FHA vs. conventional loans in 2026: a first-time buyer's guide

By Daniel Reyes

Mortgage Writer · Oct 27, 2026 · 8 min read

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Buying your first home comes with a lot of new terms. One of the first choices you'll face is the type of loan. For most first-time buyers, it comes down to two options: an FHA loan or a conventional loan.

Neither one is "better" across the board. Each fits a different kind of buyer. This guide walks through the trade-offs in plain English so you can go into lender conversations knowing what to ask.

The short version

• FHA loans are backed by the Federal Housing Administration. They're often easier to qualify for with a lower credit score or a smaller down payment.
• Conventional loans aren't backed by a government agency. They often work out cheaper over time if you have stronger credit, mainly because mortgage insurance can come off later.
• The biggest difference is usually mortgage insurance, not the down payment.

Keep reading for the details.

What's the difference between FHA and conventional loans?

An FHA loan is made by a private lender, but the FHA insures it. That insurance protects the lender if a borrower stops paying. Because of that backing, lenders can accept lower credit scores and smaller down payments.

A conventional loan is any mortgage that isn't backed by a government program. Most follow rules set by Fannie Mae and Freddie Mac. These are called "conforming" loans.

Both types are made by banks, credit unions and online lenders. Many lenders offer both, so you can compare them side by side.

Credit score: how low can you go?

FHA guidelines:

• A score of 580 or higher can qualify for the minimum 3.5% down payment.
• A score of 500 to 579 generally requires at least 10% down.
• Below 500 usually isn't eligible.

Keep in mind that these are FHA's floors. Many lenders set their own minimums higher, often around 620. These extra lender rules are sometimes called "overlays."

Conventional loans:

• Many lenders look for a score of about 620 or higher.
• Fannie Mae's automated system no longer uses a hard 620 cutoff. Even so, most lenders still have their own minimums.
• Your score matters a lot for pricing. A higher score usually means a better rate and much cheaper mortgage insurance.

Bottom line: If your score is under about 640, FHA is often the easier path. If it's 700 or higher, conventional often comes out ahead. In between, run the numbers both ways.

Down payment: it's closer than you think

Many people assume FHA always needs less money down. That's not quite true.

• FHA: 3.5% down with a 580+ score. 10% down with a score of 500 to 579.
• Conventional: As little as 3% down through some programs for first-time buyers or buyers who meet income limits. Programs like Fannie Mae's HomeReady and Freddie Mac's Home Possible are examples. Otherwise, 5% down is a common minimum.

So a first-time buyer with good credit may be able to put down less with a conventional loan.

Both loan types may allow gift money from family for the down payment. Many buyers also use down payment assistance programs. Rules vary by program, so ask your lender what's allowed.

Mortgage insurance: the biggest trade-off

This is where the two loans really split apart.

FHA mortgage insurance (MIP)

FHA loans charge two kinds of mortgage insurance premium, called MIP:

• Upfront MIP: 1.75% of the base loan amount. Most buyers roll it into the loan instead of paying cash at closing.
• Annual MIP: Paid monthly as part of your payment. Since HUD cut rates in 2023, it ranges from about 0.15% to 0.75% a year. Most 30-year FHA loans land around 0.50% to 0.55%.

The catch is how long it lasts:

• Put down less than 10%, and annual MIP generally stays for the life of the loan.
• Put down 10% or more, and it generally ends after 11 years.

To get rid of lifetime MIP, many FHA borrowers later refinance into a conventional loan once they have enough equity.

Conventional mortgage insurance (PMI)

Conventional loans with less than 20% down usually require private mortgage insurance, or PMI.

• No upfront fee in most cases. You pay it monthly.
• Cost often ranges from about 0.2% to 1.9% of the loan a year. Your credit score and down payment drive the price. Buyers with strong credit and 10% down tend to pay toward the low end. Buyers with scores in the low 600s and 3% down tend to pay near the top.
• It can come off. You can usually ask to cancel PMI once your balance hits 80% of the home's original value. It generally ends automatically at 78% on the original schedule, as long as you're current on payments.

That last point is a big deal. PMI is temporary by design. FHA MIP with a small down payment is not.

Other differences worth knowing

Loan limits. For 2026, the baseline conforming loan limit for a one-unit home is $832,750 in most of the country. It's higher in high-cost areas. FHA limits vary by county. For a one-unit home in 2026 they run from $541,287 in lower-cost areas up to $1,249,125 in the highest-cost areas. Look up your county before you shop.

Property standards. An FHA appraisal also checks basic health and safety items. A home with peeling paint, a broken railing or a bad roof may need repairs before closing. That can make FHA harder on fixer-uppers.

Debt-to-income (DTI). FHA is often more flexible if your monthly debts are high compared with your income. Conventional loans can be stricter, depending on your credit and savings.

Occupancy. FHA loans are for homes you'll live in as your main residence. Conventional loans can also be used for second homes and rentals.

Interest rates. Rates on FHA loans are sometimes lower than conventional rates, especially for buyers with lower scores. But lenders set rates and terms based on your full application. Compare the total monthly payment, including mortgage insurance, not just the rate.

A worked example (hypothetical)

These numbers are made up to show the math. They are not a quote, an offer or a prediction.

Sam is a first-time buyer looking at a $350,000 home. Sam's credit score is in the low 700s. Let's compare only the mortgage insurance, since the interest rate will depend on Sam's actual quotes.

Option A: FHA with 3.5% down

• Down payment: $12,250
• Base loan: $337,750
• Upfront MIP (1.75%): about $5,911, rolled into the loan
• Annual MIP at 0.55%: about $155 a month
• How long: likely the life of the loan, unless Sam later refinances

Option B: Conventional with 5% down

• Down payment: $17,500
• Loan: $332,500
• Upfront mortgage insurance: none
• PMI at a hypothetical 0.5% a year: about $139 a month
• How long: until the balance reaches 78% to 80% of the original value. On a 30-year loan, that's often roughly 10 to 12 years on the regular schedule. Extra payments can make it sooner.

What Sam learns:

• The conventional loan needs $5,250 more at closing.
• But it avoids about $5,900 in upfront MIP and has a slightly lower monthly insurance cost.
• Most important, the PMI ends. The FHA premium likely doesn't.

Now change one thing. Say Sam's score was in the low 600s. PMI could cost two or three times as much, and the conventional rate might be higher too. In that case, FHA could easily be the cheaper choice for the first several years. That's why you need real quotes for your credit profile.

Which loan fits you?

FHA may fit if:

• Your credit score is under about 640, or you've had recent credit bumps.
• You have a small down payment and your debts are on the high side.
• You plan to refinance or move within several years anyway.

Conventional may fit if:

• Your credit score is around 700 or higher.
• You can put down 3% to 5% or more.
• You want mortgage insurance that can come off without a refinance.
• You're buying a home that needs some work.

Not sure? Ask two or three lenders to price both options. Then compare Loan Estimates side by side. Look at the cash needed at closing, the full monthly payment and how long mortgage insurance lasts.

Before you talk to a lender

• Check your credit reports for errors. You can get free reports from each of the three bureaus at AnnualCreditReport.com.
• Know your budget. Include taxes, homeowners insurance, HOA dues and a cash cushion, not just the loan payment.
• Get preapproved with more than one lender. Mortgage credit checks within a short shopping window are generally counted as one inquiry for scoring.
• Ask directly: "What would my payment be with FHA versus conventional, and when would mortgage insurance end on each?"

This article is general information, not financial advice. Program rules and limits can change, and lenders set their own rates, terms and approval standards. Confirm current details with your lender before you decide.

About the author

Daniel Reyes

Mortgage Writer

Daniel writes about refinancing and buying a home for the Cashzilla team. He walks through the math step by step so you can see the trade-offs before you talk to a lender.