FHA vs Conventional Loan 2026: Down Payment, PMI vs MIP, Credit Scores & Which One Saves You More

If you are buying a home with a mortgage, two loan types will dominate your search: FHA loans and conventional loans. Both can get you into a house with a small down payment, but they work very differently. FHA loans are insured by the Federal Housing Administration, a government agency, while conventional loans come from private lenders without government insurance. That difference shapes everything: your down payment, the credit score you need, and what mortgage insurance costs.

What Is an FHA Loan?

An FHA loan is a mortgage insured by the Federal Housing Administration, part of the U.S. Department of Housing and Urban Development (HUD). The government does not lend the money; a private lender does. FHA insurance protects the lender if you default, which is why lenders accept lower credit scores and smaller down payments than conventional loans usually allow.

FHA loans were designed to expand homeownership and remain a top choice for first-time buyers. They allow gift funds from family, accept higher debt-to-income ratios, and forgive past credit problems such as a bankruptcy, provided enough time has passed.

What Is a Conventional Loan?

A conventional loan is a mortgage that is not insured or guaranteed by the government. It is issued by banks, credit unions, and mortgage companies, and most are later bought by Fannie Mae or Freddie Mac. Loans meeting their guidelines are called conforming loans; larger ones are called non-conforming or jumbo loans.

Because no agency insures them, conventional lenders carry more risk and demand stronger credit. The reward is flexibility: conventional loans can finance a primary residence, a second home, or an investment property, and borrowers who put down 20% or more avoid mortgage insurance entirely. Those who do pay it can usually cancel it once they build enough equity. Conventional loans also offer more variety, from 15-year and 30-year fixed rates to 3% down payment programs for first-time buyers.

Down Payment: 3.5% vs 3%

With an FHA loan, the minimum down payment is 3.5% of the purchase price if your credit score is 580 or higher. If your score is between 500 and 579, the minimum rises to 10%. A buyer with a 580 score purchasing a $300,000 home needs just $10,500 down with an FHA loan.

With a conventional loan, the minimum can be as low as 3% through first-time buyer programs such as Conventional 97, HomeReady, and Home Possible. Many lenders ask for 5% or more, and putting down less than 20% means paying private mortgage insurance. On that same $300,000 home, 3% down is $9,000 — slightly less than FHA — but the credit requirements are stricter.

Credit Score Requirements

Credit score is where FHA loans most clearly win for many buyers. FHA technically allows scores as low as 500 with a 10% down payment, and 580 with 3.5% down — though lenders often set their own minimums, commonly around 580 to 620.

Conventional loans generally require a minimum score of 620, and the best rates go to borrowers with scores of 740 or higher. A borrower with a 640 score may qualify for a conventional loan, but the rate and insurance costs will be noticeably worse than with an FHA loan. Rule of thumb: below 680, FHA often gives the lower monthly payment; at 720 or above, conventional usually wins on total cost, because you can get low rates and eventually drop mortgage insurance.

Mortgage Insurance: MIP vs PMI

Mortgage insurance is the biggest long-term cost difference. FHA borrowers pay two kinds of mortgage insurance premium (MIP). The upfront MIP is 1.75% of the loan amount — on a $290,000 loan, $5,075 — usually rolled into the loan balance. Then comes the annual MIP, paid monthly, typically 0.50% to 0.55% of the balance for a 30-year loan after the 2023 rate cut. The catch: with less than 10% down, you pay annual MIP for the life of the loan. With 10% or more down, MIP ends after 11 years.

Conventional borrowers who put down less than 20% pay private mortgage insurance (PMI), typically 0.5% to 1% of the loan per year. The key advantage: PMI can be cancelled. Once your balance falls to 80% of the home's original value, you can request cancellation, and the lender must drop PMI automatically at 78% under the Homeowners Protection Act. With 20% down, you pay no PMI at all.

Loan Limits, Property Rules, and Other Differences

FHA loan limits vary by county and are set annually; they are generally lower than conventional conforming limits, which can matter in expensive markets. FHA loans can only finance a primary residence, and the home must pass an appraisal checking HUD minimum property standards — peeling paint or a leaking roof can hold up a deal. Conventional loans can finance a primary residence, a second home, or an investment property, with appraisals focused on value.

More differences: FHA loans are assumable, so a future buyer could take over your loan at your rate — a real advantage if rates rise. FHA allows seller concessions up to 6% of the price toward closing costs, versus 3% to 6% for conventional loans.

Which One Saves You More?

There is no universal winner. Use this checklist:

• FHA usually wins when: your credit score is below 680; you have a small down payment and want the lowest monthly payment now; you need flexible rules on past credit problems or a higher debt-to-income ratio.
• Conventional usually wins when: your credit score is 720 or higher; you can put down 20% and skip mortgage insurance; you want to cancel mortgage insurance later; you are buying a second home or investment property.
• Always compare both: get a written Loan Estimate for each loan type from the same lender, and compare the monthly payment, total insurance cost, and cash needed at closing.
• Remember the refinance escape hatch: many buyers start with an FHA loan and refinance into a conventional loan later, once their credit improves or their equity reaches 20%.

Example: on a $300,000 purchase with 5% down and a 660 credit score, an FHA loan will often have the lower monthly payment today, because conventional PMI is priced steeply for that score. With a 760 score and 10% down, conventional is usually cheaper, and the gap widens yearly as PMI nears cancellation while FHA's MIP keeps going. For more plain-language explainers on mortgages, loans, and money, visit the Problem Solved channel on YouTube: Problem Solved.

Disclaimer: This article provides general information only and is not legal or financial advice. Loan programs, limits, rates, and rules change frequently and vary by lender, state, and borrower. Confirm current terms with a licensed mortgage professional before making a decision.