FHA loans continue to be one of the most accessible mortgage options for first-time homebuyers, buyers with low credit scores, and those with limited down payment savings.
But while these loans come with clear benefits, they also include important limitations and costs that borrowers need to weigh.
This guide breaks down the pros and cons of FHA loans, compares them to conventional mortgages, and helps you figure out whether this loan type fits your homeownership goals.
Benefits of an FHA Loan
FHA loans offer several key advantages, especially for buyers who may struggle to qualify for conventional financing.
Lower Down Payments
- Minimum down payment is 3.5% with a credit score of 580 or higher.
- Borrowers with scores between 500–579 may qualify with 10% down.
- Allows gift funds and down payment assistance programs.
How does FHA compare?
Conventional loan minimum down payments range from 3 – 5%, but that’s usually only available to borrowers with excellent credit scores.
It’s possible to qualify for a conventional loan with a credit score of 620, but that will often come with a much higher minimum down payment requirement. Think 20 – 40% in some cases.
Keep in mind that many lenders impose stricter requirements than program minimums.
Easier Credit Qualifications
- FHA loans may accept credit scores as low as 500 (with a higher down payment).
- More flexible when it comes to past credit issues like bankruptcies or foreclosures.
- Non-traditional credit (e.g. rental history or utility payments) may be considered.
Keep in mind that these are minimums required by the FHA. Private lenders often overlay stricter requirements. Refi.com requires a 620 FICO credit score for FHA refinances.
How does FHA compare?
Borrowers may qualify for a conventional loan with a credit score of 620 or higher.
However, the lower the credit score, the higher your costs will be; both upfront (higher down payment) and ongoing (higher PMI costs, higher interest rate).
FHA loan costs tend to be similar regardless of your credit score, apart from the down payment.
Related: Credit Score Required to Refinance Your Mortgage
Higher Debt-to-Income (DTI) Ratios Allowed
Helps buyers qualify even if they carry student loans or other monthly debt.
DTI of 50% preferred, but back-end DTI ratios up to 56.9% may be allowed with compensating factors.
How does FHA compare?
Conventional lenders prefer DTIs around 43% but may allow up to a 50% DTI with strong compensating factors.
Related: Debt-to-Income Requirements to Refinance Your Mortgage
What does that mean in real terms?
Let’s say you earn $6,000 per month (gross). FHA guidelines might allow you to spend up to $3,000 (50%) on total monthly debt — including your mortgage, car loan, student loans, and credit cards. In rare cases, if you have strong compensating factors like a large savings cushion or significant residual income, FHA may allow your total debt to reach as high as $3,414 (56.9% DTI).
- Existing debts: $500 (car loan) + $300 (student loan) = $800
- That leaves up to $2,200 for a mortgage payment (including taxes and insurance). If you qualify for the 56.9% DTI cap, you could potentially afford a mortgage payment up to $2,614.
Conventional loans may cap you closer to $2,000 or less in the same scenario, depending on credit and reserves — meaning FHA may allow you to qualify for a slightly more expensive home if your budget is tight.
Assumable Loans
FHA loans can be assumed by a qualified buyer if you sell, which can be a major selling point in a high-rate environment.
How does FHA compare?
Conventional loans typically aren’t assumable.
More Lenient Refinance Options
FHA Streamline Refinance offers a low-doc path to a better rate if you already have an FHA loan.
How does FHA compare?
Conventional loans don’t have a streamline refinance equivalent.
Downsides of an FHA Loan
While FHA loans are accessible, they can come with extra costs and restrictions.
Mortgage Insurance Premiums (MIP)
- All FHA loans require:
- Upfront MIP: 1.75% of the loan amount (can be rolled into the loan)
- Annual MIP: Ranges from 0.40% to 0.75% depending on loan size and term; typically around $46 per month per $100,000 in loan amount
- MIP lasts for the life of the loan unless you put down at least 10% (in which case it falls off after 11 years).
- You must refinance into a conventional loan to remove MIP early.
How does FHA compare? Conventional loans require private mortgage insurance (PMI) until you have 20% equity.
Lower Loan Limits
- FHA loan limits are lower than conventional loan limits.
- In 2025, FHA limits range from $524,225 to $1,209,750 for single-family homes.
- This can restrict options in high-priced markets.
How does FHA compare?
Conventional loan limits range from $806,500 to $1.2M for single-family homes.
Stricter Property Requirements
- Homes must meet HUD’s minimum property standards (safe, livable, no major defects).
- Additional inspections or repairs may be required before closing.
- FHA loans require owner occupancy and are not available for second homes or investment properties.
How does FHA compare?
Conventional loans have more lenient property requirements and can be used for second homes and investment homes.
FHA vs. Conventional Loans: A Summary
| Feature | FHA Loan | Conventional Loan |
| Minimum Down Payment | 3.5% (580+ credit) | 3% (for qualified borrowers) |
| Credit Score Requirements | More lenient (as low as 500) | Typically 620+ |
| Mortgage Insurance | Upfront + annual MIP; lasts for life in most cases | PMI required <20% down; can be canceled at 20% equity |
| Interest Rates | Often lower for credit-challenged borrowers | Best rates reserved for high-credit borrowers |
| Loan Limits | Lower | Higher |
| Property Standards | Strict | More flexible |
| Loan Assumption | Allowed | Typically not allowed |
Why FHA Rates Are Often Lower
Because FHA loans are government-insured, lenders take on less risk, and often offer lower interest rates than they do for conventional loans with similar credit profiles.
But that lower rate doesn’t always equal lower costs, since FHA mortgage insurance tends to last longer and adds more to your monthly payment.
Who Should Consider an FHA Loan?
FHA loans are a strong fit if you:
- Have a low credit score (especially under 680)
- Need a low down payment
- Carry high DTI but have stable income
- Are a first-time homebuyer without much saved
- Plan to refinance or move in a few years (before long-term MIP adds up)
They’re not ideal if:
- You have excellent credit and can qualify for better-priced conventional options
- You want to avoid mortgage insurance costs entirely
- You’re buying a home that needs significant repairs or doesn’t meet FHA property standards
Final Thoughts
FHA loans remove many of the traditional barriers to homeownership, making them a powerful tool for buyers with limited savings or imperfect credit. But it’s important to weigh the long-term costs, especially with regard to mortgage insurance.
If you’re not sure whether to go FHA or conventional, talk with a lender who can run both options side by side based on your credit, income, and down payment.
Are you looking to refinance your mortgage? Whether you’re interested in refinancing into FHA or out of it, Refi.com can help. Get started here.
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