FHA vs conventional loan comparison: down payment requirements, mortgage insurance, credit scores, and total costs. Which mortgage is best for 2026?
| Feature | FHA Loan | Conventional Loan |
|---|---|---|
| Minimum Down Payment | 3.5% with 580+ credit score | 3% (some programs) to 5% typical |
| Minimum Credit Score | 500 (with 10% down); 580 (with 3.5% down) | Typically 620-640 minimum |
| Mortgage Insurance | Upfront MIP (1.75%) + annual MIP for life of loan | PMI required if less than 20% down; removable |
| Loan Limits | $524,225 in most areas (2026) | $806,500 in most areas (2026) |
| Property Requirements | Strict - must meet FHA minimum standards | Less strict appraisal requirements |
| Interest Rates | Often slightly lower base rate | Rate depends heavily on credit score |
| DTI Ratio Limit | Up to 57% with compensating factors | Typically up to 45-50% |
| Best For | First-time buyers with lower credit or savings | Buyers with good credit and larger down payment |
FHA loans require an upfront mortgage insurance premium (MIP) of 1.75% of the loan amount, plus annual MIP of 0.55% for the life of the loan if you put less than 10% down. This permanent insurance is the FHA loan's major drawback. Conventional loans require private mortgage insurance (PMI) only when the down payment is below 20%, and PMI is automatically canceled once you reach 22% equity. On a $350,000 loan, eliminating PMI versus carrying permanent FHA MIP saves tens of thousands of dollars over the loan term.
FHA loans are designed for borrowers with imperfect credit. You can qualify with a credit score as low as 500 with a 10% down payment, or 580 with the minimum 3.5% down. Conventional loans typically require a 620-640 minimum score, and the best rates are reserved for borrowers above 740. If your credit score is between 580 and 680, an FHA loan may offer a better interest rate than a conventional loan despite the added mortgage insurance cost.
FHA appraisals are more stringent than conventional appraisals. FHA appraisers evaluate the property for health and safety hazards including peeling paint, structural issues, faulty wiring, and inadequate heating. If a property fails the FHA appraisal, the seller must make repairs before the loan can close. Conventional appraisals focus primarily on market value rather than property condition. This can make FHA loans more difficult to use in competitive markets or for fixer-upper properties.
Many borrowers choose FHA loans because of the lower down payment without realizing the long-term cost implications. On a $350,000 home with 3.5% down, the FHA upfront MIP adds $6,037 to the loan balance, and the annual MIP of roughly $1,900 per year never goes away. A conventional loan with 5% down and a credit score of 700 might have PMI of $1,400 per year, but that PMI disappears once you reach 20% equity. Over the first 10 years, the conventional loan often costs $10,000-$20,000 less in total mortgage insurance.
FHA loans serve an important purpose: making homeownership accessible to borrowers with lower credit scores and smaller savings. In 2026, if your credit score is below 680 and you have a limited down payment, the FHA loan may be your best or only path to homeownership. However, if your credit score is 700 or above and you can manage a 5-10% down payment, a conventional loan almost always costs less over time because of removable PMI and no upfront mortgage insurance premium. Many smart borrowers start with an FHA loan and refinance to a conventional loan once their credit improves and they have built sufficient equity.
