Last updated: October 2026 · Written and reviewed by Ferran Pujol Acosta, real estate agent. Official sources are listed at the end of this article.
If you are buying your first home with a small down payment, you will probably end up choosing between two loans: an FHA loan, insured by the Federal Housing Administration, or a conventional loan, usually sold to Fannie Mae or Freddie Mac. Both can work with little money down. They differ in credit requirements, mortgage insurance and how long that insurance lasts.
FHA vs Conventional at a Glance
| FHA loan | Conventional loan | |
|---|---|---|
| Minimum down payment | 3.5% (CFPB, HUD) | 3% (CFPB, Fannie Mae) |
| Credit score | 580+ for maximum financing; 500–579 limited to 90% loan-to-value; below 500 not eligible (HUD) | Fannie Mae: 620 for manually underwritten fixed-rate loans, 640 for ARMs; no set minimum for Desktop Underwriter loans |
| Mortgage insurance | Upfront premium of 1.75% of the base loan, plus an annual premium (HUD) | Private mortgage insurance (PMI) if you put down less than 20% (CFPB) |
| How long insurance lasts | 11 years if you borrow 90% or less of the value; the whole loan term if you borrow more than 90% (HUD) | You can ask to cancel at 80% of the original value; it ends automatically at 78% (CFPB) |
| 2026 loan limit (one unit) | $541,287 in most areas, up to $1,249,125 in high-cost areas (HUD) | $832,750 in most areas, up to $1,249,125 in high-cost areas (FHFA) |
| Property | Principal residence; one- to four-unit homes (HUD) | Varies by program and lender |
Credit Score: Where FHA Is More Flexible
FHA’s credit rules are written into HUD policy: a score of 580 or higher qualifies for maximum financing (3.5% down), 500 to 579 is limited to 90% loan-to-value (10% down), and below 500 is not eligible. For conventional loans sold to Fannie Mae, manually underwritten fixed-rate loans need at least 620, while loans run through Fannie Mae’s automated Desktop Underwriter have no set minimum score. In practice, lenders often add their own minimums on top, so ask each lender directly.
Mortgage Insurance: The Biggest Difference
FHA mortgage insurance (MIP). Under HUD’s current rules, most FHA purchase loans pay an upfront premium of 1.75% of the base loan amount, which is usually added to the loan, plus an annual premium paid monthly. For loans longer than 15 years and up to $726,200, the annual premium is 0.50% if you borrow 95% or less of the value and 0.55% if you borrow more. It lasts 11 years if you borrow 90% or less, and for the full term of the loan if you borrow more than 90%.
Conventional PMI. The CFPB explains that you might be required to buy PMI if you put less than 20% down on a conventional loan, and that it protects the lender, not you. Its cost depends on your credit and down payment. Unlike FHA’s premium on low-down-payment loans, PMI does not last for the life of the loan: you can ask to cancel it when your balance is scheduled to reach 80% of the home’s original value, and your servicer must end it automatically at 78% if you are current on payments.
Example: $300,000 Home
| FHA, 3.5% down | Conventional, 5% down | |
|---|---|---|
| Down payment | $10,500 | $15,000 |
| Base loan | $289,500 | $285,000 |
| Upfront mortgage insurance | $5,066 (1.75%), added to the loan | $0 |
| Total loan | $294,566 | $285,000 |
| Principal & interest at 7.28% | $2,015 | $1,950 |
| Monthly mortgage insurance (first year) | About $133 (0.55%) | About $143 (assumed 0.6%) |
| When insurance ends | Life of the loan (more than 90% borrowed) | Around year 11–12 on the original schedule (80%–78% of value) |
In this example the monthly payments look similar at first. The long-term difference is that the conventional loan’s PMI can disappear after roughly 11–12 years of regular payments, while the FHA premium stays for the whole loan unless you refinance. That is why the CFPB suggests asking lenders for detailed pricing on each option and comparing total costs over the time you expect to keep the loan.
When Each Loan Tends to Fit
- FHA can make sense if your credit score is below what conventional lenders will accept, or if you are buying a two- to four-unit home to live in.
- Conventional can make sense if your credit is strong enough to get good PMI pricing and you want the insurance to end once you build equity.
- Either way, get Loan Estimates for both. Lenders must send one within three business days of your application, and multiple mortgage credit checks within 45 days count as a single inquiry (CFPB).
From my experience as a real estate agent: I have seen buyers put down a deposit to reserve a home and then have to back out of the deal because they had not checked their financing properly. Decide between FHA and conventional with a lender before you make an offer, not after.
Final Thoughts
FHA loans open the door for buyers with lower credit scores; conventional loans usually reward stronger credit with insurance that can be cancelled. Compare both with real quotes, look beyond the first monthly payment, and check how long the mortgage insurance will last. Related: How Much Down Payment Do You Need? · What Credit Score Do You Need? · Mortgage Calculator
Sources
- CFPB, Determine your down payment
- CFPB, What is private mortgage insurance?
- CFPB, When can I remove private mortgage insurance (PMI) from my loan?
- HUD, Mortgagee Letter 2023-05 (FHA mortgage insurance premiums)
- HUD, Mortgagee Letter 2010-29 (FHA credit scores)
- HUD, FHA Announces 2026 Loan Limits
- HUD, 203(b) Mortgage Insurance
- Fannie Mae, Selling Guide B3-5.1-01, General Requirements for Credit Scores
- FHFA, Conforming Loan Limit Values for 2026
- Freddie Mac, Primary Mortgage Market Survey
- CFPB, What happens when a mortgage lender checks my credit?
About the author
Ferran Pujol Acosta is a real estate agent with more than four years of experience who advises beginners on buying and selling property. He writes BuyInMoSmart’s guides using official sources such as the CFPB, Fannie Mae, Freddie Mac, HUD and the IRS. About the author and our editorial policy.