CNN Underscored reviews financial products based on their overall value. We may receive a commission through our affiliate partners and may earn compensation when a customer clicks on a link, when an application is approved, or when an account is opened, but our reporting is always independent and objective. This may impact how links appear on this site. This site does not include all financial companies or all available financial offers.
Conventional and FHA loans are two ways you may be considering financing a home. The most popular options are conventional loans, which are issued and backed by private lenders. FHA loans are also issued by private lenders, but are insured by the Federal Housing Administration.
FHA loans can be particularly appealing if you have less-than-stellar credit or limited savings for a down payment. In fact, FHA loans are especially popular among first-time home buyers, who accounted for 83% of FHA borrowers in fiscal year 2025, according to Department of Housing and Urban Development (HUD) data. On the other hand, buyers with stronger credit and more money saved may find that a conventional loan offers a better overall deal.
Both loan types can help you achieve homeownership. The challenge is determining which one aligns best with your finances and offers better value. Here’s what you need to know to help you choose the best fit.
FHA and conventional loans each offer distinct advantages, making them better fits for different borrowers depending on their credit profile, financial situation and home-buying goals.
The table below provides a side-by-side comparison of some of the most important features, costs and qualification requirements for each loan type.
|
FHA loan |
Conventional loan |
|
|---|---|---|
| Loan type |
Government-insured |
Backed by private lenders, such as banks, credit unions and mortgage companies |
| Rate structure |
Fixed or adjustable-rate mortgages |
Fixed or adjustable-rate mortgages |
| Minimum down payment |
3.5% for eligible borrowers |
3% is the floor for some qualified borrowers through certain programs, although 5% is often the generally accepted minimum |
| Credit requirements |
Generally more flexible, minimum 500 credit score |
Generally stricter, at least 620 credit score |
| Debt-to-income (DTI) ratio |
Typically 43% or less |
Typically 36% or less but could be as high as 45% based on eligible compensating factors |
| Mortgage insurance |
One-time upfront mortgage insurance premium (UFMIP) required on all loans; annual mortgage insurance premium (MIP) required for at least 11 years |
Private mortgage insurance (PMI) typically required with less than 20% down |
| Mortgage insurance cancellation |
Depends on the loan terms and down payment |
PMI can generally be canceled when certain requirements are met |
| Who it’s best for |
Borrowers who have a lower credit score or limited funds for a down payment |
Borrowers with stronger credit who may benefit from lower overall loan costs |
-
Credit score: FHA loans may be an option if your credit score is preventing you from qualifying for other types of mortgages, as you may be eligible with a score as low as 500. Your chances for approval improve with a 580 score.
-
Down payment: FHA loans allow a minimum down payment of 3.5% if your credit score is 580 or higher. If your score falls between 500 and 579, you’ll typically need to put down at least 10%. In some cases, your lenders may require a credit score above the FHA minimum.
-
Debt-to-income ratio: Lenders generally prefer a DTI ratio of 43% or lower for FHA loan approval, meaning no more than 43% of your gross monthly income goes toward recurring debts, such as mortgage payments, credit cards, student loans and auto loans. If your DTI exceeds 43%, you may still qualify if you have compensating factors, such as a strong credit score or substantial cash reserves.
-
Steady income: The FHA doesn’t require a specific income level, but you’ll typically need to demonstrate to your lender that you’ve had consistent, stable income for at least the past two years.
-
Primary residence requirement: FHA loans are intended for homes you’ll live in as your primary residence. That means you can’t use an FHA loan to buy a vacation home, second home or investment property.
-
FHA appraisal: To qualify for an FHA loan, the home must be evaluated by an FHA-approved appraiser who verifies its market value and confirms it meets the agency’s minimum safety, security and structural standards and is in move-in-ready condition before loan approval.
-
Mortgage insurance premium: FHA loan borrowers are required to pay a one-time UFMIP equal to 1.75% of the loan amount at closing. Borrowers who put down less than 10% must also pay an annual MIP for the life of the loan. The annual premium typically ranges from 0.15% to 0.75% of the loan balance, depending on factors such as the loan term, loan amount and down payment. If you put down 10% or more, the annual MIP is removed after 11 years.
When comparing conventional loans with FHA loans, it helps to understand the two main categories of conventional financing: conforming and nonconforming.
The key difference comes down to whether a conventional loan meets guidelines established by the Federal Housing Finance Agency (FHFA) and can be purchased by Fannie Mae or Freddie Mac. These government-sponsored enterprises buy mortgages from lenders, helping replenish their funds so they can continue making new home loans.
Here’s a quick snapshot of each.
Conforming loans: Conventional mortgages that meet FHFA guidelines and are eligible for purchase by Fannie Mae or Freddie Mac.
Nonconforming loans: Conventional mortgages that don’t meet FHFA guidelines and therefore can’t be purchased by Fannie Mae or Freddie Mac. These home loans come in many forms, including jumbo loans that exceed conforming loan limits, interest-only mortgages and loans that allow credit scores or DTI ratios outside conforming standards. Certain government-backed loans are also nonconforming.
Below are the minimum requirements you can generally expect whether you get a conforming or nonconforming conventional fixed-rate loan:
-
Credit score: You’ll generally need a credit score of at least 620 to qualify for a conventional fixed-rate mortgage. Stronger credit can improve your chances of approval and help you secure better loan terms.
-
Down payment: You may be able to qualify for a conventional loan with as little as 3% down. Many low-down-payment programs are geared toward low- to moderate-income home buyers and include specific eligibility requirements, such as income limits.
-
Debt-to-income ratio: Your total monthly debt payments, including your new mortgage, should generally not exceed 45% of your gross monthly income. In some cases, borrowers may qualify with a DTI as high as 50%.
-
Income and employment: While conventional loans don’t typically have a set minimum income requirement, lenders generally want to see stable, verifiable income and employment over at least the past two years.
-
Cash reserves: Depending on your loan profile, you may need enough liquid assets to cover at least two months of mortgage payments. Acceptable reserves can include savings accounts, money market funds, stocks and other assets that can be readily converted to cash.
FHA and conventional loans: The tradeoffs of a smaller down payment
Whether you decide to go with an FHA loan at 3.5% or a 3% down conventional loan, a lower down payment doesn’t automatically translate to a lower-cost mortgage. You need to look at the broader picture.
With an FHA loan, you’ll need to pay the one-time UFMIP at closing and then the annual MIP that’s typically paid as part of your monthly mortgage payment for the entire loan term if you put down less than 10%. With a conventional loan, putting down less than 20% will usually require PMI.
The key difference is that PMI can eventually be removed. In most cases, homeowners can request cancellation once their mortgage balance reaches 80% of the home’s original value, and lenders are generally required to automatically terminate PMI once the balance reaches 78% of the original value, provided the loan is current. FHA mortgage insurance is often more difficult to remove and may remain for the life of the loan, depending on your down payment amount and when you took out the loan.
A smaller down payment also means borrowing more money, which increases your monthly mortgage payment. When mortgage insurance is added to the mix, your housing costs can climb even higher. That’s why it’s important to weigh the up-front savings against the long-term cost.
If you can afford a 20% down payment, the benefits include:
-
Borrowing less: Financing a smaller loan amount can help keep your monthly payment lower.
-
Skipping mortgage insurance: A 20% down payment lets you avoid this added monthly expense.
-
Strengthening your application: A larger down payment may help you qualify for more competitive mortgage rates.
FHA and conventional loans each have advantages, but the better option depends on your finances and home-buying goals.
FHA loans can help open the door to homeownership if your credit score or savings are less than ideal. On the other hand, a conventional loan could reward you with lower borrowing costs over time if you have a stronger credit and can make a larger down payment.
The right choice isn’t always obvious, so it helps to compare how each loan fits your situation.
Here are some signs an FHA loan may be a good fit, as well as situations where a conventional loan may be the better choice.
An FHA loan may make more sense if:
-
You have a credit score below 620.
-
You have limited savings for a down payment and need the lowest possible upfront investment to buy a home.
-
An FHA loan offers a meaningfully better combination of rates, fees and monthly payments than a conventional loan.
-
You’re a first-time home buyer who could benefit from the program’s more flexible credit and qualification requirements.
A conventional loan may be a better fit if:
-
You have strong credit.
-
You can afford to put at least 20% down.
-
You want the option to cancel PMI once you’ve built sufficient equity. Unlike PMI on a conventional loan, FHA mortgage insurance typically can’t be removed if you put down less than 10%.
-
You plan to stay in the home long enough that the ongoing cost of FHA mortgage insurance could add up significantly.
-
The conventional loan provides a meaningfully better overall deal.
Before making a final decision, get quotes for both FHA and conventional loans and compare the loan estimates. Lenders are required to provide these three-page forms within three business days of receiving your application. Your loan estimate outlines the terms the lender expects to offer if you move forward, including the interest rate, closing costs and estimated monthly payment.
As you compare offers, don’t focus solely on the interest rate. Be sure to factor in costs such as mortgage insurance and other lender fees that can affect the total cost of the loan. And don’t settle for the first offer you receive. Shopping around with multiple lenders can help you find the best deal.
In fact, Freddie Mac research found that borrowers who obtain at least two rate quotes could save up to $1,500 over the life of their loan. Those who get six quotes could save an average of $3,000 over the loan term.
You can also use the CNN mortgage calculator to compare loan offers and estimate your monthly payments and long-term borrowing costs.
How we evaluate mortgage lenders and rates
According to CNN Underscored’s mortgages and loans methodology, we evaluate mortgage lenders based on a 100-point scoring system. Based on their internal scoring results in each category, lenders rank in one of our weighted lender tiers.
-
Exceptional: 95 and above
-
Highly recommended: 86 to 94
-
Recommended: 80 to 85
-
Limited appeal: 75 to 79
-
Proceed with caution: 74 and below
Sure, a low interest rate is important, but the lowest advertised rates are typically reserved for borrowers with the strongest financial profiles. That’s why we dig into not only how competitive lenders rates appear on the surface, but also how accessible their loan products are for a broad range of borrowers.
We consider how accessible lenders are through their customer support channels, the quality of the digital experience they offer and how quickly a borrower can expect to typically close on a loan. We also evaluate whether lenders provide reasonably attainable rates or fee discounts that can help reduce borrower costs.
An FHA loan is not necessarily “better” than a conventional loan, and the reverse is true as well. The right choice depends on your financial situation, eligibility and total cost of the loan.
Both loan types offer advantages. FHA loans can be a great option if you have less-than-perfect credit or limited savings for a down payment, thanks to their more flexible qualification requirements. On the other hand, if you have strong credit and enough savings to make a 20% or higher down payment, a conventional loan may offer lower overall borrowing costs and be the better fit.
The best way to decide is to compare loan offers from multiple lenders and weigh the interest rate, fees, mortgage insurance costs and monthly payments for each option.
Generally, yes. FHA loans often come with lower interest rates than conventional loans. That said, the interest rate you’re offered will depend on factors such as your credit score, down payment, loan amount and overall financial profile. And even if you get an attractive FHA rate quote, don’t forget to factor in mortgage insurance costs, which affects your total borrowing costs.
In most cases, you’ll need a credit score of at least 620 to qualify for a conventional loan. FHA loans are more flexible, allowing borrowers with credit scores as low as 500 to qualify, although a 10% down payment is typically required. If your credit score is 580 or higher, you may be able to qualify for an FHA loan with as little as 3.5% down.
Keep in mind that these are the minimum requirements. Regardless of which loan type you choose, a higher credit score can boost your loan approval chances of approval and help you qualify for better mortgage rates and loan terms.
CNN Underscored’s Money team is guided by a transparent methodology, independent editorial judgment and a commitment to helping readers understand which home loan products genuinely deserve their consideration. Our mortgage rate and lending coverage is grounded in analysis of mortgage rate trends, lender offerings and borrower priorities, with the goal of helping readers navigate an often complex borrowing landscape with clear, practical guidance.
For this article, CNN Underscored money writer Robin Rothstein drew on more than five years of experience covering mortgage rates, home lending topics and housing market trends. That expertise, combined with ongoing research into the wide range of mortgage options and lending requirements, helped shape clear, accurate guidance for borrowers comparing FHA and conventional loans including how credit, down payment savings and long-term costs can affect which mortgage is the better fit.
