Is FHA Better Than Conventional? Down Payment, PMI, and Limits

Choosing between an FHA loan and a conventional loan comes down to your credit score, your cash on hand, your debt load, and how long you plan to keep the mortgage. FHA financing, backed by the Federal Housing Administration, will approve you with a credit score as low as 500 and a down payment of 3.5%, but it charges mortgage insurance that most borrowers carry for the life of the loan. A conventional mortgage, which follows Fannie Mae and Freddie Mac guidelines, rewards stronger credit with lower insurance costs and lets you drop that insurance once you build 20% equity. Neither is universally better. The right pick depends on where your file is strong and where it’s thin.

Credit Score Cutoffs

FHA and conventional loans draw the qualifying line in very different places. With an FHA loan, you can get approved at a 580 credit score with 3.5% down. Scores between 500 and 579 still qualify, but you’ll need 10% down to offset the added risk.¹ That 500 floor makes FHA the only mainstream mortgage option for borrowers with seriously damaged credit.

Conventional loans require a minimum credit score of 620.² No exceptions. If your score sits between 580 and 619, FHA is likely your only path to a fixed-rate mortgage with a reasonable down payment. Once you clear 620, both doors are open, and the comparison shifts to insurance costs and loan terms rather than basic eligibility.

Past bankruptcy or foreclosure doesn’t permanently disqualify you from either program, but FHA’s waiting periods are shorter. For an FHA loan, you must wait at least two years after a Chapter 7 bankruptcy discharge and three years after a foreclosure.¹ Conventional loans generally impose longer waits for the same events, which is one reason borrowers recovering from financial hardship gravitate toward government-backed financing first.

Down Payment Minimums

FHA requires 3.5% down for borrowers at 580 or higher. On a $350,000 home, that’s about $12,250 at closing. If your score falls between 500 and 579, the minimum jumps to 10%.¹

Conventional down payments depend on whether you’ve owned a home recently. First-time buyers can access Fannie Mae’s 97% loan-to-value options with just 3% down. If you’ve owned a home within the past three years, the standard minimum is 5%.² At first glance, the 3% conventional option looks more attractive than FHA’s 3.5%, but it requires a 620-plus credit score, and the insurance math works out differently.

Debt-to-Income Limits

Your debt-to-income ratio measures how much of your gross monthly income goes toward debt payments, and it’s one of the most common reasons mortgage applications get denied. FHA is significantly more forgiving. Through the automated underwriting system, FHA borrowers can qualify with a total DTI as high as 55%, or 57% when compensating factors like cash reserves or minimal payment shock are present.¹ If you’re carrying student loans, a car payment, and credit card minimums, FHA gives you more room.

Conventional loans are tighter but not as restrictive as many borrowers assume. Fannie Mae’s Eligibility Matrix lists a standard maximum DTI of 45%, but Desktop Underwriter, the automated system most lenders use, can approve loans with DTIs up to 50% when the overall risk profile is strong enough.³ Getting approved at that upper range takes a solid credit score and a low loan-to-value ratio. For most conventional applicants, treat 45% as the realistic ceiling unless everything else in your file is strong.

Mortgage Insurance

Mortgage insurance is the single biggest long-term cost difference between these two loan types, and it’s where many borrowers make the wrong choice by looking only at monthly payments instead of total cost over time.

FHA Mortgage Insurance Premium

Every FHA loan carries two forms of mortgage insurance. First, an upfront premium of 1.75% of the loan amount, typically rolled into the balance so you don’t pay it out of pocket.⁴ On a $300,000 loan, that adds $5,250 to your balance from day one.

Then there’s the annual premium, collected in monthly installments. For a typical 30-year loan at or below $726,200 with more than 5% down but less than 10%, you’ll pay 0.50% of the loan balance per year. Put down less than 5% and the rate bumps to 0.55%. Larger loans above $726,200 carry rates of 0.70% to 0.75%.⁴

Here’s the part that catches people off guard. If you put down less than 10%, the annual premium stays for the entire life of the loan. You cannot cancel it no matter how much equity you build. The only way out is to refinance into a conventional mortgage. If you put down 10% or more, the premium drops off after 11 years.⁵ Since most FHA borrowers put down 3.5%, most are locked into MIP for all 30 years unless they refinance.

Conventional Private Mortgage Insurance

Conventional loans charge private mortgage insurance only when you put down less than 20%.⁶ The cost varies based on your credit score and down payment. A borrower with strong credit might pay around 0.30% to 0.50% of the loan balance annually, while someone closer to the 620 minimum could pay 0.80% or more. On a $300,000 loan, that’s roughly $75 to $200 per month.

The critical advantage: conventional PMI goes away. Under the Homeowners Protection Act, your servicer must automatically cancel PMI once your loan balance is scheduled to reach 78% of the home’s original value based on the amortization schedule. You can also request cancellation earlier, once your balance hits 80% of original value through regular payments or a combination of payments and documented appreciation.⁷ Once PMI drops, your monthly payment shrinks permanently. This is the feature that makes conventional loans cheaper in the long run for borrowers who plan to stay in the home.

The strategic move many FHA borrowers make is to plan a refinance into a conventional loan once their credit improves and their equity reaches 20%. Doing so eliminates the permanent MIP. Over a 30-year loan, the lifetime savings can easily reach tens of thousands of dollars.

2026 Loan Limits

Both programs cap how much you can borrow, and the limits adjust each year with home prices.

For 2026, the national conforming loan limit for a single-family home is $832,750. In designated high-cost areas like parts of California and the Northeast corridor, the ceiling reaches $1,249,125.⁸ Anything above these limits requires a jumbo loan with stricter qualification standards.

FHA limits are lower. The 2026 floor for a single-family property in low-cost areas is $541,287, and the ceiling in high-cost areas is $1,249,125.⁹ In many mid-priced markets, the FHA limit falls well below the conventional ceiling, which can restrict your purchasing power. If you’re shopping for a home priced above your county’s FHA limit, conventional is your only conforming option.

Seller Concessions

Seller concessions, where the seller agrees to cover some of your closing costs, are allowed on both loan types, but the caps differ.

FHA allows seller concessions up to 6% of the purchase price. On a $350,000 home, the seller could contribute up to $21,000 toward your closing costs, prepaid taxes, or insurance. That flat cap applies regardless of your down payment amount.

Conventional concession limits are tiered based on your down payment:

Less than 10% down: capped at 3%
10% to 24.99% down: capped at 6%
25% or more down: capped at 9%

Concessions exceeding these limits get treated as a price reduction, which forces the lender to recalculate your loan-to-value ratio and potentially reduce the loan amount.¹⁰ The practical takeaway: if you’re putting down 3% to 5% on a conventional loan, the seller can only contribute 3% toward your costs. FHA’s 6% cap is twice as generous at the same down payment level, which matters in negotiations when you’re tight on cash.

Appraisal Standards

Both loans require an appraisal before closing, but the scope of what the appraiser evaluates is noticeably different.

FHA appraisals follow the HUD Single Family Housing Policy Handbook, which imposes a health-and-safety inspection on top of the standard market valuation.¹¹ The appraiser checks for peeling paint in homes built before 1978 (a lead hazard), verifies that utilities work, and flags structural defects, water damage, and environmental hazards. Homes previously used as a meth lab are ineligible for FHA financing until certified safe.¹ Any issues the appraiser identifies must be repaired before the loan can close, which can delay your timeline or kill the deal if the seller refuses to make fixes.

Conventional appraisals are simpler. The appraiser’s primary job is confirming the home’s market value through comparable sales, making sure the lender isn’t financing more than the property is worth. They note obvious problems like a caved-in roof or missing systems, but they aren’t running through a government safety checklist. This makes conventional loans easier to use on older homes or fixer-uppers.

Occupancy and Property Type

FHA loans are strictly for primary residences. At least one borrower must move into the property within 60 days of closing and intend to live there for at least one year.¹ You cannot use FHA financing for a vacation home or a pure investment property. FHA does allow one-to-four-unit properties, so you can buy a duplex or triplex, live in one unit, and rent the others.

Conventional loans offer more flexibility. You can finance a primary residence, a second home, or an investment property, though down payment and credit requirements increase for non-primary homes. Investment properties typically require at least 15% to 25% down and higher credit scores.² If you’re buying a rental property or vacation home, conventional is your only conforming option.

Which Loan Fits Your Situation

FHA is the stronger choice when your credit score is below 680, your savings are limited to the minimum down payment, or you’re carrying heavy monthly debt. The lower credit requirements and higher DTI limits simply open the door wider. FHA also helps when you need a generous seller concession to cover closing costs, since the 6% cap is double what conventional allows at low down payments.

Conventional pulls ahead when your credit score is 700 or above and you can put down at least 10%. At that profile, conventional PMI rates are low, and the insurance drops off once you hit 20% equity. Over a 10- to 15-year hold, the total insurance cost on a conventional loan is dramatically less than the permanent MIP on an FHA loan. Conventional is also your only realistic option for a second home, an investment property, or a home that might not pass FHA’s appraisal standards.

The in-between zone, credit scores from 620 to 680 with 3% to 5% down, is where the decision gets genuinely close. Run the numbers both ways with your lender. Compare total monthly payments including insurance, then calculate the break-even point where the conventional loan’s disappearing PMI starts saving you money. For many borrowers in this range, FHA costs less in the first few years but more over the full loan term.

1
U.S. Department of Housing and Urban Development. FHA Single Family Housing Policy Handbook
2
Fannie Mae. Eligibility Matrix
3
Fannie Mae. Updates to the Debt-to-Income Ratio Assessment
4
U.S. Department of Housing and Urban Development. What is the FHA Mortgage Insurance Premium Structure for Forward Mortgage Loans
5
Department of Housing and Urban Development. Appendix 1.0 – Mortgage Insurance Premiums
6
Consumer Financial Protection Bureau. What Is Private Mortgage Insurance?
7
Office of the Law Revision Counsel. 12 USC Ch 49 – Homeowners Protection
8
FHFA. FHFA Announces Conforming Loan Limit Values for 2026
9
U.S. Department of Housing and Urban Development. HUD’s Federal Housing Administration Announces 2026 Loan Limits
10
Fannie Mae. Interested Party Contributions (IPCs)
11
U.S. Department of Housing and Urban Development. SFH Handbook 4000.1 Information Page