FHA vs. Conventional Loan Comparison: Credit Scores, Down Payments, and PMI/MIP

FHA and conventional loans differ in credit requirements, down payments, and mortgage insurance. Understanding these differences helps buyers choose the right loan program for their financial situation.

Overview of Loan Types

FHA Loans

FHA loans are government-backed mortgages insured by the Federal Housing Administration. These loans allow lower credit scores and smaller down payments, making homeownership accessible to more borrowers.

Conventional Loans

Conventional loans are not government-backed and conform to standards set by Fannie Mae and Freddie Mac. These loans typically require stronger credit and larger down payments but offer more flexibility.

Credit and Down Payment Requirements

Credit Score Flexibility

FHA loans accept credit scores as low as 500 with a 10% down payment, and 580 with 3.5% down. Conventional loans require minimum scores of 620, with significantly better rates available above 740. This flexibility makes FHA ideal for borrowers rebuilding credit or with limited credit history.

PMI vs. MIP: Critical Differences

The most significant difference between FHA and conventional loans is how mortgage insurance works. This single factor can add tens of thousands of dollars to your total loan cost.

FHA Mortgage Insurance Premium (MIP)

FHA loans require both upfront mortgage insurance premium (1.75% of loan amount) and annual mortgage insurance premium. Annual premiums range from 0.45% to 1.05% depending on loan term and down payment.

Critical: FHA mortgage insurance remains for the life of the loan if down payment is less than 10%. This means you cannot cancel MIP without refinancing, regardless of how much equity you build. Only loans with 10% or more down can cancel insurance after 11 years.

Conventional Private Mortgage Insurance (PMI)

Conventional loans require private mortgage insurance when down payment is less than 20%. PMI rates range from 0.3% to 1.5% annually based on credit score and down payment.

Major advantage: Conventional PMI automatically cancels when loan-to-value reaches 78%. Borrowers can request cancellation at 80% LTV with good payment history. This automatic termination can save $50,000+ over the loan term compared to FHA MIP.

Pros and Cons

FHA Loan Advantages

• Lower credit score requirements
• Smaller down payment options
• Higher debt-to-income ratios accepted
• More lenient underwriting standards
• Assumable by future buyers

FHA Loan Disadvantages

• Upfront and annual mortgage insurance
• Lifetime mortgage insurance on most loans
• Lower loan limits in most areas
• Property must meet FHA appraisal standards
• Cannot be used for investment properties

Conventional Loan Advantages

• No upfront mortgage insurance
• PMI cancels automatically at 78% LTV
• Higher loan limits available
• More property types eligible
• Lower rates for strong credit profiles

Conventional Loan Disadvantages

• Higher credit score requirements
• Stricter underwriting standards
• Larger reserves may be required
• Less flexibility for unique situations
• Higher rates for lower credit scores

Which Loan to Choose

Choose FHA If:

• Your credit score is below 620
• You have limited savings for down payment
• Your debt-to-income ratio is high
• You had recent credit events (bankruptcy, foreclosure)
• You are a first-time homebuyer with limited credit history

Choose Conventional If:

• Your credit score is 680 or higher
• You can afford 10-20% down payment
• You want to eliminate mortgage insurance quickly
• You need a loan above FHA limits
• You are buying an investment property

Frequently Asked Questions