Conventional loan vs. FHA loan: 2022 Rates and guidelines

Dan Green
Dan Green
The Mortgage Reports Contributor
March 14, 2022 - 14 min read

Conventional loan vs. FHA: What’s better?

There’s no one-size-fits-all mortgage. When deciding between conventional loans vs. FHA loans, you’ll have to compare costs and benefits based on your personal finances.

A conventional loan is often better if you have good or excellent credit because your mortgage rate and PMI costs will go down. But an FHA loan can be perfect if your credit score is in the high-500s or low-600s. For lower-credit borrowers, FHA is often the cheaper option.

These are only general guidelines, though. And the choice between conventional vs. FHA might be different for you. So be sure to look closely at both loan types and choose the best one for your situation.


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>Related: How to buy a house with $0 down: First-time home buyer

Conventional loan vs. FHA comparison

There are plenty of low-down-payment options for today’s home buyers. But many will choose either a conventional loan with 3% down or an FHA loan with 3.5% down.

So, which loan program is better? That depends on your financial situation.

Here’s an overview of what you need to know about qualifying for a conventional loan vs. FHA loan.

 Conventional 97 LoanFHA Loan
Minimum Down Payment 3%3.5%
Minimum Credit Score 620580
Maximum Debt-to-Income Ratio43%50%
Loan Limit for 2022 (in most areas)$$
Income Limit No income limitNo income limit 
Mortgage InsuranceAnnual feeAnnual and upfront fee

Down payment requirements

Both conventional and FHA mortgage programs have down payment requirements borrowers must meet in order to be eligible for a loan.

  • FHA: 3.5% down with a 580 credit score, or 10% down a score between 500-579
  • Conventional 97: 3% down

Like other conventional loans, conventional 97 applicants will pay private mortgage insurance (PMI) with less than 20% down. And all FHA borrowers are required to pay mortgage insurance regardless of down payment.

Credit scores

In deciding between an FHA loan and the Conventional 97 loan, your individual credit score matters. This is because your credit score determines the type of mortgage loan you’re eligible for. Credit history affects your monthly mortgage payments, too.

Minimum credit score requirements for FHA and conventional loans are:

  • FHA: 580 credit score with 3.5% down, or 500-579 credit score with 10% down
  • Conventional: 620 credit score

If your credit score is between 500 and 620, the FHA loan is best suited for you because it’s your only available option.

But if your credit score is above 620, it’s worth looking into a conventional loan with 3% down. Especially because, as your credit score goes up, your mortgage rate and PMI costs go down.

Debt-to-income ratio

Another factor you need to consider when choosing between a conventional and FHA loan is your debt-to-income ratio or DTI. This is the amount of debt you owe on a monthly basis, compared to your monthly gross income.

  • Conventional loans usually allow a maximum DTI of 43% — meaning your debts take up no more than 43% of your gross monthly income
  • FHA loans allow a more generous DTI of up to 50% in some cases

However, even with FHA loans, you’ll have to shop around if your debt-to-income ratio is above 45%. Because the FHA allows mortgage lenders to set their own in-house loan requirements, some may set stricter DTI requirements that are below 50%.

Debt-to-income ratios tend to make a bigger difference in high-cost areas, like big cities, where home values are high.

If you’re buying somewhere like Los Angeles, New York, or Seattle, your monthly debt (including mortgage costs) will take up much more of your income simply because real estate is so much more expensive.

Mortgage insurance

FHA and conventional loans both charge mortgage insurance. But the cost varies depending on which type of loan program you have, and how long you keep the mortgage.

  • FHA mortgage insurance (MIP): The costs for MIP is the same for most borrowers: 0.85% of the loan amount per year, with a one-time upfront fee of 1.75%
  • Conventional loans private mortgage insurance (PMI): The costs for PMI vary depending on your credit score and loan-to-value ratio. You’ll only pay PMI when you put less than 20% down, and you’ll only continue to pay monthly premiums until you reach 20% home equity
 Conventional LoansFHA Loans
Mortgage Insurance TypePrivate Mortgage Insurance (PMI)Mortgage Insurance Premium (MIP)
Upfront Mortgage Insurance Feen/a1.75% of loan amount
Annual Mortgage Insurance RateUp to 2.25% of loan amount0.85% of loan amount
DurationUntil the loan reaches 80% LTV11 years (down payment of 10% or more) OR life of the loan (down payment of 3.5% to 10%) 

The cheaper mortgage insurance option for you depends on your financial situation.

Conventional 97 mortgage insurance goes away at 80% loan-to-value. You’ll also hear loan officers refer to this as 20% home equity (both terms essentially refer to the same thing).

This means that, over time, your Conventional 97 can become a better value — especially for borrowers with high credit scores.

Also, consider upfront charges.

  • In addition to MIP, the FHA charges an upfront mortgage insurance premium known as UFMIP. UFMIP costs 1.75% of your loan size, is added to your loan balance, and is non-recoverable except via the FHA Streamline Refinance
  • The Conventional 97 charges no equivalent upfront fee for mortgage insurance. It only charges monthly mortgage insurance premiums

Loan limits

Both the FHA and conventional loans have limits on the amount of money you can borrow.

In 2022, the FHA loan limits for a single-family home is $ in most of the U.S.

The conventional loan limit for a single-family home is $.

Any loan amount that exceeds these limits are considered non-conforming loans or jumbo loans.

Mortgage rates

Mortgage rates typically look lower for FHA loans than conventional loans on paper. For instance, today’s average FHA rates are as low as % (% APR)*, while conventional mortgage rates are as low as % (% APR)*.

However, those rates can’t be taken at face value. First, because rates vary depending on your personal finances, your rate will likely be different from the average rate.

Second, PMI and credit score can also affect your interest rate and mortgage payment. For conventional loans, a lower credit score means a higher interest rate. So if your score is in the low- to mid-600s, an FHA loan might be cheaper.

Conventional loans also base mortgage insurance rates on your credit score, which contributes to a higher monthly payment as well.

*Current rates according to The Mortgage Reports' lender network. Rates are for sample purposes only; your own rate will be different. See our mortgage rate assumptions here

Conventional loan vs. FHA mortgage payments

For home buyers with good credit scores, a conventional loan may be more attractive. That’s because conventional loan costs are more dependent on your credit and down payment than FHA loan costs. And as a result, your monthly payments and PMI are lower when your credit score is higher. This is a key difference from how FHA loans work.

Conventional 97 vs FHA Comparing Payments

With an FHA loan, your mortgage rate and MIP cost the same no matter what your FICO score.

That means in the short term, FHA loans may be more advantageous.

But over the long-term, borrowers with above-average credit scores will typically find Conventional 97 loans more economical relative to FHA ones.

Remember, mortgage insurance for conventional loans can be canceled at 20% loan-to-value ratio. But FHA mortgage insurance lasts the entire life of the loan.

So if you’ll be staying in the home long enough to reach 20% equity — and especially if you have a good credit score — a conventional loan could be your cheaper option in the long run.

FHA vs Conventional infographic

FHA vs Conventional Infograhic

Alternative low-down-payment loan programs

The conventional 97 loan and FHA loan are not the only low-down-payment mortgages on the market. A variety of other low- and no-money-down loans can help you get into a home without a huge upfront cost.

  • Fannie Mae HomeReady: This home loan offers below market rates, reduced private mortgage insurance costs, and it allows the income of everyone living in the household to qualify. However, there are income limits, loan maximums, and you’ll need a FICO score of 620 or more and a DTI of 50% or less
  • Freddie Mac Home Possible: Similar to HomeReady, it has income and loan limits, and it requires a minimum credit score of 660, 3% down payment, and DTI below 43%. However, Freddie Mac Home Possible offers flexible loan approval requirements that help low-income families become homeowners
  • VA loan: This mortgage loan requires no down payment and offers flexible credit score minimums and below-market rates. VA loans have no maximum loan amounts. Plus, bankruptcy and foreclosure are not immediate disqualifications. Yet, this program is only available to eligible service members and veterans
  • USDA loan: This rural housing loan requires no down payment and has no maximum home purchase price. Although there are drawbacks. This government-agency loan does have property standards that require the home to be located in a rural area. There are also income limits for the buyer, and it does carry mortgage insurance for the entire loan term

Most of these loan products can only be used to purchase a primary residence — a home in which you live in for the majority of the year.

Vacation homes and investment properties are generally not allowed.

For many buyers, though, the choice among low-down payment loans will be between the FHA loan and the Conventional 97. This is because VA loans are available to military borrowers only. USDA loans are restricted to suburban and rural areas, with maximum loan and income limits, and HomeReady has similar income restrictions.

Conventional loan vs FHA loan FAQ

Which is a better loan, FHA or conventional?

Between FHA and conventional, the better loan for you depends on your financial circumstances. FHA might be better than conventional if you have a credit score below 680, or higher levels of debt (up to 50 percent DTI). Conventional loans become more attractive the higher your credit score is because you can get a lower interest rate and monthly payment.

Can you switch from FHA to conventional?

You can switch from an FHA to a conventional loan by refinancing your mortgage. This means you get a new conventional loan to pay off your existing FHA loan. This might make sense to do if you have at least 20 percent equity in your home and a 620 or higher credit score. Then, you may be able to save by switching from an FHA to a conventional loan with no PMI.

What are the benefits of a conventional home loan?

If you get a conventional loan with 20 percent down or more, you won’t have to pay for mortgage insurance. That’s a big benefit over FHA loans, which require mortgage insurance regardless of your down payment size. The conventional 97 loan also lets you put just 3 percent down, while FHA requires 3.5 percent at minimum. And conventional loans offer lower mortgage rates the higher your credit score is. That’s good news if you have a good credit score of 720 or higher.

Is an FHA loan bad?

FHA loans are great for borrowers who need a home loan with a lower bar of entry. The big benefits are that they allow lower down payments (just 3.5 percent) and a lower credit score (580) than many other loans.

What are the disadvantages of FHA loans?

You have to pay for FHA mortgage insurance regardless of your down payment size. And you can’t get rid of it unless you refinance. So if you have a great credit score and/or you’re putting 20 percent or more down, an FHA loan likely isn’t the right choice for you. In that case, look into a conventional loan instead.

What credit score do I need for a conventional loan?

Conventional loans require a credit score of at least 620. But some mortgage lenders might set their own requirements, starting at 640, 660, or even higher. Plus, your conventional mortgage rate will be better the higher your credit score is. So especially if your credit is on the lower end, be sure to show around with different lenders for the best deal.

What credit score do I need for an FHA loan?

FHA loans require a credit score of 580 or higher in most cases. You might be able to get an FHA loan with a credit score of 500-580 if you make a 10 percent or bigger down payment. But you’ll have to search for the right lender because few mortgage companies allow scores in that range for FHA loans.

What’s the interest rate on a conventional loan? 

Conventional loan interest rates are typically a little higher than FHA mortgage rates. That’s because FHA loans are backed by the Federal Housing Administration, which makes them less “risky” for lenders and allows for lower rates. However, if you have a great credit score (above 680, in most cases) you might qualify for a lower conventional rate. But, you also have to consider the annual mortgage insurance rate with each loan. Depending on your credit score and down payment, conventional mortgage insurance rates could be higher or lower than FHA insurance rates. This will affect which loan is cheaper overall.

Who qualifies for a conventional loan?

You might qualify for a conventional loan if you have a credit score of at least 620; a debt-to-income ratio of 43 percent or lower; a 3 percent down payment; and a steady, two-year employment history proven by tax returns and bank statements. To qualify for the low-down-payment conventional 97 loan, you must buy a single-family property (no 2-,3-, or 4-units allowed).

Who qualifies for an FHA loan? 

You might qualify for an FHA loan if you have a credit score of 580 or higher; a debt-to-income ratio lower than 50 percent; and enough money to make at least a 3.5 percent down payment. You also need a steady job and income, proven by tax returns. You can get an FHA loan with 1-, 2-, 3-, or 4-unit properties.

Conventional vs. FHA loans: The bottom line

For today’s low down payment home buyers, there are scenarios in which the FHA loan is what’s best for financing; and there are scenarios in which the Conventional 97 is the clear winner. Rates for both products should be reviewed and evaluated.

If you’re ready to buy, talk with a loan officer about your mortgage options. You should compare personalized quotes for both FHA and conventional loans to see which one is cheaper for your situation and suits your needs best.