FHA vs. Conventional Loan: Why Highly Qualified Buyers Might Choose an FHA | Mortgages

Many conventional mortgages are conforming loans that follow agency guidelines. Those guidelines are developed by government-sponsored enterprises such as Fannie Mae and Freddie Mac. “FHA is its own entity and has its own regulations,” says Felton Ellington, lending manager with JPMorgan Chase.

Conventional loans are the “gold standard” of mortgages, according to Dan Iglesia, director of mortgage sales for Georgia’s Own Credit Union, which offers mortgages in 49 states. “There really aren’t a whole lot of reasons if you are approved for conventional to not go for it.”

However, some people may prefer an FHA loan even if they can qualify for a conventional mortgage. Here are a couple of reasons why.

One of the most appealing features of an FHA loan is that it requires a down payment of only 3.5%. That low down payment is one reason why the FHA program is popular with first-time homebuyers, although anyone can use it.

“You’ll find some conventional products that offer as low as 3% down,” Ellington says. Chase is one of the lenders that offer conventional loans with a down payment of this amount.

However, those programs might come with income limits, and some down payment assistance programs may be limited to FHA loans, according to Joel Richardson, vice president and branch manager for First Community Mortgage in Austin, Texas.

Making a down payment of less than 20% – on both conventional and FHA loans – means you’ll end up paying mortgage insurance. Private mortgage insurance applies to conventional loans while mortgage insurance premium applies to FHA loans. Although they are different names, they both add a fee to mortgage payments and protect lenders in the event of a default.

“That PMI could eventually drop off where it wouldn’t with an FHA,” Iglesia says.

With a conventional mortgage, PMI can be canceled once a homebuyer has 20% equity in their property. With an FHA loan, MIP can only be canceled if you put at least 10% down. Even then, you’ll have to wait 11 years before canceling. If your down payment is less than 10%, then the MIP is assessed for the life of the loan.

In some cases, borrowers might get a better mortgage rate with an FHA loan than with a conventional loan.

That’s because conventional loans and FHA loans factor credit scores into their rates differently. “You might get better pricing with a conventional if you have a good score,” Ellington says.

While FHA rates may be cheaper for those with lower credit scores, homebuyers could have higher fees with this program. “A lot of times, it can come down to that mortgage insurance payment,” Richardson says.

FHA loans assess flat MIP fees regardless of a person’s credit score. Those include a 1.75% up-front fee as well as annual fees. With PMI, there is no up-front fee, and annual fees are based on a borrower’s credit score.

Richardson says a $100,000 FHA mortgage would have an annual MIP of $550, or approximately $46 per month. For someone with good credit, the PMI for a conventional loan might be $200 per year, or $17 per month, Richardson calculates. However, for a borrower with lower credit, the PMI might be $67 per month with a conventional loan.

“The higher your credit score, the lower your mortgage insurance,” Richardson says. Someone with a low credit score may pay less for mortgage insurance on an FHA loan, but “the downside is that the mortgage insurance just never goes away,” he adds.

FHA mortgages may be available to borrowers with credit scores as low as 580 and debt-to-income ratios as high as 50%.

“They are much more lenient on foreclosure and bankruptcy,” according to Iglesia. You may be able to get an FHA loan three years after a foreclosure and two years after a bankruptcy, he says. That compares to seven years and four years, respectively, for a conventional loan.

If you want to refinance in the future, FHA also offers a simplified option. “You can do what is called an FHA Streamline with no appraisal,” Ellington says, although he notes some conventional refinances may also waive an appraisal.

But not every property will qualify for an FHA mortgage.

“A lot of sellers don’t like the FHA (program),” Iglesia says. That’s because they require a more robust inspection process that may flag issues, such as peeling paint, that would be considered cosmetic problems in other inspections.

All issues must be resolved before closing on an FHA mortgage, and if sellers receive multiple offers for their home, they may be inclined to pass over one that includes FHA financing for that reason.

In 2026, the FHA lending limit is $541,287 for a single-family home in much of the country. Given current housing prices, that could place many properties out of reach for borrowers using FHA loans.

If you are looking for seller concessions – that is, cash from the seller to cover closing costs – you can negotiate larger concessions with an FHA loan. These mortgages allow concessions up to 6% of the property’s sale price or appraised value, whichever is less. Conforming loans allow concessions of up to 3% for borrowers who put down less than 10%.

Larger seller concessions can be beneficial for those who are having difficulty coming up with the cash needed for closing costs.

Seller concessions may be more limited for conventional loans, but you could negotiate the sales price in lieu of concessions. That may not help buyers who need cash for closing, but it is a way to save money on the purchase of a home.

A highly qualified buyer might want an FHA loan because it is assumable, while most conventional mortgages are not.

An assumable loan means a qualified homebuyer can simply take over the existing mortgage with lender approval. This could be a selling point for someone who purchases a house at a low interest rate since it might make it easier to sell in the future if the next owner can assume that low-interest loan.

This could also be an attractive feature for people who are buying a house on behalf of someone else. For instance, parents might purchase a home using an FHA loan with the expectation that their child will eventually inherit the house and assume the mortgage.

However, the situations in which someone might assume a mortgage are limited. What’s more, the current interest rate environment doesn’t make it seem likely that today’s rates will be lower than those available in the future.

“How many people are going to want to come in and assume a 6% mortgage (if prevailing rates are lower)?” Richardson asks.

There is also the problem of a buyer needing to come up with funds to cover the difference between the mortgage balance and the selling price. For instance, if someone is purchasing a home for $300,000 and assuming a $200,000 mortgage, they will need $100,000 to pay the remainder of the selling price.

Conventional loans are popular for a reason, but FHA mortgages can be a good choice for even highly qualified borrowers in certain circumstances. Work with a trusted mortgage broker to consider your options before submitting a loan application.