The core difference between conventional and government-backed mortgages is who stands behind the loan. Conventional mortgages are private loans with no federal backing. Government-backed mortgages, meaning FHA, VA, and USDA loans, carry insurance or guarantees from federal agencies that reimburse lenders if you default. That single distinction shapes almost every number on your loan estimate: the down payment, the credit score you need, the insurance you’ll pay, which properties qualify, and how much you can borrow.
Here’s how the two categories compare on the decisions that actually determine which loan fits you.
Who Can Qualify: Credit and Down Payment
For many buyers, this is the whole ballgame. The programs draw very different lines.
Conventional loans through Fannie Mae require a minimum credit score of 620 for fixed-rate mortgages and 640 for adjustable-rate mortgages.1Fannie Mae. General Requirements for Credit Scores Below those thresholds, the loan won’t be purchased by the agencies that buy most conventional mortgages, so lenders generally won’t originate it. Down payments can go as low as 3 percent for first-time buyers through Fannie Mae’s 97 percent loan-to-value options, but anything under 20 percent triggers private mortgage insurance.2Fannie Mae. 97% Loan-to-Value Options
FHA opens the door wider. Borrowers with a credit score of 580 or above qualify for the maximum 96.5 percent loan-to-value, meaning 3.5 percent down. Scores between 500 and 579 are still eligible but require at least 10 percent down.3U.S. Department of Housing and Urban Development. Does FHA Require a Minimum Credit Score and How Is It Determined
VA loans require zero down payment for eligible veterans and service members with full entitlement.4U.S. Department of Veterans Affairs. VA Home Loan Entitlement and Limits USDA loans also require no down payment for eligible borrowers in qualifying rural areas.5U.S. Department of Agriculture. Single Family Housing Direct Home Loans Neither VA nor USDA has a federally mandated minimum credit score, though individual lenders commonly set their own cutoffs around 580 to 620.
On debt-to-income, conventional loans generally cap the ratio around 45 percent, with automated underwriting sometimes stretching to 50 percent when credit and reserves are strong. FHA is similarly flexible. VA layers on a residual income test: after the mortgage, taxes, insurance, and other debts, the borrower must still have enough cash each month to cover basic living costs. That catches something a percentage ratio misses. A borrower at 40 percent DTI in San Francisco has far less spending power than one at 40 percent DTI in rural Kentucky.
All four programs allow gift funds to cover some or all of the down payment, with a documented gift letter and verified transfer.6U.S. Department of Housing and Urban Development. HOC Reference Guide – Gift Funds State and local housing finance agencies also offer down payment assistance as forgivable grants, deferred second mortgages, or low-interest subordinate loans, though eligibility varies widely by location.7FDIC. Down Payment and Closing Cost Assistance
What You Pay for the Backing
Every program has a mechanism for managing default risk, and each mechanism shows up in your closing costs, your monthly payment, or both.
Private Mortgage Insurance on Conventional Loans
PMI protects the lender if you default on a conventional loan with less than 20 percent equity. You pay it, but the coverage benefits the lender.8Consumer Financial Protection Bureau. What Is Private Mortgage Insurance The premium depends on your credit score, down payment, and the coverage level required, which ranges from 6 to 18 percent of the loan amount based on your loan-to-value ratio.9Fannie Mae. Mortgage Insurance Coverage Requirements
PMI doesn’t last forever. Under the Homeowners Protection Act, your servicer must automatically cancel PMI when the scheduled balance reaches 78 percent of the home’s original value, provided you’re current on payments.10Consumer Financial Protection Bureau. Homeowners Protection Act Examination Procedures You can request cancellation at 80 percent, though the lender may require an appraisal and a clean payment history.
FHA Mortgage Insurance Premiums
FHA loans carry two insurance charges: an upfront premium paid at closing and an annual premium spread across your monthly payments. The Federal Housing Administration insures these loans under 12 U.S.C. ยง 1709.11Office of the Law Revision Counsel. United States Code Title 12 – 1709
Cancellation rules here are less borrower-friendly. If your down payment was less than 10 percent, you pay the annual premium for the entire life of the loan. The only exits are refinancing into a different loan type, paying off the balance, or selling. Borrowers who put at least 10 percent down get some relief: the annual premium drops off after 11 years. This is where many buyers with moderate savings end up paying insurance long after they’ve built significant equity, and it’s the strongest argument for refinancing from FHA to conventional once credit and equity improve.
VA Funding Fee
VA loans carry no monthly mortgage insurance. Most borrowers pay a one-time funding fee at closing instead. For first-time users with no down payment, the fee is 2.15 percent of the loan amount. Putting 5 percent down drops it to 1.5 percent; 10 percent or more brings it to 1.25 percent. Subsequent use with less than 5 percent down raises it to 3.3 percent.12U.S. Department of Veterans Affairs. VA Funding Fee and Loan Closing Costs Veterans with service-connected disabilities are typically exempt.
USDA Guarantee Fee
USDA uses an FHA-style structure: an upfront guarantee fee at closing plus an annual fee in monthly installments. Both are generally lower than FHA premiums, which makes USDA loans particularly cost-effective in eligible rural and suburban areas. The annual fee continues for the life of the loan.
How Interest Rate Pricing Shifts Between Them
A sticker rate on a conventional loan is a starting point. Fannie Mae and Freddie Mac apply loan-level price adjustments that change your effective rate based on credit score, down payment, property type, and loan features. These stack: a borrower with a 640 score putting 15 percent down on a second home can face several percentage points in added fees compared to a 780-score buyer putting 25 percent down on a primary residence.13Fannie Mae. Loan-Level Price Adjustment (LLPA) Matrix
Government-backed loans are less sensitive to individual credit profiles because the federal guarantee absorbs much of the lender’s risk. FHA loans tend to carry lower base rates for borrowers with credit scores below roughly 680. Above that range, conventional often wins because you avoid both the rate penalty and the lifetime FHA insurance. If your score falls in the 660 to 720 range, getting quotes on both is the only way to know which comes out ahead.
What You Can Actually Buy
The two categories serve different parts of the housing market.
FHA, VA, and USDA loans are restricted almost entirely to primary residences. USDA is the strictest, requiring the home to be in an eligible rural area and occupied as the borrower’s primary residence.14USDA Rural Development. Single Family Housing Guaranteed Loan Program FHA and VA similarly require owner occupancy, with standard mortgage documents requiring move-in within 60 days of closing and at least one year of primary use.
Conventional loans offer the most flexibility. They can finance primary residences, vacation homes, or investment rentals, in exchange for higher down payments and steeper pricing on non-primary uses.
Condition standards diverge too. FHA appraisers check for defective conditions, including structural settlement, excessive dampness, decay, termite damage, and anything that impairs safety or soundness. Defective paint in homes built before 1978 triggers lead-based paint protocols that can require repairs before closing.15U.S. Department of Housing and Urban Development. HUD Handbook 4150.2 – Property Analysis Conventional appraisals focus on market value, so a home with peeling paint or an aging electrical panel that would fail FHA can still be financed conventionally. For older homes and fixer-uppers, that difference alone often decides the loan type.
Condos add another wrinkle. An FHA condo loan requires the project to be on the FHA-approved list or to qualify under single-unit approval rules covering project size, occupancy mix, and financial health.16U.S. Department of Housing and Urban Development. FHA Condominiums Many associations don’t pursue approval, which effectively closes those buildings to FHA buyers.
How Much You Can Borrow in 2026
Every program caps the loan amount, but the caps work differently.
The Federal Housing Finance Agency sets annual conforming loan limits for what Fannie Mae and Freddie Mac can purchase.17Federal Housing Finance Agency. FHFA Conforming Loan Limit Values For 2026, the baseline limit for a one-unit property is $832,750. In high-cost areas, the ceiling reaches $1,249,125. Alaska, Hawaii, Guam, and the U.S. Virgin Islands have a baseline of $1,249,125 and a ceiling of $1,873,675.18Federal Housing Finance Agency. FHFA Announces Conforming Loan Limit Values for 2026 Loans above the conforming limit are jumbo loans, with stricter qualification and typically higher rates.
FHA loan limits track the conforming limit but sit lower. The law sets a floor for low-cost areas and a ceiling for high-cost areas at 150 percent of the national conforming limit, with county-by-county variation in between based on local median home prices.19U.S. Department of Housing and Urban Development. HUD’s Federal Housing Administration Announces 2026 Loan Limits The limit in one ZIP code can be tens of thousands higher than the next county over, so check HUD’s lookup tool for your specific county.
VA is different again. Veterans with full entitlement have no loan limit at all, as long as they qualify for the payment and the appraisal supports the price.4U.S. Department of Veterans Affairs. VA Home Loan Entitlement and Limits Veterans with reduced entitlement, typically from an existing VA loan or a prior VA-loan foreclosure, may face limits tied to the conforming loan limit for their county.
Seller Contributions at Closing
Sellers can pay part of your closing costs, but each program caps how much.
Conventional loans tie the cap to your down payment. Above 90 percent loan-to-value, the seller can contribute up to 3 percent of the sale price. Between 75.01 and 90 percent LTV, the cap rises to 6 percent. At 75 percent or below, it’s 9 percent. Investment properties are limited to 2 percent regardless of LTV.20Fannie Mae. Interested Party Contributions (IPCs) Anything over the limit gets deducted from the sale price for underwriting, which can sink a deal.
USDA allows seller contributions up to 6 percent of the sale price.21U.S. Department of Agriculture. Single Family Housing Guaranteed Loan Program Overview – 101 FHA follows a similar 6 percent cap.
VA handles this differently. The 4 percent cap applies only to “concessions,” which the VA defines as items of value added at no cost to the buyer, such as credits toward the funding fee, debt payoff, or prepaid hazard insurance. Normal closing costs like origination fees, discount points, title insurance, and recording fees are excluded from the 4 percent calculation entirely.12U.S. Department of Veterans Affairs. VA Funding Fee and Loan Closing Costs In practice, a VA seller can often cover well more than 4 percent of total transaction costs.
Which One Fits You
The choice usually sorts itself once you line up your credit score, cash on hand, property type, and eligibility.
If you’re an eligible veteran or service member, VA is almost always the strongest option: zero down, no monthly insurance, no strict loan limit at full entitlement. If you’re buying in a qualifying rural area and meet the income tests, USDA gives you zero down with lower ongoing fees than FHA. If your credit is under about 680 or your down payment is under 5 percent and you don’t qualify for VA or USDA, FHA is the most accessible route, with the understanding that you’ll likely refinance out later to shed the lifetime insurance.
If your credit sits above 680, you can put at least 5 percent down, and you want a home that might not pass an FHA inspection, or a condo, second home, or rental property, conventional is usually the better long-term fit. The PMI ends at 78 percent LTV, and the pricing rewards stronger profiles.
The rate and cost comparison flips around the 660 to 720 credit score range, so if you’re in that band, get real quotes on both a conventional and an FHA loan before deciding. The right answer depends on numbers that only your lender can produce for your specific file.