How to Choose an FHA Loan or Conventional as a First-Time Buyer

The Quick Read: The right loan depends on your credit score, your cash, your monthly debts, and how long you plan to keep the loan. FHA tends to fit buyers with thinner credit or smaller savings. Conventional tends to fit buyers with stronger credit who want mortgage insurance that can end sooner. The only reliable way to know is to price both on the same home and compare the full costs.

What Is the Real Difference Between the Two Loans?

An FHA loan is a mortgage from a private lender that the Federal Housing Administration insures. A conventional loan has no government insurance behind it. It follows the guidelines of the big secondary-market investors who buy loans from lenders.

That difference shapes everything else. Because the government insures FHA loans, lenders can accept lower credit scores and higher debt loads. Because conventional lenders carry more of the risk, they price it based on your credit profile.

Across the wholesale programs Lendmire places FHA files with, the starting point is a 580 decision score. At that score the maximum financing is 96.5% of the price, so you put in a minimum of 3.5%. The home must be your principal residence, with one to four units. A non-occupant co-borrower is allowed, such as a parent who helps you qualify. Seller or interested-party contributions can cover costs up to 6% of the price.

The FHA loan programs Lendmire arranges follow those guidelines. Every figure here is subject to lender guidelines and a full file review.

How Is an FHA Loan Underwritten, Step by Step?

Underwriting is the lender’s review of whether you, and the home, fit the loan. Here is how an FHA file moves.

Step 1: Credit and income review. Most files go through an automated system first. If the system refers the file, an underwriter reviews it by hand.

Step 2: Debt ratios. Two ratios matter. The housing ratio compares your total housing cost to your gross income. The total ratio adds your other monthly debts. The base pair for FHA is 31/43 with no compensating factors. Documented strengths, such as savings or a steady job history, can push the limits as high as 40/50 at the top tier.

Step 3: Appraisal. An FHA appraiser estimates the home’s market value and also checks it against HUD’s property standards. Safety and soundness issues must be fixed or addressed before closing. An appraisal is not a home inspection. You still hire your own inspector.

Step 4: Mortgage insurance set-up. FHA charges an upfront premium of 1.75% of the base loan. Borrowers typically finance it into the loan. There is also an annual premium, billed monthly.

Step 5: Closing. You receive a Loan Estimate early and a Closing Disclosure before you sign. Those documents are how you compare offers line by line.

How Does Mortgage Insurance Differ?

Mortgage insurance is the biggest long-term cost difference, so it deserves its own look.

On FHA, the annual premium runs between 0.15% and 0.75% of the balance. Where you land depends on the loan term, the loan amount, and the loan-to-value ratio (LTV), which is the loan balance divided by the home’s value. On a thirty-year loan above 90% LTV, the annual premium lasts for the term. At or below 90% LTV, it ends after eleven years. HUD’s mortgagee letter on FHA premiums sets the 1.75% upfront premium and revised the annual schedule. Terms vary by lender guidelines, property type, leverage, credit profile, and full file review.

Most first-time buyers put down under 10%. That puts them in the “lasts the term” bucket. The usual way out is to refinance into a different loan later.

Conventional private mortgage insurance (PMI) is priced on your credit and down payment. Stronger credit means cheaper PMI. It also has a built-in exit. Under federal rules explained by the Consumer Financial Protection Bureau, you can ask the servicer to cancel PMI when your balance is scheduled to reach 80% of the home’s original value. The servicer must end it automatically at 78% if you are current. Those are the legal minimums. Some servicers allow removal on their own terms.

Is FHA Really the Only Low-Down-Payment Option?

No. FHA is not the only low-down-payment option.

Fannie Mae, a secondary-market investor and not a lender, supports conventional financing with a very small down payment. It has two paths. HomeReady has an income limit tied to your area. A second option requires at least one first-time buyer and has no income limit. Fannie Mae defines a first-time buyer as someone with no ownership interest in residential property in the past three years.

Both paths have conditions. The loan must run through Fannie Mae’s automated underwriting system. It must be a fixed-rate loan of up to thirty years on a principal residence. Homebuyer education is required when all occupying borrowers are first-timers and the purchase is above a certain LTV. Fannie Mae’s FAQ notes that adjustable-rate and high-balance loans are not eligible.

So the question is not “who offers a small down payment,” since both do. The question is who prices your profile better.

Side-by-Side: FHA vs. Conventional

Program figures reflect the FHA guidelines Lendmire’s wholesale lenders use. All are subject to lender guidelines and full file review. Some lenders set stricter standards than the program minimums.

A Five-Step Way to Decide

Work through these in order. Each step ends with a lean, not a verdict.

1. Check your credit. If your score sits near the lower end of what lenders accept, FHA usually has the edge. If your score is solid, conventional pricing improves and may beat FHA. The CFPB says FHA can often be a more affordable option for lower scores or smaller down payments, and that it tends to cost more for borrowers with good credit and a medium down payment of 10–15%.

2. Check your cash. Count the down payment, closing costs, and reserves. If cash is tight, FHA’s seller-contribution allowance and co-borrower option may help. If you have more savings, a larger down payment pushes conventional PMI lower and may remove it from the picture.

3. Check your monthly debts. Heavy car or student loan payments squeeze the total ratio. FHA’s wider ratio room, with documented strengths, can be the difference between a yes and a no.

4. Check the home. A move-in-ready home passes either appraisal. A fixer-upper with peeling paint, a failing roof, or missing handrails can stall on an FHA appraisal. Conventional may handle the same house more easily.

5. Check your time horizon. Planning to stay a decade or more? The annual premium keeps adding up, so think hard about how long it lasts. Planning to sell or refinance within a few years? The upfront premium weighs more, because it is spread over fewer years. The long-lasting annual premium matters less over a short stay.

Where the General Rule Breaks

Rules of thumb fail at the edges. These are the cases that surprise buyers.

Credit events. After a bankruptcy or foreclosure, HUD sets waiting periods: two years from a Chapter 7 discharge and three years from a foreclosure. Those are HUD’s rules. Conventional waiting periods are typically longer, so FHA often opens the door sooner. Lenders can add their own overlays.

Price and loan size. FHA limits are set by county and change every year, so county loan limits apply. In high-cost areas, an FHA loan may not cover the price. Conventional high-balance loans, in turn, are excluded from Fannie Mae’s small-down-payment options. You can end up squeezed from both sides.

Property type. FHA covers one to four units if you live in one of them. It can also cover some mixed-use buildings where most of the floor area is residential, per HUD’s handbook drafting table. Condos bring their own appraisal rules, so ask your loan officer about them early.

Strong credit, moderate down payment. This is the zone where FHA tends to lose. The upfront premium and long-lasting annual premium add up, and conventional PMI is cheap for strong files.

Borderline files. Say your score is mid-range, your down payment is small, and your debts are moderate. Both loans work on paper. The tiebreaker is the home and your timeline. A good home you plan to keep a long time leans conventional. A tight file or an older home leans FHA.

How Your Choice Affects Your Offer

Sellers care about certainty. An FHA appraisal can flag repairs that the seller must fix before closing. That adds friction. A clean house with no issues removes it. Some sellers and agents view conventional offers as simpler for that reason, though a well-prepared FHA buyer on a sound home is a solid offer.

Get your pre-approval in hand before you shop. Tell your agent which loan you are using so you can screen homes for condition problems. Skip houses with obvious defects if you are leaning FHA.

Myths and Mistakes to Skip

• “FHA is cheaper for every first-timer.” It depends on credit and down payment.
• “The government lends the money.” The FHA insures. Private lenders lend.
• “A 580 score means approval.” It is a floor. Ratios, reserves, and lender overlays still apply.
• “An FHA appraisal replaces an inspection.” It does not. Hire an inspector.
• “I can drop mortgage insurance at 20% equity on any loan.” The cancellation rights above apply to conventional PMI, not FHA premiums.
• Comparing only the monthly payment. Compare the upfront costs, the insurance duration, and the total cost over your likely stay.

What Happens If You Start With FHA and Want Out Later?

FHA works well as a starting point. Once your credit improves or your equity grows, you can refinance. The FHA Streamline refinances an existing FHA loan with no appraisal and a limited credit review. It requires a net tangible benefit, and the mortgage insurance premium continues. Refinancing into a conventional loan is a separate step. It can end the FHA premiums if your equity and credit support it. The upfront premium you paid is generally not refundable, so factor that in.

Key Terms Defined

LTV (loan-to-value): The loan balance divided by the home’s value. A higher LTV means a smaller down payment.

Mortgage insurance: A cost that protects the lender if you default. FHA calls it MIP. Conventional calls it PMI.

Upfront premium: A one-time FHA insurance charge, 1.75% of the base loan, usually financed into the loan.

Debt-to-income ratios (31/43): The share of gross income that goes to housing and to all monthly debts, in that order.

Overlay: A lender’s own rule that is stricter than the program’s minimum.

Compensating factors: Documented strengths, like savings or job stability, that let a file exceed the base ratios.

Questions to Ask Your Loan Officer

• What is my decision score on each loan, and how does it change my costs?
• How long will mortgage insurance last on each loan at my down payment?
• Does your lender add overlays beyond the program minimums?
• What do the Loan Estimates look like side by side?
• What repairs could an FHA appraisal require on the homes I’m considering?

Your Next Step

If you are buying a home and want to see whether an FHA loan fits your file, Lendmire can help you compare the options and what each one asks of the file. Lendmire is a mortgage broker, so the loans are arranged through wholesale lenders, and every program detail is subject to lender guidelines and full file review. Nothing here is a commitment to lend. Compare the Loan Estimates, and let the full cost, not the headline down payment, pick your loan.

For your own numbers, request a scenario review with Lendmire.

About Lendmire

Lendmire, NMLS# 2371349, is a mortgage brokerage with consumer lending licenses in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending partners, and each application is reviewed individually by the lender. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. HUD – Mortgagee Letter 2023-05

2. Consumer Financial Protection Bureau

3. Fannie Mae – 97% LTV Options

4. Fannie Mae – 97% LTV FAQs

5. CFPB – FHA loans

6. HUD – Handbook 4000.1 modernization drafting table