FHA vs Conventional Loan: Which is Right for You?
Choosing between FHA and Conventional loans? Compare down payments, credit requirements, mortgage insurance, and total costs to find the best mortgage for your situation.
FHA vs Conventional: Quick Comparison
| Feature | FHA Loan | Conventional Loan |
|---|---|---|
| Minimum Down Payment | 3.5% | 3% (first-time buyers) 5% (repeat buyers) |
| Minimum Credit Score | 580 (500 with 10% down) | 620 (700+ for best rates) |
| Mortgage Insurance | 1.75% upfront + 0.55% annual (for life of loan if <10% down) | 0.3-1.5% annual (PMI) (cancels at 20% equity) |
| Loan Limits (Bergen County 2024) | $498,257 | $766,550 |
| Debt-to-Income Ratio (Max) | Up to 56.9% | Up to 50% (typically 43-45%) |
| Property Requirements | Must meet FHA standards (stricter inspections) | Standard appraisal (more flexible) |
| Best For | Lower credit scores Minimal down payment Higher debt ratios | Good credit (700+) 10%+ down payment Higher loan amounts |
Detailed Comparison: FHA vs Conventional
FHA Loan
Pros
- •Only 3.5% down payment required (580+ credit score)
- •Accepts credit scores as low as 580 (500 with 10% down)
- •Higher debt-to-income ratios allowed (up to 56.9%)
- •Easier to qualify after bankruptcy or foreclosure
- •Seller can contribute up to 6% toward closing costs
- •Down payment can be a gift from family
Cons
- •1.75% upfront mortgage insurance premium
- •Mortgage insurance for life of loan (if less than 10% down)
- •Lower loan limits ($498,257 vs $766,550)
- •Stricter property condition requirements
- •Must be owner-occupied (no investment properties)
- •Higher total costs over time due to MIP
Conventional Loan
Pros
- •No upfront mortgage insurance premium
- •PMI cancels automatically at 20% equity
- •Higher loan limits ($766,550 in Bergen County)
- •Lower total costs with good credit and 10%+ down
- •More flexible property types (condos, investment, multi-family)
- •3% down available for first-time buyers
Cons
- •Requires higher credit score (620 minimum, 700+ for best rates)
- •Stricter debt-to-income requirements
- •Higher rates with less than 20% down
- •More difficult to qualify after credit events
- •Seller can only contribute 3-9% toward closing costs
- •More expensive if credit score is below 700
Which Loan Should You Choose?
Choose FHA if:
- Your credit score is below 680
- You only have 3.5-5% for a down payment
- Your debt-to-income ratio is above 45%
- You had a bankruptcy or foreclosure within the past 3 years
- You're buying a home under $498,257
- You don't plan to stay in the home long-term (less than 5 years)
Choose Conventional if:
- Your credit score is 700 or higher
- You have 10-20% for a down payment
- You want to cancel mortgage insurance after reaching 20% equity
- You're buying a home between $498,257-$766,550
- You're buying a condo or investment property
- You plan to stay in the home long-term (10+ years)
Real Cost Comparison Example
$500,000 Home Purchase in Bergen County
6.5% interest rate, 30-year fixed mortgage
| Item | FHA (3.5% down) | Conventional (10% down) |
|---|---|---|
| Down Payment | $17,500 | $50,000 |
| Loan Amount | $482,500 | $450,000 |
| Upfront MIP/PMI | $8,444 (financed) | $0 |
| Monthly P&I Payment | $3,103 | $2,844 |
| Monthly MI/PMI | $221 (lifetime) | $225 (until 20% equity) |
| Total Monthly Payment | $3,324 | $3,069 |
| Year 1 Total Cost | $39,888 | $36,828 |
| 5-Year Total Cost | $199,440 | $184,140 |
| Lifetime MI/PMI Cost | $79,560 (30 years) | ~$18,000 (8 years) |
Key Takeaway:
While FHA requires less upfront cash ($17,500 vs $50,000 down), the lifetime mortgage insurance costs $61,560 more over 30 years. If you can afford 10% down and have good credit, Conventional saves significantly long-term. However, if you need minimal down payment, FHA gets you into a home sooner.
Frequently Asked Questions
What is the main difference between FHA and Conventional loans?
The main difference is that FHA loans require only 3.5% down with a 580 credit score, while Conventional loans typically require 5-20% down with a 620+ credit score. FHA loans have upfront and monthly mortgage insurance, while Conventional loans only require PMI if you put down less than 20%.
Which is cheaper: FHA or Conventional loan?
It depends on your down payment and credit score. With 10%+ down and good credit (700+), Conventional is usually cheaper because you can cancel PMI at 20% equity. With minimal down payment (3.5-5%) or lower credit scores, FHA may be more affordable initially despite lifetime mortgage insurance.
Can I cancel mortgage insurance on an FHA loan?
FHA loans with less than 10% down have mortgage insurance for the life of the loan. The only way to remove it is to refinance to a Conventional loan once you have 20% equity. FHA loans with 10%+ down can cancel MIP after 11 years.
What credit score do I need for FHA vs Conventional?
FHA loans accept credit scores as low as 580 (or 500 with 10% down). Conventional loans typically require a minimum 620 credit score, with better rates available at 700+. Higher credit scores qualify for better interest rates on both loan types.
Can I switch from FHA to Conventional later?
Yes! Many borrowers start with an FHA loan to buy with minimal down payment, then refinance to a Conventional loan once they have 20% equity and improved credit. This eliminates the lifetime mortgage insurance and can save thousands per year.
Which loan is better for first-time homebuyers?
It depends on your financial situation. If you have limited savings and lower credit (580-680), FHA is often better because of the 3.5% down requirement. If you have 10%+ saved and good credit (700+), Conventional will save you money long-term. We can run both scenarios to show you the exact costs.
Still Not Sure Which Loan is Right for You?
Get a personalized analysis comparing FHA vs Conventional based on your exact credit score, down payment, and home price. We'll show you which option saves you the most money.