What Is an FHA Loan?
An FHA loan is a mortgage insured by the Federal Housing Administration, a division of HUD. The government backing lets lenders offer the loan to borrowers with lower credit scores and smaller down payments than conventional loans require. FHA doesn't lend money directly — it insures the lender against borrower default, which is why you pay mortgage insurance premiums.
FHA loans are particularly common among first-time buyers and those rebuilding credit. The more flexible qualifying standards come at a cost: mandatory mortgage insurance that, for many borrowers, lasts the entire life of the loan. More at hud.gov.
What Is a Conventional Loan?
A conventional loan is a mortgage not backed by a government agency — it's funded by private lenders and must meet guidelines set by Fannie Mae and Freddie Mac to be sold on the secondary market. Because there's no government guarantee, lenders take on more risk and require stronger borrower qualifications.
Conventional loans have stricter credit and income requirements, but lower long-term costs for qualified borrowers — particularly because PMI can be cancelled once you reach 20% equity, unlike FHA's lifetime insurance requirement.
Side-by-Side Comparison
| Feature | FHA Loan | Conventional Loan |
|---|---|---|
| Minimum credit score | 580 (3.5% down) / 500 (10% down) | 620 minimum; 680+ for best rates |
| Minimum down payment | 3.5% (score 580+) | 3% (some programs); typically 5–20% |
| Mortgage insurance | Upfront MIP (1.75%) + annual MIP | PMI if below 20% down |
| Can insurance be removed? | Only if 10%+ down (at 11 years) | Yes — at 20% equity |
| Loan limits (2026) | $498,257 (standard) / higher in high-cost areas | $766,550 conforming limit |
| DTI limit | Up to 50% with compensating factors | Typically 43% |
| Best for | Lower credit scores, smaller down payments | Good credit (680+), 10%+ down, lower long-term cost |
Source: HUD.gov and FHFA 2026 conforming loan limits. Limits updated annually.
The Mortgage Insurance Difference — This Is What Really Matters
This is where most comparisons miss the point. The mortgage rate is visible and easy to compare. The mortgage insurance cost over time is where the real difference lies.
FHA mortgage insurance (MIP):
- Upfront MIP: 1.75% of the loan amount, paid at closing (on a $350,000 loan, that's $6,125 — usually rolled into the loan)
- Annual MIP: 0.55% of the loan balance per year for most borrowers (~$160/month on a $350,000 loan)
- Duration: if you put down less than 10%, MIP lasts the entire life of the loan — 30 years
Conventional PMI:
- No upfront premium (typically)
- Annual cost: 0.5–1.5% of loan amount depending on credit and LTV
- Duration: cancelled automatically when you reach 22% equity, or you can request cancellation at 20%
On a $350,000 FHA loan with less than 10% down, you'd pay roughly $160/month in MIP for 30 years — totalling approximately $57,600 in insurance premiums alone. A conventional borrower with a 720 credit score paying PMI at 0.7% would pay roughly $204/month initially, but PMI would end once they reached 20% equity — likely within 7–10 years depending on appreciation and extra payments.
Which Should You Choose?
Choose FHA if: your credit score is below 680, you have less than 10% for a down payment, you've had past credit issues like a bankruptcy or foreclosure (FHA has shorter waiting periods), or a conventional lender has declined your application.
Choose Conventional if: your credit score is 680 or higher, you can put down 10% or more, you plan to stay in the home long enough for PMI removal to matter, or the home price exceeds FHA loan limits in your area.
The upgrade strategy: some buyers take an FHA loan initially to get into the market, then refinance to a conventional loan once they've built equity and improved their credit. This lets them take advantage of FHA's easier qualifying now and escape lifetime MIP later.
Government-Backed Loan Equivalents in the UK, India, and Canada
UK — Help to Buy and Government Schemes: The UK had several government mortgage assistance schemes. Help to Buy (now closed to new applicants) provided equity loans to first-time buyers. The current main scheme is the Mortgage Guarantee Scheme, which allows lenders to offer 95% LTV mortgages (5% deposit) with a government guarantee — similar in concept to FHA. First Homes is another scheme offering discounted properties for local first-time buyers. Details at gov.uk.
India — PMAY (Pradhan Mantri Awas Yojana): India's government housing scheme offers credit-linked subsidies on home loan interest rates for economically weaker sections, low-income groups, and middle-income groups. Eligible buyers can receive interest subsidies of 3–6.5% on a portion of the loan, significantly reducing the effective cost. The scheme is administered through HFCs (Housing Finance Companies) and banks. More at pmaymis.gov.in.
Canada — CMHC Insured Mortgages: In Canada, mortgages with less than 20% down payment must be insured through CMHC (Canada Mortgage and Housing Corporation), Sagen, or Canada Guaranty. This is mandatory — not optional like PMI. The insurance premium is 2.8–4.0% of the loan amount, added to the mortgage. Unlike FHA, this insurance protects the lender (not the borrower) and cannot be cancelled — it ends with the mortgage term. Canadian buyers can put as little as 5% down on homes under $500,000. Details at cmhc-schl.gc.ca.