FHA vs conventional comes down to who backs the loan and how picky the rules are. FHA loans are insured by the federal government. They allow lower credit scores and as little as 3.5% down, but they carry mortgage insurance that often lasts the life of the loan. Conventional loans follow Fannie Mae and Freddie Mac rules. They usually want better credit, can go as low as 3% down, and their mortgage insurance can come off later. Here's how I explain it so a buyer gets it in two minutes.
The short answer
- FHA: easier to qualify, more mortgage insurance, stricter on the home's condition.
- Conventional: harder to qualify, cheaper over time for strong credit, more flexible on the home.
The lender decides which one fits. You need to know enough to set expectations and write a smart offer.
Step by step
- Know the basics.
| FHA | Conventional | |
|---|---|---|
| Who backs it | FHA (HUD) insurance | Fannie Mae / Freddie Mac guidelines |
| Credit floor (typical) | 580 for 3.5% down; 500 to 579 needs 10% down | About 620 |
| Minimum down | 3.5% | 3% on some programs |
| Mortgage insurance | Upfront premium plus annual premium; often for the life of the loan with under 10% down | PMI with under 20% down; can be removed later |
| Property condition | Must meet FHA minimum standards | More flexible |
| Seller concession cap | Up to 6% | 3% to 9% by down payment |
Typical guidelines. Lenders can be stricter. Check current FHA rules in HUD Handbook 4000.1 and conventional rules in the Fannie Mae Selling Guide.
- Ask what the lender recommends. Don't pick the loan for the buyer.
- Shop homes with the loan in mind. FHA buyers should avoid homes with peeling paint, missing handrails, roof problems or safety issues that the appraiser will call out.
- Write the offer to fit. In a multiple-offer situation, some sellers fear FHA appraisals. Show them a strong pre-approval and a clean offer.
- Plan for the appraisal. FHA appraisers note required repairs. Know who will fix them before closing.
A worked example (illustration only)
A buyer with a 660 credit score looking at a $350,000 home.
| FHA | Conventional | |
|---|---|---|
| Down payment | 3.5% = $12,250 | 3% = $10,500 |
| Base loan | $337,750 | $339,500 |
| Mortgage insurance | Upfront plus annual premium | Monthly PMI, priced by credit |
| Removing it later | Often stays unless refinanced | Can come off as equity grows |
At 660, the FHA payment might be lower today. At 760, conventional usually wins. The lender runs both.
Illustration only. A lender sets the real terms. Mortgage insurance, taxes, homeowners insurance and fees not shown. The annual percentage rate (APR) would differ from any note rate. This is not an offer of credit.
How to explain it to your client
"Think of FHA as the easier door to walk through. Lower credit is OK and the down payment is small, but you'll pay for mortgage insurance, often for as long as you have the loan. Conventional is a tighter door, but if your credit is strong, it usually costs less over time and the insurance can come off. Your lender will run both and show you the real numbers side by side. My job is to find you a house that works with whichever one wins."
Watch-outs
- Condition matters for FHA. A fixer may not pass. Look at a 203(k) for those.
- Condos. FHA requires the condo project to be FHA-approved. Check first.
- Don't trash FHA to sellers. Plenty of FHA deals close smoothly. Sell the buyer's strength.
- Mortgage insurance changes. Premiums get updated. Don't quote them.
- VA and USDA exist. Eligible veterans and rural buyers may have better options. Ask the lender.
- No steering. Loan advice is the lender's job. Base everything on money and the property.
This is training for real estate agents. It isn't legal or lending advice. A licensed loan officer sets terms. Check with your managing broker.
Questions
Is FHA only for first-time buyers?
No. Any eligible owner-occupant can use FHA.
Can FHA buyers win multiple offers?
Yes. A strong pre-approval and a clean, fast offer help.
Does conventional always need 20% down?
No. Some programs go to 3% down with PMI.
Can FHA mortgage insurance be removed?
On many FHA loans with under 10% down, it lasts the life of the loan unless refinanced. Check current rules.
Which one has lower rates?
It depends on the buyer's credit and the day. The lender compares the full cost, not just the rate.
Brian Lee Burke is the founder of PadLeaders, a Colorado real estate broker licensed since 2003, team leader of The Kenna Group at Keller Williams DTC (formerly Kenna Real Estate Group) and the author of Mastering Real Estate and The Real Estate Playbook. More about Brian.