Two loan programs account for the vast majority of U.S. home purchases: conventional and FHA. They're both widely available, both offer low down payments, and both can work for first-time buyers. But the math on which is better depends on your credit, your down payment, and how long you plan to stay in the home.
Conventional loans, in plain language
A conventional loan is a mortgage that's not insured by the federal government. Most conform to guidelines set by Fannie Mae and Freddie Mac (the government-sponsored enterprises that buy mortgages from lenders). Because they're privately insured rather than government-insured, they give you more structural flexibility. Primary, second, or investment properties; fixed or adjustable rates; and the ability to drop private mortgage insurance (PMI) once you hit 20% equity.
- Minimum down payment: 3% for qualified first-time buyers, 5% for most other programs
- Minimum credit score: 600 with LTV above 80%; no hard minimum below 80% LTV
- Mortgage insurance: PMI required under 20% equity, drops off automatically at 78% LTV
- Loan limits: 2026 limits vary by county (higher in high-cost areas)
- Properties: primary, second, or investment
FHA loans, in plain language
An FHA loan is insured by the Federal Housing Administration. Because the government is guaranteeing the loan against default, lenders can accept borrowers with lower credit scores and smaller down payments than conventional allows. That's the main selling point, and the reason FHA is often called the "first-time buyer loan."
- Minimum down payment: 3.5% with a credit score of 580+, 10% between 500–579
- Mortgage insurance: upfront MIP (1.75%) + annual MIP that typically stays for the life of the loan
- Special programs: 203(k) renovation, 203(h) disaster, $100 Down, Good Neighbor Next Door
- Loan limits: vary by county; high-cost areas have higher limits
- Properties: primary residence only (no second homes or investment)
Side-by-side, for a real scenario
Consider a $400,000 home purchase. Assume a 680 credit score and 5% down ($20,000). Here's roughly how the two programs compare:
- Conventional: $380,000 loan, ~0.5% PMI annual, total monthly PMI ~$158. PMI drops off at 80% LTV.
- FHA: $380,000 loan, ~0.55% annual MIP plus 1.75% upfront MIP (usually rolled into the loan). MIP stays for the life of the loan.
At closing, FHA costs slightly more because of the upfront MIP. Month-to-month, both are similar. The big difference is long-term: FHA's mortgage insurance doesn't go away on its own. To get rid of it, you'll need to refinance into a conventional loan once you've built 20% equity, which may or may not make sense depending on where rates are at that point.
When conventional wins
- Credit score 680 or higher. You'll price better than FHA at comparable down payment.
- You're buying a second home or investment property. FHA doesn't do either.
- You want PMI that eventually drops off without a refinance.
- Down payment 10%+. The PMI cost drops significantly at higher equity.
- You're planning to stay in the home long enough that the lifetime cost matters more than the initial payment.
When FHA wins
- Credit score 580–680. FHA pricing is often meaningfully better than conventional in this range.
- You have compensating factors (strong savings, low DTI) but a credit score below 600.
- You're buying a fixer-upper and want to finance renovations with a 203(k) loan.
- Your down payment is in the 3.5–5% range and you have no other option.
- You're a teacher, law enforcement officer, or firefighter who qualifies for Good Neighbor Next Door (50% off listing price in eligible areas).
What most people actually do
For first-time buyers with credit in the mid-600s to low-700s, both programs are viable. The right pick usually comes down to two questions: how long do you plan to own this home, and do you have the credit headroom to qualify conventional?
If you plan to stay 7+ years, conventional's PMI auto-drop is worth real money. If you're buying a starter home that you'll likely sell in 3–5 years, the FHA monthly payment may actually be lower because the pricing premium on lower credit scores can disappear under FHA.
How we actually decide
When we pre-approve a borrower, we quote both programs side by side whenever it's a close call. You see the payment, the cash to close, and the total cost over 5, 10, and 30 years for each. Then you pick the one that fits your real life. Not the one the lender makes the most money on. That's the core difference between working with a senior loan officer and running a pre-approval through a national shop's algorithm.