Most buyers end up choosing between the two workhorses of the mortgage world: a conventional loan or an FHA loan. They can both get you into a house with a modest down payment, but they're built for different borrowers — and the biggest difference, the one that follows you for years, is the mortgage insurance.
Conventional, in plain terms
A conventional loan isn't government-insured; it follows the Fannie Mae and Freddie Mac rulebook. In general it rewards stronger credit, and while some programs allow a down payment as low as 3%, you'll usually get better terms as you put more down.
The thing to understand is its mortgage insurance. Put less than 20% down and you'll pay private mortgage insurance (PMI) — but PMI is cancellable. As you pay down the balance and build equity, you can have it removed (and by law it generally falls off automatically once you reach a set equity threshold). So on a conventional loan, the insurance is temporary.
Tends to fit: borrowers with solid credit, and anyone who'll reach ~20% equity in a reasonable time — because that cancellable PMI keeps the long-run cost down.
FHA, in plain terms
An FHA loan is insured by the Federal Housing Administration. It's more forgiving on the things that trip people up: it allows lower credit scores and, in many cases, a higher debt-to-income ratio, with a common minimum down payment around 3.5% for qualifying credit. For a buyer who's rebuilding credit or stretching a bit, FHA is often what gets them in the door.
The catch is — again — the mortgage insurance. FHA charges an upfront premium plus an annual premium, and on most FHA loans today that annual premium lasts the life of the loan; it doesn't simply cancel as you build equity (the exception is a 10%-or-more down payment, which ends MIP after 11 years). To get rid of it, borrowers typically refinance out of FHA once their credit and equity have improved.
Tends to fit: borrowers who need the easier qualification to buy now — with a plan to refinance into a conventional loan later to shed the lasting mortgage insurance.
The quick way to tell
- Strong credit, and you'll hit ~20% equity? Conventional usually wins on long-run cost, thanks to cancellable PMI.
- Lower or rebuilding credit, or you need the easier approval? FHA gets you in — just treat the mortgage insurance as a "for now," and plan to refinance out when your numbers improve — and when rates make a refinance worthwhile.
That's the rule of thumb. The real decision also turns on the rate, the fees, and your full picture, so it's worth having a lender run both side by side before you choose.
The takeaway
Conventional rewards stronger credit and lets its mortgage insurance fall away over time; FHA opens the door for more borrowers but tends to keep its insurance for the life of the loan. Get in with whichever fits today — and if that's FHA, keep an eye on refinancing into conventional once you've earned your way there.
Minimum credit scores, down-payment minimums, PMI and MIP rules and cancellation, and loan limits all vary by program and change over time. Confirm the current specifics — especially how long FHA mortgage insurance lasts on your particular loan — with your lender.