The main difference between an FHA loan and a conventional loan is that FHA loans are backed by the Federal Housing Administration and allow lower credit scores (as low as 580) and smaller down payments (3.5%), while conventional loans are not government-backed and typically require a 620 credit score and at least 3% down, but offer lower long-term costs and more flexibility.
Choosing between an FHA loan and a conventional mortgage is one of the most important decisions you will make as a first-time home buyer. Both loan types have advantages and trade-offs, and the right choice depends on your credit score, savings, and long-term plans.
I have helped hundreds of buyers navigate this decision in Burlington County and across South Jersey. Here is an honest, side-by-side comparison to help you understand which loan type fits your situation best.
What Is an FHA Loan?
An FHA loan is a mortgage insured by the Federal Housing Administration, a part of the U.S. Department of Housing and Urban Development (HUD). Because the government insures the loan, lenders are willing to offer more favorable terms to borrowers who might not qualify for a conventional mortgage.
Key features of FHA loans:
- Down payment as low as 3.5% with a credit score of 580 or higher
- Credit score as low as 500 with 10% down (though most lenders require 580+)
- Mortgage insurance required for the life of the loan (unless you put 10% down, then it drops after 11 years)
- Upfront Mortgage Insurance Premium (UFMIP) of 1.75% of the loan amount, paid at closing
- Annual MIP (Mortgage Insurance Premium) of 0.55% to 0.85% of the loan amount
- Loan limits vary by county. In Burlington County, the 2026 FHA loan limit is approximately $498,257 for a single-family home
- Properties must meet FHA minimum property standards, assessed during the appraisal
What Is a Conventional Loan?
A conventional loan is a mortgage that is not insured or guaranteed by the federal government. It follows the guidelines set by Fannie Mae and Freddie Mac, the government-sponsored enterprises that purchase most conventional mortgages.
Key features of conventional loans:
- Down payment as low as 3% through Fannie Mae HomeReady or Freddie Mac HomeOne programs
- Minimum credit score of 620 (most lenders prefer 660+)
- Private Mortgage Insurance (PMI) required with less than 20% down
- PMI can be cancelled once you reach 20% equity
- No upfront mortgage insurance premium
- Loan limits in Burlington County are $766,550 for a single-family home in 2026
- More flexible property standards than FHA
- Available as fixed-rate or adjustable-rate mortgages
FHA vs Conventional: Side-by-Side Comparison
| Feature | FHA Loan | Conventional Loan |
|---|---|---|
| Minimum Down Payment | 3.5% | 3% (some programs) |
| Minimum Credit Score | 580 (3.5% down) | 620+ |
| Mortgage Insurance | MIP for life (or 11 years with 10% down) | PMI, cancellable at 20% equity |
| Upfront Insurance | 1.75% of loan amount | None |
| Interest Rates | Typically lower | Typically higher (with good credit, can be lower) |
| Loan Limits (Burlington County 2026) | ~$498,257 | ~$766,550 |
| Property Standards | Stricter (FHA appraisal) | More flexible |
| Debt-to-Income Ratio | Up to 43% (sometimes 50%) | Up to 36% (sometimes 50% with strong credit) |
| Best For | Lower credit scores, smaller down payments | Good credit, lower long-term costs |
Which Loan Type Is Cheaper Overall?
The answer depends on your specific situation. Here is a quick comparison using a $300,000 home purchase in Burlington County:
FHA loan (3.5% down, 580 credit score):
- Down payment: $10,500
- Upfront MIP (1.75%): $5,066
- Monthly MIP (0.55%): approximately $137
- Lower interest rate typically offsets some of the MIP cost
Conventional loan (3% down, 700 credit score):
- Down payment: $9,000
- Upfront PMI: $0
- Monthly PMI (varies): approximately $90 to $150
- PMI drops off automatically at 20% equity
Over the first five years, the conventional loan is often cheaper for buyers with good credit because PMI drops off eventually. However, for buyers with lower credit scores, the FHA loan's lower interest rate and more lenient requirements make it the more accessible option.
When Should You Choose an FHA Loan?
An FHA loan is likely the better choice if:
- Your credit score is between 580 and 620
- You have a smaller down payment saved (3.5% or less)
- Your debt-to-income ratio is higher (up to 43% or 50%)
- You plan to stay in the home for a shorter period (5 to 7 years)
- You are a first-time buyer who needs more flexible qualification guidelines
FHA loans are particularly popular among first-time buyers in South Jersey because they make homeownership accessible with a modest down payment and lower credit requirements. The NJHMFA down payment assistance program can also be paired with FHA loans to reduce your upfront costs further.
When Should You Choose a Conventional Loan?
A conventional loan is likely the better choice if:
- Your credit score is 660 or higher
- You can put at least 5% down (or 3% with a specialized program)
- You want to avoid the upfront MIP (1.75% of the loan amount)
- You plan to stay in the home long enough to build 20% equity and cancel PMI
- You are buying a home that may not meet FHA's stricter property standards
- You need a loan amount above the FHA limit (over $498,257 in Burlington County)
For buyers with strong credit and a solid down payment, conventional loans typically offer lower lifetime costs. The ability to cancel PMI once you reach 20% equity is a significant advantage over FHA's lifetime MIP.
What About Other Loan Types?
FHA and conventional are the most common loan types for first-time buyers, but they are not the only options:
- VA Loans: Zero down payment, no PMI, competitive interest rates. Available to eligible veterans, active-duty military, and surviving spouses. No official minimum credit score but most lenders look for 620+.
- USDA Loans: Zero down payment for homes in eligible rural and suburban areas. Parts of Burlington County qualify, including areas in Lumberton, Southampton, Shamong, and Tabernacle. Requires a credit score of 640 or higher.
- NJHMFA Programs: Down payment assistance of up to $15,000 that can be combined with FHA, conventional, or VA loans for eligible first-time buyers.
Many first-time buyers assume they need a conventional loan with 20% down, but that is rarely the case. The best loan for you depends on your specific financial situation, and a good lender will walk you through all your options.
Frequently Asked Questions
Is an FHA loan only for first-time buyers?
No. FHA loans are available to any qualified buyer, not just first-time buyers. However, they are most popular among first-time buyers because of the lower down payment and credit score requirements. There is no limit on how many times you can use an FHA loan, as long as you are buying a primary residence.
Can I switch from an FHA loan to a conventional loan later?
Yes. You can refinance an FHA loan into a conventional loan once you have built enough equity and your credit score has improved. This allows you to drop the FHA's lifetime MIP. Many buyers start with an FHA loan and refinance to conventional after a few years.
How long does FHA MIP last?
For FHA loans with a down payment of less than 10%, MIP lasts for the life of the loan. With a down payment of 10% or more, MIP drops off after 11 years. This is one of the main disadvantages of FHA loans compared to conventional loans, where PMI can be cancelled at 20% equity.
Which loan type has the lowest monthly payment?
FHA loans often have slightly lower interest rates, which can mean a lower principal and interest payment. However, FHA's monthly MIP (0.55% to 0.85%) can offset that advantage. The best way to compare is to get quotes from multiple lenders for both loan types and compare the total monthly payment.
Can I use down payment assistance with both loan types?
Yes. New Jersey's NJHMFA down payment assistance program can be used with FHA, conventional, and VA loans. Many local lenders also offer their own down payment assistance programs. A good lender will help you explore all available options.
Not Sure Which Loan Is Right for You?
Choosing between an FHA loan and a conventional loan depends on your specific financial situation, and the right answer is different for every buyer. I work with trusted local lenders who can run your numbers, explain your options, and help you make an informed decision without any pressure.
Reach out to me anytime, and I will connect you with lenders who specialize in first-time buyer programs and know the South Jersey market inside and out.
Bob Millaway
Redfin Senior Agent · AI Certified Agent · 636+ homes sold across Burlington County and South Jersey. Licensed NJ Salesperson #791082.