# FHA vs. Conventional Loans: A First-Time Buyer's Guide By Tim Steinbrecher (@timsteinbrecher) · Published 2026-10-22 Canonical: https://voce.com/@timsteinbrecher/fha-conventional-loans-first-time-buyer-guide-5epw0g --- If your credit score sits below **620**, choose an **FHA loan** — it accepts a 580 score with 3.5% down and is your realistic route to approval ([Compass](https://www.compmort.com/fha-loan-requirements-this-year)). If it clears 620, choose **conventional** — it starts at 3% down and its private mortgage insurance (PMI) cancels at 20% equity, while FHA's mortgage insurance (MIP) can stay for the life of the loan ([Channing](https://mortgagesbychanning.com/conventional-loan/3-percent-down)). As a branch manager who has walked Michigan buyers through both programs, I've seen the decision turn on two numbers: the credit score and the down payment you can actually put together. The tables below lay out how each loan stacks up on credit, cost, and property standards. #### Key Takeaways - FHA accepts a 580 credit score with 3.5% down, while conventional lending typically requires a 620 minimum - FHA mortgage insurance (MIP) can last the life of the loan; conventional PMI cancels once you hit 20% equity - Conventional loans offer 3% down programs like HomeReady for buyers with solid credit and limited savings - Choose FHA for lower credit and gift-funded down payments; choose conventional when your credit clears 620 and you want long-term savings ## FHA vs. Conventional at a Glance The table below lays out the four numbers that determine which loan you can actually get, and which one will cost less over time. Use it as a quick reference, then read the sections below for the context behind each row. Buyer concern FHA loan Conventional loan Minimum credit score **580** with 3.5% down; 500 to 579 with 10% down ([Compass](https://www.compmort.com/fha-loan-requirements-this-year)) **620** for most programs ([Mortgages by Channing](https://mortgagesbychanning.com/conventional-loan/3-percent-down)) Minimum down payment **3.5%**, or 10% with lower credit **3%** through HomeReady/Home Possible; 5% standard Debt-to-income (DTI) Flexible; commonly up to **43%**, higher with compensating factors ([Lower](https://www.lower.com/mortgages/fha-loan/how-to-qualify-for-an-fha-loan)) Typically capped near **45%**, with 3% down programs often stricter Mortgage insurance **MIP** — upfront 1.75% plus annual premium, can last the life of the loan ([Compass](https://www.compmort.com/fha-loan-requirements-this-year)) **PMI** — cancels once you reach **20% equity** ([Channing](https://mortgagesbychanning.com/conventional-loan/3-percent-down)) Best for Buyers with credit below 620 or limited savings who want a gift-funded down payment Buyers with solid credit who want lower long-term cost Main limitation Life-of-loan mortgage insurance adds thousands over 30 years Higher credit bar and income caps on 3% down programs Here is the rule of thumb I give every client: **your credit score is the deciding factor.** Under 620, FHA is your realistic route to approval. At 620 and above, run the numbers on conventional — the insurance that disappears after a decade of payments is the single biggest long-term difference. ## Conventional Loans: The Strong-Credit Route A conventional loan is a mortgage not backed by a government agency — it's underwritten to standards set by **Fannie Mae** and **Freddie Mac**, the two companies that buy most conforming mortgages from lenders. Because there's no government insurance cushioning the risk, lenders demand a stronger borrower profile: a minimum **620 credit score** and enough income to keep your debt-to-income ratio in line ([Mortgages by Channing](https://mortgagesbychanning.com/conventional-loan/3-percent-down)). The down payment barrier you've probably heard about — 20% — is a myth for first-time buyers. Fannie Mae's **HomeReady** and Freddie Mac's **Home Possible** programs let qualified buyers put down just **3%** with reduced PMI rates, though both cap qualifying income at **80% of the area median income** for the property's location ([Channing](https://mortgagesbychanning.com/conventional-loan/3-percent-down)). Fannie Mae's **Standard 97** program also offers 3% down with no income limit, but it requires at least one borrower to be a first-time buyer and a homeownership education course ([Gustan Cho](https://gustancho.com/3-percent-down-payment-conventional-loan)). **Bottom line:** if your credit clears 620 and your income fits the program caps, conventional's 3% down plus cancellable PMI beats FHA's 3.5% down plus life-of-loan MIP on total cost over the life of the mortgage. ## FHA Loans: The Lower-Credit Door An **FHA loan** is a mortgage insured by the Federal Housing Administration, a division of the U.S. Department of Housing and Urban Development. The FHA doesn't lend you the money — it insures the loan so approved lenders will take on borrowers who don't clear conventional standards ([Compass](https://www.compmort.com/fha-loan-requirements-this-year)). That government backing is what opens the door to a **580 credit score** with just **3.5% down**, and even scores as low as **500** can qualify with 10% down. FHA is built for the two barriers that stop first-time buyers most often: limited savings and thinner credit. The **entire 3.5% down payment can come from a gift** from a family member, with a signed gift letter and a clean paper trail ([McGowan](https://www.mcgowanmortgages.com/fha-loan-requirements-2026-ai-eligibility-screener)). And where conventional underwriting caps debt-to-income near 45%, FHA routinely approves files at **43% and higher** when the borrower shows compensating factors like cash reserves or a stable work history ([Lower](https://www.lower.com/mortgages/fha-loan/how-to-qualify-for-an-fha-loan)). **Bottom line:** FHA is your approval route when credit is below 620 or savings are thin — accept the life-of-loan MIP as the price of getting in now, and refinance to conventional once your equity and credit improve. ## The Hidden Cost: Mortgage Insurance Compared Mortgage insurance is where the two loans diverge most sharply — and it's the cost most first-time buyers don't see coming. Because both loans let you buy with a tiny down payment, both require you to pay for insurance that protects the lender if you default. The difference is how long you pay it — and whether you can ever stop. FHA's MIP is removable only by refinancing, so a buyer who builds equity and raises their credit can escape it by moving to conventional later. On an **FHA loan**, you pay two premiums: an **upfront MIP of 1.75%** of the loan amount (typically financed into the mortgage) plus an **annual MIP** paid monthly, and on most FHA loans today the annual premium **stays for the life of the loan** unless you refinance ([Compass](https://www.compmort.com/fha-loan-requirements-this-year)). On a **conventional loan**, private mortgage insurance **cancels automatically once you reach 20% equity** — typically seven to ten years into the mortgage ([Channing](https://mortgagesbychanning.com/conventional-loan/3-percent-down)). The dollar gap is significant. A conventional 3% down loan on a $300,000 home with a 700 credit score carries roughly **$125 a month in reduced PMI that eventually disappears**, while the same home on FHA costs about **$133 a month in MIP that never goes away** — pushing total mortgage insurance over 30 years from roughly $12,000 to about $52,000 ([Channing](https://mortgagesbychanning.com/conventional-loan/3-percent-down)). Those are illustrative figures that vary by lender and credit profile, but the structure is the point: **FHA's insurance compounds over decades; conventional's ends.** ## Property Standards: What the Appraiser Looks For The house itself can decide your loan type. FHA carries stricter **property requirements**, because the FHA wants to protect against borrowers defaulting on a home with serious safety or structural problems. The appraisal focuses on **safety, soundness, and security** — meaning the home must be livable and structurally safe, and it must be your **primary residence** within 60 days of closing ([Compass](https://www.compmort.com/fha-loan-requirements-this-year)). Conventional loans take a more flexible view of the property. Their appraisals still check value and condition, but they're less rigid about safety defects — a conventional loan can finance homes with fixable issues that would fail an FHA appraisal. Conventional loans also open the door to **second homes and investment properties**, which FHA does not allow ([Compass](https://www.compmort.com/fha-loan-requirements-this-year)). If you're eyeing a fixer-upper or a home with cosmetic damage, this is a real point in conventional's favor. ## Choose FHA if... / Choose Conventional if... **Choose FHA if** your credit score sits below 620, you have limited savings for a down payment, or your down payment will come entirely from a family gift. FHA is also the stronger pick when your debt-to-income ratio runs high but your other signs — steady employment, cash reserves — are strong. The trade-off you accept is a mortgage insurance premium that may follow you for the life of the loan. **Choose conventional if** your credit clears 620 and your income fits the 3% down program caps (or you can put 5% or more down). The 3% down programs like **HomeReady** and **Home Possible** pair a small down payment with reduced PMI that cancels at 20% equity — a combination that saves tens of thousands of dollars over 30 years ([Channing](https://mortgagesbychanning.com/conventional-loan/3-percent-down)). Either loan can get you into a first home. The number that matters is where you stand today on credit, savings, and income — and the honest conversation to have with your loan officer is about which of the two gets you the best monthly payment now without costing you a fortune over the decades.