FHA vs Conventional Loan

FHA vs Conventional Loan: Where the Differences Start

The FHA vs conventional loan decision starts with understanding where each loan comes from. That’s where every meaningful difference originates.

An FHA loan is backed by the Federal Housing Administration, a government agency under HUD. Because the government insures the loan, lenders carry less risk. That allows them to approve borrowers with lower credit scores and smaller down payments. But the protection has a price. It shows up in mortgage insurance that can follow you for decades.

A conventional loan has no government backing. It follows guidelines set by Fannie Mae and Freddie Mac. Lenders take on more risk, so they want stronger credit profiles. But the trade-off is real: mortgage insurance that ends when you build equity, more flexible property options, and lower long-term costs for borrowers who qualify.

According to HUD’s FY2025 Annual Report, more than 83 percent of FHA purchase mortgage endorsements went to first-time homebuyers. That number tells you who this program was built for. FHA isn’t only for first-time buyers, but borrowers at earlier stages of their financial profile tend to fit it best.

Neither loan is better across the board. Each fits a different borrower, a different credit profile, and a different time horizon. Here’s a side-by-side look at how they compare.

Down Payment Requirements and 2026 Loan Limits

Down payment is usually the first number buyers focus on. The difference between FHA and conventional is smaller than most people expect on the front end. The bigger gap shows up in the loan limits.

FHA requires 3.5% down for borrowers with a 580 or higher credit score. On a $450,000 home, that’s $15,750. If your score falls between 500 and 579, FHA still works, but the required down payment jumps to 10%. Below 500, FHA won’t approve the loan.

Conventional loans start at 3% down through programs like Fannie Mae’s HomeReady for qualified first-time buyers. Standard conventional loans start at 5%. Any down payment under 20% on a conventional loan triggers private mortgage insurance, which we’ll cover in detail below.

The 0.5% gap in minimum down payment looks small on paper. But the 2026 loan limits tell a more useful story. In El Paso County, Colorado, the FHA loan limit for a single-family home is $541,650. The conventional conforming limit in the same county is $832,750. Buyers targeting the $600,000 to $800,000 range in Colorado Springs often find FHA isn’t a fit at their target price without a larger down payment. In the Denver metro, Adams County, and Douglas County, 2026 FHA limits all reach $862,500. For conventional, Denver and Douglas County reach $903,450, while Adams County sits at $856,750. In Florida, most counties sit at the $541,287 FHA floor and the $832,750 conventional baseline, with Monroe County reaching $990,150 for FHA and the Broward, Miami-Dade, and Palm Beach tri-county area reaching $667,000 for FHA. Use the lookups below to check the exact limits for your county and property type.

Colorado buyers may have access to down payment assistance through the Colorado Housing and Finance Authority (CHFA), while Florida buyers can explore programs through Florida Housing. Both can pair with FHA or conventional loans and change the upfront cost picture for buyers who qualify. Check the full range of down payment options before assuming how much cash you’ll need at closing.

How Your Credit Score Changes the Calculation

FHA approves borrowers starting at 580. Conventional loans technically start at 620. So if your score is in the 580 to 619 range, FHA is likely your only conforming option. Below 580, you’re looking at a 10% down payment on FHA, or other loan types entirely.

But once you’re above 620, the comparison gets more nuanced. And this is where most buyers make the wrong assumption.

Fannie Mae applies risk-based pricing add-ons, called LLPAs, based on your credit score and loan-to-value ratio. A borrower with a 640 score pays a meaningfully higher rate than one with a 760 score on the same conventional loan. So “I qualify for conventional” is not the same as “conventional is the cheaper loan.” Understanding what lenders look at when evaluating your application helps you see where each loan fits your full profile.

We work with Colorado buyers across the full credit spectrum, and one pattern shows up regularly. Buyers in the 620 to 680 range assume conventional is the right call without running both scenarios. After pulling the numbers, FHA often wins on the monthly payment at that credit tier. The problem is that MIP follows you for the life of the loan. If you stay in the home long enough, conventional can eventually win, even with a higher starting rate, because the PMI cancels.

Above 720, conventional almost always wins on rate. And with 20% down, there’s no mortgage insurance at all. That’s the cleanest scenario by far.

DTI also matters here. FHA allows debt-to-income ratios up to 57% with strong compensating factors. Conventional typically caps around 45% to 50%. Buyers carrying student loans, car payments, or other recurring debt may find that FHA’s DTI flexibility matters more than the insurance cost difference.

Mortgage Insurance: The Cost That Can Last 30 Years

FHA mortgage insurance has two parts, and one of them cannot be canceled if you put down less than 10%. That distinction is the biggest long-term cost difference between these two loans, and most buyers don’t see the full picture until after they’ve already committed to a direction.

The first part is an upfront premium of 1.75% of the loan amount, rolled into the loan at closing. On a $450,000 home with 5% down, the loan amount is $427,500. That means $7,481 added to your balance before you make a single payment. The second part is an annual premium of roughly 0.55% for most 30-year loans, split into monthly payments. On that same loan, the annual MIP runs about $2,351 per year, or roughly $196 per month added to your payment.

Here’s the part that catches buyers off guard. If you put down less than 10%, that monthly MIP stays on the loan for its full term. You cannot cancel it by building equity. The only exit is a refinance into a conventional loan once you’ve built 20% equity, and that means new closing costs.

Conventional loans use private mortgage insurance when you put down less than 20%. But federal law requires lenders to cancel PMI when the borrower reaches 78% loan-to-value based on the original payment schedule. You can also request cancellation at 80% LTV. So conventional PMI has an end date. FHA MIP, in most cases, does not.

For buyers in the 620 to 680 credit range, conventional PMI often costs more per month than FHA MIP in the first few years. But once it cancels, the math flips. A buyer staying 10 years might pay thousands less with conventional, even accounting for the higher starting payment. Getting that comparison on paper before committing is exactly where the right guidance changes the outcome of this decision.

Three Things Most Comparisons Skip

Most FHA vs conventional articles cover credit score and down payment and stop there. Three factors that actually move the needle for real buyers often get left out entirely.

Gift funds. FHA allows you to use gift money from a broad range of sources: family members, employers, charities, and government programs. Conventional loans restrict gift funds primarily to relatives and certain defined close relationships. For buyers relying on gifted money for part of the down payment, FHA’s gift rules are more flexible and easier to satisfy.

Assumability. FHA loans are assumable. If you sell your home in a few years and the buyer wants to take over your existing loan at your rate, an FHA loan allows that, subject to lender approval. Conventional loans are generally not assumable. In a market where future rates are higher than what you locked in, an assumable FHA loan can be a genuine selling advantage.

Seller hesitancy. In competitive markets across Colorado, some sellers and their agents are skeptical of FHA-backed offers. FHA appraisals are stricter than conventional ones. The appraiser checks for health and safety conditions, not just market value. Issues like peeling paint, broken handrails, or roof problems can stall or kill a transaction. A seller who has had an FHA deal fall apart at the appraisal stage may be less willing to accept an FHA offer the next time. Florida buyers in active markets like Tampa and Jacksonville run into the same dynamic, particularly in older neighborhoods where properties are more likely to surface FHA minimum property conditions.

None of these factors automatically makes one loan better. But knowing them before you’re under contract puts you in a better position to make the right call for your situation.

How to Pick the Right Loan for Your Situation

Two numbers determine which loan fits your situation: your credit score and how long you plan to stay in the home. Clear patterns show up consistently when comparing these two loans across real borrower profiles.

FHA tends to fit if you:

• Have a credit score below 680
• Are putting down less than 10% with limited reserves
• Carry a debt-to-income ratio above 45%
• Plan to stay in the home fewer than five years before refinancing
• Need flexibility in where your down payment gift funds come from

Conventional tends to fit if you:

• Have a credit score of 720 or above
• Have 5% to 20% saved for a down payment
• Want mortgage insurance that ends when you build equity
• Are buying a second home or investment property
• Are competing in a market where sellers prefer conventional-backed offers

The 620 to 680 range is where the decision is hardest. You qualify for both. But conventional rate add-ons at that credit tier can be substantial, and FHA rates are more consistent. Run both scenarios side by side over your expected time in the home. That comparison tells you more than any payment quote alone.

Reviewing the full range of mortgage programs available in Colorado may also surface options worth considering alongside these two, including USDA or VA if you qualify.

Common Mistakes to Avoid

Questions to Ask Your Lender

• At my credit score, what rate add-ons apply to the conventional loan versus FHA?
• What is the total mortgage insurance cost for each loan type over my expected time in this home?
• At what point does conventional become cheaper than FHA, assuming I stay in the home?
• Does the property I’m considering meet FHA minimum property standards?
• What are my gift fund options for the down payment under each loan type?
• Does my debt-to-income ratio fit better under FHA or conventional guidelines?