FHA vs. Conventional Loans: How to Choose the Right Mortgage in 2026

Detailed Answer

Reviewed for accuracy by the Home Loan Playbook editorial team. Our editors cross-reference all claims against CFPB guidelines, HUD documentation, and current lender rate sheets. Last reviewed: April 8, 2026.

FHA loans and conventional loans are the two most common mortgage types in the United States, and the right choice depends on your credit score, savings, and how long you plan to stay in the home. For borrowers with credit scores below 680 and limited savings, FHA loans typically offer lower monthly payments and easier qualification. For borrowers above 700 with at least 5% to put down, conventional loans almost always cost less over the full life of the mortgage because private mortgage insurance can be canceled once you build 20% equity.

That distinction sounds simple, but the details matter. Mortgage insurance rules, loan limits, appraisal requirements, and refinancing options all differ between the two programs, and a choice that saves you $80 per month in Year 1 can cost you $15,000 more over 15 years if you pick the wrong structure. This guide breaks down every major difference with current 2026 numbers so you can make the comparison yourself.

The Core Difference Between FHA and Conventional Loans

FHA loans are insured by the Federal Housing Administration, a government agency within HUD. The government insurance means lenders take on less risk, so they can approve borrowers with lower credit scores and smaller down payments. You pay for that insurance through mortgage insurance premiums (MIP).

Conventional loans are not government-insured. They follow guidelines set by Fannie Mae and Freddie Mac, the two government-sponsored enterprises that buy mortgages from lenders. Because lenders keep more risk, they require stronger credit profiles. But conventional loans give borrowers a path to eliminate mortgage insurance entirely, which FHA loans do not.

Here is the fundamental trade-off: FHA loans are easier to get into. Conventional loans are cheaper to stay in.

Side-by-Side Comparison: FHA vs. Conventional in 2026

Feature	FHA Loan	Conventional Loan
Minimum down payment	3.5% (580+ credit score)	3% (Fannie Mae HomeReady / Freddie Mac Home Possible)
Credit score minimum	500 (with 10% down); 580 (with 3.5% down)	620 (most lenders require 640-660 in practice)
Mortgage insurance	1.75% upfront MIP + 0.55% annual MIP (for life of loan with <10% down)	PMI varies by credit/LTV; cancellable at 80% LTV
2026 loan limit (baseline)	$498,257	$806,500 (conforming)
2026 loan limit (high-cost areas)	$1,149,825	$1,209,750
Interest rates (2026 avg.)	6.50% to 7.00%	6.625% to 7.125%
Debt-to-income ratio max	43% (up to 50% with compensating factors)	45% (up to 50% with strong reserves)
Property appraisal	Strict HUD minimum property standards	Standard appraisal, less prescriptive
Eligible property types	1-4 unit primary residence only	Primary, second home, investment property
Seller concessions allowed	Up to 6% of sale price	3% to 9% depending on down payment
Assumability	Yes (with lender approval)	Generally no

Sources: CFPB Mortgage Guide [1], FHFA Conforming Loan Limits [3], HUD FHA Program [2]. Interest rates reflect national averages as of March 2026 and change daily.

Down Payment Requirements

FHA loans require 3.5% down with a credit score of 580 or above. With a credit score between 500 and 579, you need 10% down. On a $400,000 home, that is $14,000 at the 3.5% tier or $40,000 at the 10% tier.

Conventional loans technically allow 3% down through Fannie Mae's 97% LTV program and Freddie Mac's Home Possible program [4][5]. In practice, most lenders prefer 5% or more, and your PMI costs drop significantly at 10% and 15% down payment levels.

One thing borrowers often miss: the FHA 3.5% down payment can come entirely from gift funds (family, employer, or down payment assistance programs). Conventional loans also allow gift funds, but some lenders require the borrower to contribute at least 3% to 5% from their own savings when the total down payment is below 20%. This varies by lender and by specific loan product, so ask your loan officer about their gift fund policy early in the process.

San Diego Example

San Diego County's median home price hit approximately $875,000 in early 2026. The FHA loan limit for San Diego County is $1,006,250, meaning FHA is available for most properties in the county. Here is what down payments look like on an $875,000 purchase:

• FHA 3.5% down: $30,625
• Conventional 5% down: $43,750
• Conventional 10% down: $87,500
• Conventional 20% down (no PMI): $175,000

The $13,125 difference between FHA minimum and conventional 5% down is meaningful for many first-time buyers. But as we will see in the mortgage insurance section, that upfront savings has a long-term cost.

Credit Score Requirements

FHA's published minimum is 500. That is real, but misleading. Almost no lender actually originates FHA loans at a 500 credit score. Most FHA lenders set their own overlays at 580 or 620. If your score is between 500 and 579, expect to call many lenders before finding one willing to work with you, and expect a higher interest rate when you do.

Conventional loans officially require 620, but in practice the pricing penalties for scores below 680 are steep. Fannie Mae and Freddie Mac use loan-level pricing adjustments (LLPAs) that add basis points to your rate based on credit score and loan-to-value ratio. A borrower with a 660 score putting 5% down might see an LLPA adding 1.75% to their loan cost as a fee (or roughly 0.375% to 0.5% added to the rate). The same borrower at 740 pays a fraction of that adjustment.

The practical credit score breakpoints look like this:

• Below 580: FHA is your only realistic option, and you need 10% down.
• 580 to 619: FHA only. Conventional loans are not available.
• 620 to 679: FHA is almost always cheaper. Conventional LLPAs are too high.
• 680 to 719: This is the gray zone. Run the numbers both ways. FHA might still win depending on your down payment and local rates.
• 720 and above: Conventional wins in most scenarios because LLPAs are minimal and you can eliminate PMI.

Mortgage Insurance: The Biggest Cost Difference

This is where the real money is. Mortgage insurance exists to protect the lender if you default. Both loan types require it when you put less than 20% down, but the structures are completely different.

FHA Mortgage Insurance Premium (MIP)

FHA charges two types of insurance. First, an upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount, usually rolled into the loan balance. Second, an annual MIP of 0.55% of the outstanding loan balance, paid monthly.

The critical detail: if you put less than 10% down on an FHA loan (which most FHA borrowers do), MIP stays on the loan for its entire life. You cannot cancel it. The only way to remove it is to refinance into a conventional loan once you have enough equity and a high enough credit score, which means paying closing costs again.

If you put 10% or more down, MIP drops off after 11 years. But most FHA borrowers choose FHA specifically because they need the low down payment option, so the lifetime MIP rule applies to the majority.

Conventional Private Mortgage Insurance (PMI)

PMI on conventional loans works differently. The rate varies based on your credit score, down payment, and the insurer. Typical PMI rates for a borrower with a 720 score and 5% down range from 0.40% to 0.80% of the loan balance annually.

PMI cancels automatically when your loan balance reaches 78% of the original home value based on the amortization schedule. You can also request cancellation at 80% LTV, and many lenders will approve early cancellation based on a new appraisal showing your home's current market value exceeds the required equity threshold.

Mortgage Insurance Cost Comparison (30-Year Loan, $400,000 Home)

Scenario	FHA (3.5% Down)	Conventional (5% Down)	Conventional (10% Down)
Down payment	$14,000	$20,000	$40,000
Loan amount	$386,000 + $6,755 UFMIP = $392,755	$380,000	$360,000
Monthly MI cost (Year 1)	$180/mo (0.55% annual MIP)	$175/mo (est. 0.55% PMI, 700 score)	$120/mo (est. 0.40% PMI, 700 score)
MI duration	Life of loan (30 years)	About 7 to 9 years (until 78% LTV)	About 5 to 6 years (until 78% LTV)
Total MI cost (estimated)	$6,755 upfront + approx. $54,000 over 30 years = approx. $60,755	Approx. $14,700 over 7 years	Approx. $7,200 over 5 years

The total MI cost difference between FHA and conventional with 5% down is approximately $46,000 over the life of the loan. That number alone explains why borrowers with credit scores above 700 should almost always choose conventional, even if the monthly payment is slightly higher in Year 1.

One caveat: these estimates assume you hold the mortgage for its full term. The average American homeowner stays in a home for about 8 to 10 years. If you plan to sell or refinance within 5 to 7 years, the lifetime MIP cost matters less because you will not actually pay it for 30 years. But betting on a future refinance to escape MIP carries its own risk, especially if rates rise or your financial situation changes.

Interest Rates

FHA rates are generally 0.125% to 0.25% lower than conventional rates for the same borrower profile. In early 2026, average FHA 30-year fixed rates hovered around 6.50% to 7.00%, while conventional 30-year fixed rates ran 6.625% to 7.125%.

That small rate advantage exists because FHA loans carry government insurance, reducing lender risk. But the rate savings rarely offset the higher total mortgage insurance cost for borrowers who qualify for competitive conventional pricing.

Rates vary by lender and change daily. The spread between FHA and conventional can narrow or widen depending on the rate environment. During periods of economic uncertainty, FHA rates sometimes hold steadier because of the government backing, while conventional rates react more sharply to market conditions.

Do not make your FHA vs. conventional decision based on today's rate quote alone. The structural costs (mortgage insurance, loan limits, refinancing flexibility) matter more over time than a 0.125% rate difference.

Loan Limits in 2026

FHA Loan Limits

The FHA baseline loan limit for 2026 is $498,257 for a single-family home in most counties. In high-cost areas, FHA limits go up to $1,149,825. These limits are set annually by HUD based on median home prices by county.

High-cost county examples for 2026:

• San Diego County, CA: $1,006,250
• Los Angeles County, CA: $1,149,825
• King County, WA (Seattle): $1,149,825
• New York City (all 5 boroughs): $1,149,825
• Denver County, CO: $816,500

In counties where the median home price exceeds the FHA limit, you cannot use an FHA loan for a typical purchase. This locks FHA borrowers out of some expensive markets entirely.

Conventional Conforming Loan Limits

The 2026 conforming loan limit is $806,500 for most of the country, as set by the Federal Housing Finance Agency (FHFA) [3]. High-cost area limits reach $1,209,750. Loans above these amounts are considered "jumbo" and carry different qualification requirements and typically higher rates.

For buyers in expensive markets, conventional loans offer a higher ceiling. In San Diego, for example, you can borrow up to $1,209,750 on a conforming conventional loan, compared to $1,006,250 on FHA. That $203,500 difference can determine whether you qualify for the home you want.

Appraisal Requirements

FHA appraisals are more thorough and more likely to create issues. In addition to assessing market value, FHA appraisers must certify that the property meets HUD's Minimum Property Standards (MPS). These standards cover structural integrity, safety, and habitability.

Common FHA appraisal flags that do not typically affect conventional appraisals:

• Peeling or chipping paint on homes built before 1978 (lead paint concern)
• Missing handrails on stairs with more than two steps
• Broken windows or doors
• Water damage or evidence of moisture intrusion
• Non-functional plumbing or electrical systems
• Structural deficiencies in the foundation or framing
• Inadequate water heater strapping (common in California)

If the appraiser flags any of these issues, repairs must be completed before the loan can close. This can delay closing by weeks and creates a negotiation point between buyer and seller about who pays for repairs.

Conventional appraisals focus primarily on the property's market value. Unless there is a clear safety hazard, conventional appraisers rarely flag cosmetic or minor maintenance issues. This makes conventional loans smoother for purchasing older homes, fixer-uppers, or properties that have been sitting on the market.

If you are buying a home that needs some work, conventional is the path with fewer surprises at appraisal.

Property Type Eligibility

FHA loans are limited to primary residences only. You can use FHA for single-family homes, duplexes, triplexes, and fourplexes (1 to 4 units), but you must live in one of the units as your primary residence. Investment properties and second homes are not eligible.

Conventional loans cover a wider range. You can finance primary residences, second homes, and investment properties. Down payment and rate requirements increase for non-primary residences (typically 10% to 15% down for second homes and 15% to 25% for investment properties), but the option exists.

For buyers interested in house hacking (buying a duplex or triplex, living in one unit, and renting the others), both FHA and conventional work. FHA actually has an advantage here because the 3.5% down payment applies to multi-unit properties, making it possible to buy a fourplex with relatively little cash. On a $600,000 fourplex, FHA requires $21,000 down versus $30,000 to $90,000 conventional depending on the program and down payment tier.

Condo Considerations

FHA financing for condos requires the entire condo project to be on HUD's approved condo list. Many condo complexes, especially smaller or older ones, are not FHA-approved, which limits your options. Getting a condo project approved requires the homeowners' association to submit documentation to HUD, and many HOAs do not bother.

Conventional loans can finance individual condo units without project-level approval in most cases, though the lender will still review the HOA's financial health and insurance coverage.

If you are shopping for condos, check HUD's condo lookup tool early. Finding out your preferred building is not FHA-approved after you are under contract is a frustrating experience.

Closing Costs

Closing costs on both loan types typically run 2% to 5% of the loan amount. The composition differs slightly.

FHA-specific closing costs include the 1.75% upfront mortgage insurance premium ($6,755 on a $386,000 loan), which most borrowers finance into the loan. FHA also tends to have slightly lower origination fees because lenders can sell FHA loans to Ginnie Mae at standardized pricing, reducing their overhead.

Conventional closing costs vary more by lender. Origination fees, discount points, and underwriting fees differ significantly between lenders. Shopping multiple lenders (we recommend getting quotes from at least three) matters more on conventional loans because the pricing is less standardized.

Both loan types allow seller concessions, but the limits differ. FHA allows sellers to contribute up to 6% of the sale price toward closing costs. Conventional limits depend on down payment: 3% with less than 10% down, 6% with 10% to 25% down, and 9% with more than 25% down.

In buyer-friendly markets, negotiating seller concessions can offset a significant portion of closing costs. In competitive markets like San Diego in early 2026, seller concessions are harder to negotiate but not impossible, especially on properties that have been listed for 30 or more days.

A practical tip: ask your lender for an itemized breakdown of third-party fees versus lender fees. Third-party fees (title insurance, escrow, recording fees) are largely fixed regardless of your lender. Lender fees (origination, underwriting, processing) are where negotiation and comparison shopping pay off. Some lenders advertise "no origination fee" but embed that cost in a higher rate. Others charge an explicit origination fee but offer a lower rate. Neither approach is inherently better. What matters is total cost over your expected holding period. The CFPB's Loan Estimate comparison tool [9] helps you line up these numbers from different lenders in a standardized format.

Refinancing Options

FHA Streamline Refinance

FHA offers a Streamline Refinance program that allows existing FHA borrowers to refinance with minimal documentation. No appraisal is required. No income or employment verification. The primary requirement is that you have been making on-time payments for at least six months and that the refinance results in a tangible benefit (lower payment or moving from an adjustable to a fixed rate).

The Streamline Refinance is genuinely useful when rates drop. It is one of the fastest, cheapest refinance options available. But it only refinances into another FHA loan, meaning MIP continues on the new loan.

Conventional Rate-and-Term Refinance

Conventional refinancing requires a full application, income verification, and usually a new appraisal. It takes longer and costs more upfront than an FHA Streamline. But if you started with an FHA loan and your credit score has improved and you have built equity, refinancing into a conventional loan lets you drop MIP permanently.

This FHA-to-conventional refinance path is common: buy with FHA at 3.5% down, build equity through payments and appreciation over 2 to 4 years, refinance to conventional once you hit 20% equity and a 700+ credit score. It works, but depends on rates being favorable when you are ready and your home value having held or increased.

Cash-Out Refinancing

Both programs offer cash-out refinancing, but with different limits. FHA allows cash-out refinancing up to 80% LTV with at least 12 months of on-time payments. Conventional cash-out refinancing also goes up to 80% LTV, with slightly stricter credit requirements.

One thing worth knowing about refinancing timing: there is a concept called "seasoning" that affects when you can refinance. FHA requires at least 210 days from your first payment and six on-time payments before a Streamline Refinance. Conventional cash-out refinances typically require 12 months of ownership. If you are planning to refinance out of FHA relatively quickly, factor these minimum waiting periods into your timeline.

Lender Comparison: Who Offers What in 2026

Not all lenders are equal on FHA or conventional loans. Some specialize in one product and offer mediocre pricing on the other. Here is how five major lenders compare on key dimensions.

Better.com

Better.com operates entirely online with no origination fees on most products. Their FHA rates tend to be competitive, and the digital application process is faster than most traditional lenders. The trade-off is limited human support. If your file is straightforward, Better works well. If you have complex income (self-employment, multiple jobs, irregular bonuses), you may hit friction with their automated underwriting that a more hands-on lender could work through. Conventional pricing is competitive, particularly for borrowers with 740+ credit scores.

Rocket Mortgage

The largest mortgage originator in the US by volume. Rocket offers both FHA and conventional loans with a polished digital experience and extensive marketing. Their rates are not always the lowest, especially on FHA products, where they tend to price 0.125% to 0.25% above the most competitive lenders. Service quality is consistent but not personalized. For borrowers who want a recognizable brand and a reliable process, Rocket delivers. For rate shoppers, get competing quotes.

loanDepot

loanDepot is strong on conventional products and has competitive closing cost structures. Their FHA pricing has been average to slightly above average in 2026. They offer both digital and in-person options with loan officers available by phone. One advantage: loanDepot has a "lifetime guarantee" program that waives lender fees on future refinances for existing customers. If you expect to refinance in a few years, that could save $1,000 to $2,000.

United Wholesale Mortgage (UWM)

UWM does not lend directly to consumers. You access their products through independent mortgage brokers. This wholesale model often produces the lowest rates available because brokers compete on margin. For FHA loans in particular, UWM's broker channel frequently beats retail lender pricing by 0.125% to 0.375%. The catch: your experience depends on your broker's competence and responsiveness. A good broker using UWM pricing is hard to beat. A disorganized broker adds stress regardless of the rate.

Guaranteed Rate

Guaranteed Rate combines competitive pricing with above-average customer service. They have physical branches in most major metros, including San Diego, and their loan officers tend to be experienced with both FHA and conventional products. FHA pricing is consistently competitive. Their digital tools are solid but not as streamlined as Better or Rocket. Good option for borrowers who want a hybrid of technology and human guidance.

No single lender is best for every borrower. Get loan estimates from at least three lenders (one broker, one online lender, one traditional lender) and compare the Loan Estimate forms line by line. The Annual Percentage Rate (APR) captures more of the total cost than the interest rate alone, but even APR does not fully account for differences in mortgage insurance duration.

When FHA Is the Better Choice

FHA loans make the most sense in specific situations:

Your credit score is below 680. The mortgage insurance and rate penalties on conventional loans for sub-680 borrowers are steep enough that FHA's lifetime MIP is still the cheaper option for many.

You have very little saved for a down payment. If you can only put down 3.5%, FHA's gift fund flexibility and lower credit requirements make homeownership possible years earlier than waiting to save 5% to 10% for a conventional loan. Time in the housing market matters. If home prices in your area are appreciating at 4% to 5% annually, waiting two years to save a bigger down payment can cost more in purchase price increases than the extra mortgage insurance.

You are buying a multi-unit property to house hack. FHA's 3.5% down on a fourplex is hard to replicate with conventional financing, where multi-unit down payments are often 15% or more for non-owner-occupied units.

You recently experienced a financial setback. FHA has shorter waiting periods after bankruptcy (2 years from discharge for Chapter 7) and foreclosure (3 years) compared to conventional loans (4 years for bankruptcy, 7 years for foreclosure).

When Conventional Is the Better Choice

Conventional loans win in most other scenarios:

Your credit score is 700 or above. The combination of lower PMI rates, PMI cancellation, and competitive interest rates means conventional is cheaper over time for strong-credit borrowers.

You can put at least 10% down. At 10% down with a 720+ score, conventional PMI rates drop below 0.30% annually, and you are closer to the 20% equity threshold where PMI disappears entirely.

You are buying a condo. Conventional financing works with far more condo projects than FHA, giving you a wider selection.

You are buying a second home or investment property. FHA simply does not allow it.

You want to avoid lifetime mortgage insurance. If the idea of paying insurance for 30 years regardless of your equity position bothers you (it should), conventional is the answer.

The property needs cosmetic work. Fewer appraisal headaches with conventional loans on older or imperfect properties.

Common Mistakes to Avoid

Choosing FHA because "it is easier" without running the numbers. FHA is easier to qualify for, but it is not always cheaper. A borrower with a 710 credit score and 5% down payment who picks FHA over conventional because "the payment is $50 less" might pay $30,000 more in total mortgage insurance over the loan's life.

Ignoring the FHA-to-conventional refinance costs. Many buyers plan to start with FHA and refinance to conventional later to drop MIP. That plan works, but it requires closing costs of $3,000 to $6,000 on the refinance, a favorable rate environment, sufficient equity, and an improved credit profile. If any of those conditions are not met when you want to refinance, you are stuck with MIP longer than planned.

Comparing only the interest rate. The rate is one component of cost. Mortgage insurance premiums, upfront fees (FHA's 1.75% UFMIP), and PMI duration all affect total cost. Compare APR, then compare total cost over your expected holding period (how long you plan to keep the home or the mortgage).

Not shopping multiple lenders. Rate and fee differences between lenders on the same product can exceed $5,000 over the loan's life. This applies to both FHA and conventional. Get at least three Loan Estimates and compare them using the CFPB's Loan Estimate explainer [1].

Skipping down payment assistance research. Many state and local programs offer grants or forgivable loans for first-time buyers. Some work with FHA, some with conventional. California's CalHFA program, for example, offers down payment assistance that can be layered with either loan type. Check your state housing finance agency before assuming you cannot afford either option.

Limitations of This Comparison

This guide uses national averages and general program rules. Your actual rates, fees, and qualification will differ based on several factors we cannot account for here:

Rates change daily. The rate comparisons in this article reflect early 2026 averages. By the time you apply, rates could be higher or lower.

Lender overlays vary. While FHA and Fannie Mae/Freddie Mac set minimum guidelines, individual lenders add their own requirements (called overlays). One lender might approve an FHA loan at 580 credit while another requires 620. The same applies to DTI limits, employment history, and asset documentation.

State and local programs are not covered. Down payment assistance, first-time buyer programs, and state-specific tax benefits can shift the math significantly.

This comparison covers 30-year fixed-rate mortgages only. FHA and conventional both offer adjustable-rate mortgages (ARMs) and 15-year terms with different trade-offs.

Individual financial situations are complex. Factors like self-employment income, recent job changes, student loan debt, and alimony obligations all affect qualification in ways that a general comparison cannot address. A mortgage professional can run your specific numbers through both programs and show you the actual cost difference.

We have not evaluated every lender. The five lenders mentioned are well-known national options, but local lenders, credit unions, and community banks sometimes offer better pricing or more flexible underwriting, especially on FHA loans.

Frequently Asked Questions

Can I switch from FHA to conventional after closing?

Yes. You refinance from FHA into a conventional loan. This requires a new application, appraisal (usually), and closing costs. Most borrowers who take this path do so once they have at least 20% equity and a credit score of 700 or higher, which eliminates PMI entirely on the new conventional loan.

Is there a maximum income limit for FHA loans?

No. FHA does not have income limits. However, some FHA-related down payment assistance programs do have income caps, so check eligibility for those separately.

Can I use an FHA loan for a home renovation?

Yes, through the FHA 203(k) program, which rolls renovation costs into the mortgage. The standard 203(k) covers major renovations up to the FHA loan limit, while the limited 203(k) covers up to $35,000 in repairs. This is one area where FHA has a clear advantage over conventional, which requires separate renovation loans with more complex structures.

Do both loan types allow co-signers?

FHA calls them "non-occupant co-borrowers" and allows them. Their income counts toward qualification, but they must also meet credit requirements. Conventional loans allow co-signers under similar terms, though some lenders restrict co-signer arrangements more tightly on conventional products.

What if my credit score is borderline (620 to 660)?

Get quotes for both. Have lenders run preliminary pricing on FHA and conventional. Compare the total monthly payment (including MI) and total cost over your expected holding period. At this credit range, FHA often wins, but not always, especially if you have 10% or more to put down.

This content is for educational purposes only and does not constitute mortgage advice. Consult a licensed mortgage professional for advice specific to your situation. Equal Housing Lender.