FHA vs. Conventional Loan: What’s the Difference?

A conventional loan follows guidelines from Fannie Mae/Freddie Mac and is not government-insured, so it rewards stronger credit and larger down payments. An FHA loan is insured by the FHA (part of HUD), letting lenders approve lower scores and down payments but requiring mortgage insurance for most of the loan’s life. Which is cheaper depends on your credit, down payment, and how long you keep the loan.

It depends on your credit and savings. FHA often wins for buyers with a lower credit score or minimal down payment, because it is more forgiving. Conventional often wins for buyers with solid credit (roughly mid-600s and up) because you can put as little as 3% down and cancel mortgage insurance later. Compare real quotes from a lender for both.

FHA generally allows a 3.5% down payment with a credit score of 580+ (or 10% down for scores 500–579), a steady income with acceptable debt-to-income, and a property that meets FHA condition standards. Mortgage insurance (MIP) is required. Exact thresholds are set by HUD and your lender’s overlays — confirm current rules at hud.gov and with a lender.

Conventional loans typically want a credit score around 620+ (higher scores get better rates), a down payment as low as 3% for many first-time buyers, a manageable debt-to-income ratio (often up to ~43–50% depending on the file), and documented income and assets. Private mortgage insurance applies below 20% down but can be removed later. Guidelines come from Fannie Mae/Freddie Mac.

FHA requires at least 3.5% down with a 580+ score. Conventional can be as low as 3% down for qualifying buyers, or 5%+ for others; 20% down avoids mortgage insurance. VA and USDA loans can be 0% down for eligible buyers. The right target balances your cash, monthly payment, and mortgage-insurance cost — a lender can model each.

FHA can go as low as 580 for 3.5% down (500–579 with 10% down). Conventional usually starts around 620, with the best pricing at 740+. Lenders may add their own minimums ("overlays"), so one lender’s floor can differ from another’s. These are general thresholds — your actual options depend on the full application.

Both protect the lender if you default, and you pay for them. PMI (private mortgage insurance) applies to conventional loans with less than 20% down and can be canceled once you reach about 20% equity. MIP (mortgage insurance premium) applies to FHA loans, includes an upfront fee plus a monthly amount, and on most FHA loans lasts the life of the loan unless you refinance. Confirm specifics with a lender.

A USDA loan is a 0%-down mortgage guaranteed by the U.S. Department of Agriculture for buyers in eligible rural and some suburban areas who meet income limits. Parts of the Austin metro’s outer ring can qualify. Check the property-eligibility map and income limits at usda.gov, and confirm with a USDA-approved lender.