FHA vs Conventional Loan: Which Saves You More in 2025?
May 27, 2025
7 Minutes
FHA vs Conventional loan.
Choose wrong-and you could lose $15K to $20K in hidden costs, lifetime fees, and bad interest deals.
You searched because you're not just buying a house. You're building a future.
This data-backed guide answers:
- Which loan is actually better for YOU in 2025?
- How to save more on interest, fees, and insurance
- The exact difference in approval, risk, and long-term cost
Let’s settle the debate once and for all.
FHA vs Conventional Loan Comparison Table
| Feature | FHA Loan | Conventional Loan |
|---|---|---|
Min. Credit Score | 500 (580+ for 3.5% down) | 620+ |
Down Payment | 3.5% (with 580+ score) | 20% (or PMI if lower) |
Mortgage Insurance | Lifetime MIP required | PMI can be removed at 20% equity |
Loan Backing | Government-backed (FHA) | Private lender (Fannie/Freddie) |
Interest Rate (Avg) | 7.34% | 7.11% |
Who It’s Best For | First-time buyers with lower credit | Strong credit buyers, investors |
| Property Type Restriction | Primary residence only | Includes 2nd home, vacation, investment |
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Cost Comparison: FHA vs Conventional Over 30 Years
Which loan actually costs less long-term-FHA or Conventional?
The answer isn’t obvious… until you run the numbers.
Let’s break down the real cost difference between an FHA loan and a Conventional loan using a $300,000 mortgage as an example.
| Metric | FHA Loan (7.34%) | Conventional Loan (7.11%) |
|---|---|---|
Down Payment | $10,500 (3.5%) | $60,000 (20%) |
Monthly Principal + Interest | $2,068 | $1,932 |
Upfront Mortgage Insurance (UFMIP) | $5,250 (1.75%) | $0 |
Monthly Mortgage Insurance (PMI/MIP) | $213 (MIP for life of loan) | $0 (removed after 20% equity) |
Total Monthly Payment (Yr 1) | ~$2,281 | ~$1,932 |
Interest Paid After 30 Years | $444,672 | $398,146 |
| Total Cost After 30 Years | $519,672 | $458,146 |
While FHA loans are easier to qualify for, they’re significantly more expensive long-term due to:
- Lifetime mortgage insurance
- Higher interest rate
- Higher total payments
If you can afford the 20% down payment, a Conventional loan could save you over $60,000 across 30 years.
FHA vs Conventional Loan Interest Rates in 2025
Here’s how 2025 interest rates compare for FHA and Conventional loans (based on lender data as of this month):
| Credit Score | FHA Loan (2025 Avg) | Conventional Loan (2025 Avg) |
|---|---|---|
740+ | 6.85% | 6.45% |
700–739 | 7.05% | 6.89% |
680–699 | 7.34% | 7.11% |
620–679 | 7.58% | 7.42% |
| 580–619 (FHA only) | ✅ Eligible | ❌ Not eligible |
Example: $400,000 Mortgage
Scenario | FHA Loan (7.34%) | Conventional Loan (7.11%) |
|---|---|---|
Monthly P&I | $2,758 | $2,684 |
Total Cost After 30 Years | $993,780 | $966,240 |
| PMI/MIP Impact | Always applies | Can be removed at 20% equity |
FHA vs Conventional Loans: Pros & Cons Summary
| Factor | FHA Loan | Conventional Loan |
|---|---|---|
| 🧾 Credit Score | 580+ (or 500 w/ 10% down) | 620+ |
| 💵 Down Payment | 3.5% minimum | 20% preferred to avoid PMI |
| 🛡 Insurance | MIP required for life | PMI removable at 20% equity |
| 🏡 Eligible Properties | Primary residence only | Primary, secondary, or investment |
🧠 Best For | First-time buyers, low credit | Buyers with good credit, long-term wealth |
| 💸 Long-Term Cost | Higher due to MIP + interest | Lower if good credit + large down payment |
Can You Switch from FHA to Conventional Later?
Yes-and in many cases, you should.
Many homebuyers use an FHA loan to enter the market, then refinance into a Conventional loan later to save money.
Step 1: Build 20% Equity
Once your home equity hits 20%, you can apply for a Conventional refinance and eliminate monthly MIP.
Step 2: Apply for a Refinance
Use a standard refi process or FHA Streamline Refinance to get a better rate or switch loan types.
Step 3: Lock in Lower Payments
Refinancing to a conventional loan typically means:
- No more mortgage insurance
- Lower interest rates if your credit score improved
- More control over loan terms (15-year, 30-year, ARM, etc.)
Internal CTA: Want to learn how refinancing works and when to do it?
Check out our FHA refinancing guide →
Watch Out:
Refinancing involves fees, appraisal, and credit checks-so calculate your break-even point before making the switch.
What is an FHA Loan?
An FHA loan is a government-backed mortgage insured by the Federal Housing Administration (FHA). An FHA loan is designed for home buyers with low credit scores or a limited downpayment.
The government backs FHA loans. This motivates lenders to approve FHA loans for less cash-ready buyers.
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FHA Loan Requirements and Eligibility
- Credit Score: You can opt for an FHA loan with a minimum credit score of 580 and just a 3.5% downpayment. Home buyers with credit scores between 500 - 579 may qualify with a 10% downpayment.
- Debt-to-Income Ratio (DTI): The DTI ratio measures the percentage of your monthly income used to pay debts. You need a minimum of 43% DTI to qualify for an FHA loan.
- Loan Limits: FHA loan limits vary by location. For 2025 the range is between $524,225 and $1,209,750.
- Employment History: You must show your employment history and proof of income to the lender. This proves that you can repay the loan you are asking for.
- Property Details: The FHA has certain safety and livability checks that your dream house has to tick-mark.
Let’s do a quick comparison of an FHA loan with a conventional loan
Many homebuyers confuse conditional approval with pre-approval. Learn the key differences in our detailed guide on understanding conditional approval and why it matters in your home-buying process.
FHA Loan vs. Conventional Loan
| Feature | FHA Loan | Conventional Loan |
|---|---|---|
| Down Payment | Minimum 3.5% (for credit scores above 580) 10% for scores below 579 | The minimum down payment required is 20% |
| Credit Score Requirement | 580 | 620 or higher |
| Mortgage Insurance | Needed for the life of the loan | Not required |
| Loan Limits | $524,225 and $1,209,750 | Higher limits available in high-cost areas |
| Interest Rates | 7.34% | 7.11% |
Pros of an FHA Loan
- Lower Down Payment: FHA loans are popular among first-time home buyers because you need only a 3.5% down payment and a credit score of 580. Young home buyers who have not had the chance to save up for the down payment or those who are still building their credit can benefit from an FHA loan.
- Lenient Credit Requirements: Unlike a conventional loan, an FHA loan is designed to help buyers with less-than-perfect financial health. Borrowers with scores as low as 500 can qualify (with a higher down payment). These loans allow for more flexibility with financial hiccups, such as past bankruptcies (eligible after three years) or foreclosures.
- Competitive Interest Rates: The government backing reduces the lender’s risk, allowing them to offer lower rates to borrowers.
- Streamline Refinancing Options: FHA loans offer a simple refinancing option called the FHA Streamline Refinance. The process allows buyers to refinance their existing FHA loan to a lower interest rate. You can also seek better terms without the need for a full appraisal.
Cons of an FHA Loan
- Mortgage Insurance Costs: You must pay two types of mortgage insurance on an FHA loan. Upfront Mortgage Insurance Premium - a one-time payment of 1.75% of the total loan amount. You also pay a monthly Mortgage Insurance Premium (MIP) for the lifetime of the loan.
- Property Limits: FHA loans are limited to financing primary residences. You can’t use them to buy a vacation home or investment property! Additionally, the house must meet FHA safety and livability standards
- Higher Long-Term Costs: You can get an FHA loan for a minimum of 3.5% down. While this is great for first-time homebuyers, you end up with a bigger principal amount. This means a bigger monthly expense!
Who Should Consider an FHA Loan?
First-Time Home Buyers: FHA loans are best for home buyers trying to buy their first homes with a low credit score.
- Buyers in High-Priced Markets: Those purchasing within FHA loan limits but struggling to meet conventional requirements.
- Borrowers with Credit Issues: If you have faced bankruptcy or foreclosure, you can opt for an FHA loan after a three-year waiting period.
If meeting your lender’s conditions seems overwhelming, you might have options to reduce monthly payments. Learn how recasting your mortgage can help you adjust your loan terms.
What is a Conventional Loan?
Unlike an FHA loan, a conventional loan is not backed by the government. These loans are funded by private lenders under guidelines by Fannie Mae and Freddie Mac.
Conventional Loan Requirements and Eligibility
- Credit Score: To opt for a conventional loan you need a minimum credit score of 620. Borrowers with high credit scores (740 and above) can get a loan with less than 20% down.
- DTI: A maximum DTI of1% is acceptable but most lenders prefer a lower DTI ratio.
- Mortgage Insurance: Buyers with less than 20% down need to pay for private mortgage insurance.
- Loan Limits: The Federal Housing Finance Agency (FHFA) sets limits on conventional loans based on property location and unit count.
For 2025, the baseline conforming loan limits for conventional loans are as follows:
| Number of Units | Contiguous States, District of Columbia, and Puerto Rico | Alaska, Guam, Hawaii, and the U.S. Virgin Islands |
|---|---|---|
| One | $806,500 | $1,209,750 |
| Two | $1,032,650 | $1,548,975 |
| Three | $1,248,150 | $1,872,225 |
| Four | $1,551,250 | $2,326,875 |
For designated high-cost areas within the contiguous states, the loan limits are:
| Number of Units | High-Cost Areas in Contiguous States, District of Columbia, and Puerto Rico |
|---|---|
| One | $1,209,750 |
| Two | $1,548,975 |
| Three | $1,872,225 |
| Four | $2,326,875 |
Important Note: Alaska, Guam, Hawaii, and the U.S. Virgin Islands do not have designated high-cost areas for 2025. Loan limits remain at elevated baseline levels for these areas.
Pros of a Conventional Loan
- Opt-out of Mortgage Insurance: Home buyers putting a minimum of 20% down do not require mortgage insurance. For FHA loans you are required to opt for insurance.
- Higher Loan Limits: Conventional loans have higher limits compared to FHA loans. This makes it ideal for buyers looking for expensive properties.
- No Property Limits: Unlike an FHA loan which can be only used against your primary residence, conventional loans do not limit on property type. You can buy your second home, vacation home, or investment property with a traditional loan.
- Competitive Interest Rates: Borrowers with good to excellent credit (above 700) can qualify for lower interest rates.
- Customizable Loan Terms: You can select loan terms based on your financial stability and goals. For example, you can opt for different mortgage types like 15-year, 30-year, or adjustable-rate options.
Cons of a Conventional Loan
- Strict Credit Requirements: Only buyers with a good credit score (min. 620) can apply for a conventional loan.
- No Government Backing: Conventional loans do not have government backing. This means private lenders will have stricter requirements for borrowers and higher risk-related costs.
- Higher Down Payment: A minimum downpayment of 20% is typical for a conventional loan.
Conclusion
Whether you’re a first-time buyer with a tight budget or a credit-strong investor hunting for long-term gains… the loan you choose defines your financial future.
FHA gives low-entry flexibility, while Conventional unlocks bigger equity, faster wealth, and investment freedom.
reAlpha can help you save ₹13,000+ instantly.
Why? Because we don’t charge you any commission when you buy your home-just smarter tech and expert guidance.
FAQs
What is the difference between FHA and conventional loans?
FHA loans are backed by the government and require lower credit scores and down payments. Conventional loans are private, need higher credit, but offer flexibility and long-term savings.
Which loan is better for first-time home buyers?
FHA loans are better for first-time buyers with low credit or savings. Conventional loans are ideal for buyers with 620+ scores and stable finances.
Is FHA or conventional loan cheaper long term?
Conventional loans are usually cheaper in the long run due to lower interest rates and no lifetime mortgage insurance. FHA loans have upfront and ongoing MIP.
Can I buy a second home with an FHA loan?
No. FHA loans can only be used for primary residences. To buy a second home or investment property, use a conventional loan.
Do FHA loans have lower interest rates than conventional?
FHA loans often advertise lower rates, but lifetime insurance costs can make them more expensive than conventional in the long term.
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Article by
Rocky Billore is a mortgage industry leader and Chief Sales Officer with over two decades of experience across residential and commercial lending. Since entering the industry in 2004, he has been directly involved in funding more than $1.4 billion in loans. A recognized expert in VA and government lending, Rocky combines deep program knowledge with a data driven, relationship-first leadership style. His work focuses on building scalable sales organizations, developing high performing teams, and aligning technology with real world lending outcomes to improve the homeownership experience.