Finance Agency (FHFA). For buyers weighing financing structure more broadly — including how a down payment compares to paying outright — the underlying logic shares parallels with decisions like financing versus paying cash for a car.
Buyers should also consider how their mortgage type interacts with loan structure. For a side-by-side look at fixed-rate versus adjustable-rate options and how they layer onto these loan types, see Fixed-Rate vs. Adjustable-Rate Mortgage.
This article is for general informational purposes only and does not constitute personalized financial, legal, or mortgage advice. Consult a qualified mortgage professional or financial adviser before making decisions about home financing.
