In 2025, 22% of first-time homebuyers financed their purchase with an FHA loan, while 58% turned to a conventional mortgage, according to the National Association of Realtors. This split shows that both loan types remain popular pathways to homeownership, yet the choice between them can feel overwhelming for newcomers. Understanding the differences in down payment requirements, credit score thresholds, and ongoing costs is essential for making a decision that fits your budget and long‑term goals. In this guide, we’ll break down how FHA and conventional loans work, compare their eligibility rules, and highlight which option may serve you best if you’re buying your first home with limited savings.
Key Takeaways
– FHA loans allow down payments as low as 3.5% with a credit score of 580, while conventional loans typically require at least 5% down and a 620 score (Experian, 2025).
– In 2025, 22% of first-time buyers used FHA loans versus 58% who chose conventional financing (NAR, 2025).
– The average 30‑year fixed mortgage rate was 6.72% in 2024 for both loan types, but FHA borrowers pay extra mortgage insurance premiums (Freddie Mac, 2024).
What Are FHA Loans and How Do They Work?
An FHA loan is a mortgage insured by the Federal Housing Administration, designed to help buyers with lower credit scores or smaller savings purchase a home. The program allows down payments as low as 3.5% of the purchase price and accepts credit scores down to 580, though some lenders may go lower with additional scrutiny. Borrowers pay both an upfront mortgage insurance premium (UFMIP) and an annual premium that is added to the monthly payment.
Because the government backs the loan, lenders face less risk, which translates to more flexible underwriting. However, the mortgage insurance costs can make FHA loans more expensive over time compared to a conventional loan once you reach 20% equity. If you plan to stay in the home for many years, it’s worth calculating how long those extra premiums will last.
Would you rather pay a slightly higher monthly cost now to get into a home sooner, or wait until you can qualify for a conventional loan with lower ongoing fees?
What Are Conventional Loans and How Do They Work?
A conventional loan is any mortgage not insured or guaranteed by a government agency such as the FHA, VA, or USDA. These loans follow guidelines set by Fannie Mae and Freddie Mac and typically require a minimum down payment of 5% for first‑time buyers, though many lenders offer 3% down programs with stricter credit and income requirements. Credit score thresholds usually start around 620, and the best rates are reserved for scores above 740.
Conventional loans do not require mandatory mortgage insurance if you put down at least 20%; otherwise, you’ll pay private mortgage insurance (PMI) until you reach that equity threshold. PMI rates vary by loan amount, credit score, and down payment size, but they are often cancelable once you hit 20% equity, unlike FHA’s premiums which typically stay for the life of the loan.
Because the insurance can drop off, a conventional loan may become cheaper than an FHA loan after a few years, assuming your credit and down payment meet the standards.
Which Loan Type Offers the Lowest Down Payment?
In 2025, 22% of first-time buyers used FHA loans while 58% chose conventional financing, according to the National Association of Realtors. The FHA program’s 3.5% minimum down payment remains the lowest widely available option for buyers who qualify with a credit score of at least 580. Conventional loans generally ask for at least 5% down, although some lenders offer 3% down loans to borrowers with strong credit and low debt‑to‑income ratios.
For a $250,000 home, an FHA down payment would be $8,750, whereas a 5% conventional down payment would be $12,500. If you can only save $10,000, the FHA route gets you into the home sooner, while the conventional path may require additional savings or a gift from family.
Keep in mind that lower down payments mean borrowing more, which increases both your monthly payment and the total interest paid over the life of the loan.
How Do Credit Score Requirements Compare?
According to Experian’s 2025 data, the average credit score for FHA borrowers is about 657, while the average for conventional borrowers sits near 750. The FHA program officially accepts scores as low as 580 with a 3.5% down payment, though individual lenders may impose higher overlays. Conventional loans typically require a minimum score of 620, and the best interest rates are reserved for scores of 740 or above.
If your score is in the low‑600s, an FHA loan may be your only viable option without a larger down payment or a co‑signer. Conversely, if your score is above 700, you’ll likely qualify for both loan types, and the conventional route could save you money on mortgage insurance over time.
Improving your score by even 20 points can shift you into a better pricing tier, potentially lowering your monthly payment by tens of dollars.
What Are the Cost Differences (Mortgage Insurance, Interest Rates)?
The average 30‑year fixed mortgage rate was 6.72% in 2024 for both FHA and conventional loans, according to Freddie Mac’s Primary Mortgage Market Survey. While the base interest rates are nearly identical, the cost of mortgage insurance diverges sharply. FHA loans require an upfront premium of 1.75% of the loan amount and an annual premium that averages 0.55% (Bankrate, 2025). Conventional loans with less than 20% down typically incur private mortgage insurance (PMI) ranging from 0.3% to 1.5% of the loan annually, depending on credit score and down payment size (NerdWallet, 2025).
Consider a $200,000 loan at 6.72% interest. The FHA borrower pays $3,500 upfront plus roughly $1,100 per year in insurance, while a conventional borrower with a 720 score and 10% down might pay about $800 per year in PMI and no upfront fee. Over five years, the FHA borrower could pay $2,000 more in insurance alone.
If you saved $100 per month toward a down payment on a $250,000 home, you’d accumulate $12,000 in ten years at a modest 2% annual return—enough to meet a 5% conventional down payment but still short of the 3.5% FHA minimum plus closing costs. This illustrates how even disciplined saving may leave you reliant on loan‑specific advantages.
When comparing offers, ask lenders for a detailed loan estimate that breaks down interest, insurance, taxes, and fees so you can see the true annual percentage rate (APR) for each option.
How Do Loan Limits Affect Your Purchase Power?
FHA loan limits are set by county and vary based on local home prices; in 2025 the ceiling for a single‑family home in most low‑cost areas is $498,257, while high‑cost markets can reach up to $1,149,825 (HUD, 2025). Conventional loan limits, governed by the Federal Housing Finance Agency, are $766,550 for most of the country in 2025, with higher limits in expensive regions. These caps determine the maximum amount you can borrow without needing a jumbo loan, which typically carries stricter underwriting and higher rates.
If you’re eyeing a property in a pricey metro area, the conventional limit may allow you to avoid jumbo financing, whereas an FHA loan could restrict you to a lower price range unless you make a larger down payment to stay under the ceiling.
Always check the specific limit for your county before falling in love with a home, as exceeding it will require a different loan product or a larger cash contribution.
Which Loan Is Better for First-Time Buyers with Limited Savings?
For buyers who have saved less than 10% of the purchase price, the FHA loan’s 3.5% down payment requirement often makes homeownership attainable sooner than waiting to save for a conventional 5% minimum. However, the trade‑off is the mandatory mortgage insurance that lasts for the life of the loan unless you refinance. If you expect your income to grow and your credit to improve, you might start with an FHA loan and refinance to a conventional loan once you reach 20% equity, shedding the costly premiums.
Consider your timeline: if you plan to move or refinance within five years, the higher ongoing cost of FHA insurance may outweigh the benefit of a lower down payment. Conversely, if you intend to stay put for a decade or more, building equity while paying the FHA premium could still be worthwhile, especially if your credit score would otherwise keep you out of the conventional market.
Assume you buy a $300,000 home with an FHA loan at 3.5% down ($10,500) and a 6.72% rate. Your monthly principal and interest payment is about $1,550, plus roughly $138 in monthly mortgage insurance. After five years, you’ll have paid about $8,280 in insurance premiums. If instead you saved for a 10% conventional down payment ($30,000) and qualified for a 6.72% loan with no PMI, your monthly principal and interest drops to $1,554 (virtually the same) but you avoid the $8,280 insurance cost, saving you over $8,000 in half a decade.
Weigh the upfront savings against the long‑term expense, and consider whether you plan to refinance or stay in the loan for the full term.
Frequently Asked Questions
What is the minimum down payment for an FHA loan?
The FHA program allows a down payment as low as 3.5% of the purchase price, provided the borrower has a credit score of at least 580. Some lenders may accept scores between 500 and 579 with a 10% down payment, but those cases are less common and may carry higher interest rates.
What is the minimum down payment for a conventional loan?
Most conventional loans require a minimum down payment of 5% for first‑time buyers, though select programs offer 3% down to borrowers with strong credit (typically 680+), low debt‑to‑income ratios, and stable income. These low‑down options often come with stricter underwriting and may require private mortgage insurance.
How does mortgage insurance differ between FHA and conventional loans?
FHA loans mandate both an upfront premium (1.75% of the loan amount) and an annual premium that averages 0.55% of the loan balance, which cannot be canceled unless you refinance. Conventional loans only require private mortgage insurance (PMI) when the down payment is under 20%; PMI rates vary by credit score and loan size, and the coverage can be canceled once you reach 20% equity, usually by request or automatic termination.
Can I qualify for an FHA loan with a low credit score?
Yes. The FHA officially accepts scores down to 580 with a 3.5% down payment, and scores between 500 and 579 may be eligible with a 10% down payment, though individual lenders often impose higher minimums. If your score falls below 500, you will need to improve your credit or consider a co‑signer before applying.
Is it possible to switch from an FHA loan to a conventional loan later?
Absolutely. Many homeowners refinance from an FHA to a conventional loan once they have built at least 20% equity and their credit score has improved. This refinancing eliminates the mandatory FHA mortgage insurance premiums, potentially lowering the monthly payment, though you’ll need to cover closing costs and qualify under conventional guidelines.
Conclusion
- FHA loans shine for buyers with limited savings or lower credit scores, offering down payments as low as 3.5% and flexible underwriting.
- Conventional loans often become cheaper over time for those who can afford a larger down payment and have stronger credit, thanks to cancelable private mortgage insurance.
- Compare the total cost—interest, insurance, fees, and your expected timeline—before choosing the loan type that best aligns with your financial goals.
This article is for educational purposes only and does not constitute financial advice. Investing involves risk, including loss of principal.