FHA vs. Conventional Loan: Which Mortgage Is Right for You?

This article was originally published in 2019 and updated on April 10, 2025.

Buying a home is a major milestone and one of the most important financial decisions you'll ever make. 

But before you can secure the perfect place, you’ll need to choose the right mortgage.

For many homebuyers, especially first-timers, the choice often comes down to two popular options: an FHA loan or a conventional loan.

Both loan types can help you get the keys to your new home, but they’re built for different kinds of borrowers and come with distinct requirements, benefits, and long-term costs.

So how do you know which loan is the better fit for your financial situation?

In this guide, we’ll walk you through the key differences between FHA and conventional loans so you can:

• Save money on interest rates and mortgage insurance
• Boost your chances of approval
• Choose a loan that aligns with your long-term homeownership goals

Whether you’re buying your very first home or upgrading to your next, this article will give you the insights you need to make a confident, informed mortgage decision.

Why Do You Need to Know the Difference?

Understanding the difference between an FHA loan and a conventional loan is essential because it directly impacts your finances, including:

• How much you’ll pay upfront
• What your monthly payment will be
• Whether you’ll even qualify for a mortgage.

As we mentioned in the introduction, these two loan types are designed for very different borrowers. 

FHA loans are tailored to help buyers with credit scores below conventional standards, limited savings, or less traditional financial backgrounds, while conventional loans are generally better suited for those with a stronger credit score and larger down payments saved.

Knowing which type of loan fits your financial situation will help you:

• Save money on interest rates and mortgage insurance
• Improve your chances of getting approved
• Choose a loan that aligns with your long-term goals

Whether you’re a first-time buyer or a seasoned homeowner, choosing the right loan can mean the difference between getting the keys to your new home—or falling short of qualification. 

That’s why it’s worth taking the time to compare your options before applying.

FHA Loans: What Are They?

FHA loans are home mortgages that are insured by the Federal Housing Administration (FHA) which is an agency within the U.S. Department of Housing and Urban Development (HUD). 

While the FHA doesn't lend money directly, it provides insurance to approved lenders, reducing their risk and making it easier for more people to qualify for a home loan.

The FHA was created by Congress in 1934, during the Great Depression, to boost homeownership at a time when renting was the norm and financing a home was out of reach for many Americans. Back then, high unemployment, rising costs, and strict lending standards made it difficult for average families to get approved for a mortgage.

Since its inception, the FHA has insured millions of mortgages and currently backs over $1 trillion in home loans across the U.S.

FHA loans function like conventional mortgages but include a few key differences—such as lower credit score requirements and smaller down payments—that make them especially appealing to first-time buyers, lower-income households, and those working to rebuild their credit.

What To Use FHA Loans For

While most borrowers use FHA loans to purchase or refinance a single-family home, the program also covers multi-unit properties, such as duplexes, triplexes, and fourplexes, as long as the buyer lives in one of the units.

In addition to individual homes, the FHA also supports financing for larger-scale residential and care facilities, including:

• Multifamily apartment buildings
• Hospitals
• Nursing and assisted living facilities

These specialized loans are part of broader FHA programs aimed at boosting access to affordable housing and healthcare infrastructure across the country.

Where Do You Get An FHA Home Loan?

The FHA does not lend money directly to homebuyers.

Instead, it sets the loan guidelines and insures mortgages issued by FHA loan lenders including banks, credit unions, mortgage companies, and independent mortgage brokers that meet HUD’s approval standards.

If you're planning to apply for an FHA loan—whether you're in Seattle or anywhere else—you'll need to work with an FHA-approved lender. These lenders handle the full loan process and are responsible for:

• Taking your loan application
• Reviewing your financial documents
• Determining whether you meet FHA eligibility guidelines
• Processing and underwriting the loan
• Disbursing the funds at closing

All homes purchased with an FHA loan must undergo an FHA appraisal, which not only verifies the property's market value but also ensures the home meets HUD’s minimum standards for safety and livability. 

This extra layer of inspection helps protect buyers from purchasing a home that may require significant repairs.

To find an FHA-approved lender, you can search the HUD Lender List online or speak with a local mortgage broker who works with multiple FHA-approved institutions. 

As always, it’s a good idea to compare rates, fees, and customer service between lenders to find the best fit for your specific situation.

Key Benefits of Choosing an FHA Loan

If you're exploring your options for buying a home, especially as a first-time buyer, FHA loans can be an excellent choice. 

Here’s why so many homebuyers choose FHA loans over conventional financing:

Low Down Payments

One of the biggest draws of FHA loans is the low down payment requirement. 

You can purchase a home in Seattle with as little as 3.5% down, making it far more attainable than the traditional 10%–20% required with many conventional loans.

This translates to a Loan-to-Value ratio (LTV) of up to 96.5%, meaning you can finance nearly the entire purchase price of the home—ideal for buyers who don’t have a large amount of cash saved.

Seller Contributions

FHA loans also allow sellers to contribute up to 6% of the home’s purchase price toward your closing costs, prepaid expenses, or even repairs. This flexibility can significantly reduce the amount of cash you need to bring to the table.

Co-Signers

Need help qualifying? 

FHA loans let you apply with a co-borrower (also known as a non-occupant co-signer). This can boost your loan eligibility if you’re still building your income or credit profile.

Low Interest Rates

Thanks to government backing, FHA loans pose less risk to lenders, which often results in more competitive FHA loan interest rates. 

This reduced risk allows lenders to offer favorable terms, even to borrowers with average or below-average credit.

In many cases, FHA interest rates are lower than those offered on conventional loans, making homeownership more affordable—especially for first-time buyers or those with less-than-perfect credit.

Flexible Credit Requirements

FHA loans are known for their lenient credit score standards, allowing a minimum credit score as low as 580 (or even 500 with a larger down payment). 

While individual lenders may have their own minimums, this lower threshold opens the door to many buyers who might otherwise be left out.

Easier Qualification and Underwriting

In general, FHA underwriting is more flexible than conventional loans. That means:

• Higher debt-to-income ratios allowed
• More forgiving income and employment verification
• Manual underwriting options for those with non-traditional financial backgrounds

While FHA loans offer a clear path to homeownership for many buyers, they’re not the only option.

For those with stronger credit or larger down payments, a conventional loan might be a better fit.

Let’s take a look at how conventional loans compare.

What is a Conventional Loan?

A conventional loan is a type of mortgage that is not backed by a government agency like the FHA, VA, or USDA. 

Instead, it’s offered through private lenders such as banks, credit unions, and mortgage companies. Because these loans are not government-insured, they often come with stricter requirements, but also more flexibility for borrowers with stronger financial profiles.

To qualify for a conventional loan, you typically need:

• A higher credit score (usually 620 or above)
• A stable income and employment history
• A larger down payment, often 20% and sometimes more
• A lower debt-to-income ratio, ideally under 43%

Conventional loans come in two main types:

• Conforming loans, which meet lending limits and guidelines set by Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), two government-sponsored enterprises that play a major role in the U.S. housing finance system.
• Non-conforming loans, including jumbo loans that exceed local loan limits

These loans can be either fixed-rate or adjustable-rate, and they are popular among buyers who have strong credit and can make a larger upfront investment.

Key Benefits of Choosing a Conventional Loan

For buyers with solid credit and steady income, conventional loans offer flexibility, savings, and control that government-backed loans often can't match. 

While the qualification process is more rigorous, the long-term financial advantages make conventional loans a top choice for many well-prepared borrowers.

Conventional Loan Interest Rates

Conventional loan interest rates are influenced by your credit score, down payment, loan amount, and the market.

While FHA loans may advertise lower starting rates, borrowers with strong financial profiles often secure even better rates with conventional loans—and without the added cost of ongoing government mortgage insurance.

Greater Property Flexibility

One of the key advantages of conventional loans is the flexibility in the types of properties you can finance. 

Unlike FHA loans, which are strictly limited to owner-occupied primary residences, conventional loans allow for a much broader range of real estate opportunities.

This expanded eligibility makes conventional loans ideal for buyers looking to grow their real estate portfolio, generate rental income, or simply enjoy the freedom of owning multiple properties.

Whether you're planning to purchase a second home or an investment property, a conventional loan offers the financial flexibility and broader property options that FHA loans simply don't allow.

Private Mortgage Insurance May Not Be Necessary

Conventional loans do not require an upfront insurance fee, which keeps your initial costs lower. 

If you put down less than 20%, you’ll likely need to pay private mortgage insurance (PMI), but here’s the advantage:

• PMI can be canceled once you reach 20% equity in your home.
• In some cases, you can even opt for lender-paid PMI, which may result in a slightly higher rate but no monthly insurance.

This means conventional loans give you a clearer path to eliminating mortgage insurance entirely, helping you save money both now and in the long run.

Flexible Loan Terms and Long-Term Savings

Conventional loans come in a variety of terms—15, 20, or 30 years—giving you more control over your budget and future. 

Opting for a shorter loan term can significantly reduce your interest costs and help you build equity faster, all while locking in a low fixed rate.

From lower overall insurance expenses to broader property options and customizable loan terms, conventional financing is a strong choice for those who can meet the higher credit and income standards.

But how do you know whether a conventional loan or an FHA loan is the best fit for your situation? 

Let’s explore how to choose the right mortgage based on your unique financial goals and homebuying needs.

How to Choose Which Loan is Best For You

When deciding between an FHA and conventional loan, there’s no one-size-fits-all answer. 

The best option depends on your credit score, savings, long-term financial goals, and even the price of the home you’re buying.

Below are some key factors to consider when comparing the two loan types:

1. Understand Conventional Loan Limits vs. FHA Loan Limits

One of the first things to consider is the loan limit for each type of mortgage.

Conventional loans must usually stay within the conforming loan limits set by the Federal Housing Finance Agency (FHFA) to be eligible for backing by Fannie Mae or Freddie Mac.

In 2025, the conforming loan limit for a single-family home is $1,037,300 in King County. Loans above these limits are known as jumbo loans, which come with stricter requirements like higher credit scores and larger down payments.

FHA loan limits are also set by region and are dependent on the type of unit you're purchasing.

2. Factor in Mortgage Insurance Costs

Another major difference when comparing an FHA vs. conventional loan is the cost and structure of mortgage insurance.

FHA loans require both an upfront mortgage insurance premium (MIP) (equal to 1.75% of the loan amount) and monthly insurance payments, which can last 11 years or even the entire life of the loan, depending on your down payment and loan terms.

It’s important to understand that FHA mortgage insurance premiums are higher and will cost you over the course of the loan, especially when compared to the private mortgage insurance required by conventional loans. Even if the interest rate on an FHA loan appears lower at first glance, the total cost of mortgage insurance can make it more expensive in the long run.

With a conventional loan, you typically only have to pay mortgage insurance (PMI) if your down payment is less than 20%. 

However, unlike FHA loans:

• PMI rates are usually lower
• PMI can be canceled once you build 20% equity in your home
• And most notably, conventional loans do not require an upfront mortgage insurance premium, helping you keep closing costs more affordable

If you qualify for both loan types, a conventional loan could save you thousands in mortgage insurance over time.

3. Evaluate Credit and Down Payment Requirements

While FHA loans are known for being more accessible, conventional loans are often more rewarding if you have a stronger financial profile.

FHA loans allow for credit scores as low as 580 with 3.5% down, or even 500 with 10% down, making them ideal for buyers who are rebuilding credit.

Meanwhile, conventional loans typically require a minimum credit score of 620 and a down payment of at least 5%. But this is offset by better long-term benefits, such as lower interest rates and no mortgage insurance once equity is built.

When choosing between an FHA and a conventional loan, it’s important to think beyond just the initial interest rate. Consider your loan amount, credit score, available down payment, and how long you plan to stay in the home.

If you’re looking for flexibility and long-term savings, and you meet the credit and income standards, a conventional loan is likely the better choice. 

But if you're just starting out, rebuilding your credit, or don’t have much saved for a down payment, an FHA loan can offer a faster way to own a home.

Making the Right Mortgage Choice for Your Situation

Choosing between an FHA and a conventional loan ultimately comes down to your unique financial situation, homebuying goals, and long-term plans. 

Whether you're buying your first home or upgrading to your next one, the right loan can open the door to better affordability, lower costs, and a smoother path to homeownership.

Ready to Explore FHA Loan Programs?

If you've determined that an FHA loan is the right fit for your needs, the next step is selecting the right program.

At SMB, we offer a variety of FHA loan programs tailored to individual needs—whether you're buying a single-family home, refinancing, or investing in a multi-unit property.

Click here to explore our most popular FHA loan products and see how they can help you achieve your homeownership dreams.