FHA vs. Conventional Loans: Which Is Right for You?

Two Popular Paths to Homeownership

FHA and conventional loans are the two most common mortgage types in America. Each has distinct advantages depending on your financial situation, credit history, and homebuying goals.

FHA Loans at a Glance

FHA loans are insured by the Federal Housing Administration and are designed to make homeownership accessible to more Americans, especially first-time buyers.

• Minimum Down Payment: 3.5% with a credit score of 580+
• Credit Score: Minimum 580 (or 500 with 10% down)
• Mortgage Insurance: Required for the life of the loan (upfront MIP of 1.75% + annual MIP)
• DTI Ratio: Up to 50% in some cases
• Best For: First-time buyers, lower credit scores, smaller down payments

Conventional Loans at a Glance

Conventional loans are not government-insured and typically follow guidelines set by Fannie Mae and Freddie Mac.

• Minimum Down Payment: 3% for first-time buyers, 5% for others
• Credit Score: Minimum 620 (best rates at 740+)
• Mortgage Insurance: PMI required if down payment is less than 20%, but can be removed once you reach 20% equity
• DTI Ratio: Typically up to 45%
• Best For: Good credit, larger down payments, removing PMI over time

Key Differences

The biggest practical differences come down to mortgage insurance and long-term cost. FHA loans have permanent mortgage insurance that can only be removed by refinancing. Conventional loans allow PMI removal once you reach 20% equity, which can save you hundreds per month over time.

For borrowers with credit scores above 700 and at least 5% down, conventional loans are often the better long-term value. For those with lower scores or minimal savings, FHA loans provide an accessible path to homeownership.

Which Should You Choose?

The best choice depends on your unique situation. With Lumina, you don't have to choose blindly — our AI compares both options (and many more) across 50+ lenders to show you the most cost-effective path based on your actual financial profile.