What Is the Difference Between an FHA Loan and a Conventional Loan?

First-Time Buyer Guide: Understanding FHA vs. Conventional Loans and Which One Is Right for You

💡 When you’re choosing a mortgage, understanding the difference between FHA loans and conventional loans can have a significant impact on your home-buying experience.

As a first-time homebuyer, it’s crucial to understand the advantages and potential drawbacks of the mortgage options available to you. FHA and conventional loans are two popular choices, but they have distinct features that cater to different financial needs. Let’s dive into the details of both loan types and help you decide which one is best for your situation.

1. FHA Loans: Government-Backed Loans with Lower Down Payments

An FHA loan (Federal Housing Administration loan) is a government-backed mortgage designed to assist first-time homebuyers and those with less-than-perfect credit.

🔑 Key Features of FHA Loans:

  • Lower down payment requirements: As low as 3.5%, making it accessible for those with limited savings.
  • More lenient credit requirements: FHA loans are often ideal for individuals with lower credit scores, making them a great option for buyers who may not qualify for conventional financing.

Mortgage insurance premiums (MIP): FHA loans require MIP, which protects the lender in case of default. This adds to your monthly payment but is often a necessary tradeoff for lower credit or down payment.

While FHA loans are more accessible, the requirement for mortgage insurance may increase the total cost of your loan over time.

See exactly how FHA’s low down payment and mortgage insurance affect your monthly payment. Calculate your FHA Purchase Loan Payment now to understand your complete monthly costs including MIP, taxes, and insurance.

2. Conventional Loans: Stricter Requirements, But No Mortgage Insurance

A conventional loan is a non-government-backed mortgage typically offered by private lenders. These loans tend to come with more stringent requirements but can be a more affordable long-term option for eligible buyers.

🔑 Key Features of Conventional Loans:

  • Higher credit score requirements: Generally, a credit score of 620 or higher is required, though a higher score will improve your chances of receiving favorable terms.
  • Larger down payments: While you can find conventional loans with down payments as low as 3%, most buyers opt for 5%, 10%, or 20%.

No mortgage insurance required: If you put down at least 20%, you can avoid private mortgage insurance (PMI), which can save you money in the long run. However, if you pay less than 20%, PMI is typically required until you reach 20% equity in the home.

Conventional loans offer more flexibility with loan terms, such as a wider range of interest rate options, and the potential to save money by avoiding mortgage insurance if you can make a larger down payment.

Ready to compare your conventional loan options? Calculate your Conventional Purchase Loan Payment now to see how different down payment amounts affect your monthly payment and whether you’ll need PMI.

3. Which Loan Is Right for You?

The choice between an FHA loan and a conventional loan depends on your financial situation.

💡 Consider an FHA loan if:

  • You have a lower credit score or limited credit history
  • You don’t have a large down payment

You’re looking for more lenient qualifying criteria
However, keep in mind that you’ll need to budget for mortgage insurance premiums.

💡 Consider a conventional loan if:

  • You have a higher credit score (620 or above, but ideally 700+)
  • You have a larger down payment (5% or more)

You can afford higher monthly payments but want to avoid mortgage insurance over the life of the loan.

Ultimately, both loan types serve distinct purposes and can be excellent tools for different homebuyers. Understanding your financial goals, the cost of homeownership, and your long-term financial planning will help you make the best choice for your future.

Want to see the real cost difference side-by-side? Calculate your Compare 2 Rates (Interest Costs) now to compare FHA versus conventional loan scenarios and see which saves you more money over time.

Ready to Choose Between an FHA and Conventional Loan? Let’s Talk About Your Options

At Stairway Mortgage, we help you choose the right path to homeownership—so you can make informed, confident decisions at every step of the way.

📘 Download our homebuyer guides comparing FHA and conventional options.

📊 Check Current Rates for both FHA and conventional loans.

🧮 Compare scenarios with our Compare 2 Rates Calculator.

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