Choosing between FHA and conventional loan interest rates can feel overwhelming. But understanding the key differences can save you thousands over the life of your mortgage. Let’s break down what really matters.
FHA vs Conventional Loan Interest Rates: Understanding the Basics
When comparing FHA vs conventional loan interest rates, it’s essential to start with a clear understanding of what each loan type is and how they differ fundamentally. While both help borrowers finance home purchases, their structures, requirements, and costs vary significantly.
What Is an FHA Loan?
FHA loans are insured by the Federal Housing Administration, a government agency under the U.S. Department of Housing and Urban Development (HUD). These loans are designed to make homeownership more accessible, especially for first-time buyers, low-to-moderate-income earners, or those with less-than-perfect credit.
- Backed by the federal government, reducing lender risk
- Lower credit score requirements (as low as 500 with a 10% down payment)
- Minimum down payment of 3.5% for borrowers with a credit score of 580 or higher
- Requires mortgage insurance premiums (MIP), both upfront and annually
Because the government insures FHA loans, lenders are more willing to offer favorable terms to borrowers who might not qualify for conventional financing. This often translates into competitive FHA vs conventional loan interest rates, especially for those with lower credit profiles.
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What Is a Conventional Loan?
Conventional loans are not backed by any government agency. Instead, they are offered by private lenders and typically adhere to guidelines set by Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs) that buy and securitize mortgages.
- No government insurance, so lenders assume more risk
- Higher credit score requirements (typically 620 or above)
- Down payments can range from 3% to 20%, depending on the program
- Private mortgage insurance (PMI) required if down payment is less than 20%
Despite the stricter qualification standards, conventional loans offer greater flexibility in loan amounts and property types. When comparing FHA vs conventional loan interest rates, conventional loans often have slightly lower rates for borrowers with strong credit, but this isn’t always the case.
Key Differences Affecting Interest Rates
The interest rate you receive on any mortgage depends on a variety of factors, including your credit score, debt-to-income ratio, loan term, and market conditions. However, the loan type itself plays a crucial role in determining your rate.
- FHA loans often have lower interest rates for borrowers with credit scores below 680
- Conventional loans may offer lower rates for borrowers with credit scores above 720
- Lender risk perception differs: FHA reduces lender risk via government backing, which can influence pricing
“FHA loans can be a lifeline for borrowers who don’t meet conventional lending standards, often providing lower interest rates when credit is a challenge.” — Consumer Financial Protection Bureau (CFPB)
How FHA vs Conventional Loan Interest Rates Compare Today
To make an informed decision, it’s vital to look at current market data. As of 2024, average interest rates for both FHA and conventional loans have been influenced by broader economic trends, including inflation, Federal Reserve policy, and housing market demand.
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Current Average Rates for FHA Loans
According to the Federal Housing Finance Agency (FHFA), the average 30-year fixed FHA loan interest rate in mid-2024 ranges between 6.1% and 6.5%. This is slightly lower than the average for conventional loans among borrowers with similar credit profiles.
- Borrowers with FICO scores of 640–679 typically see FHA rates around 6.3%
- Those with scores above 740 may still benefit from FHA rates as low as 5.9%, though conventional options may be cheaper
- Adjustable-rate FHA loans (ARMs) are less common but can start as low as 5.5% for the initial period
The stability of FHA rates makes them attractive during periods of economic uncertainty. Because the government absorbs part of the risk, lenders can offer more consistent pricing even when market volatility increases.
Current Average Rates for Conventional Loans
As reported by the Freddie Mac Primary Mortgage Market Survey, the national average for a 30-year fixed conventional loan is approximately 6.6% to 7.0% in 2024. However, top-tier borrowers (credit score 760+) can secure rates as low as 6.0% with favorable terms.
- Conventional rates are more sensitive to credit score fluctuations
- Lenders often offer “rate discounts” for higher down payments or shorter loan terms
- Jumbo conventional loans (above conforming limits) may have slightly higher rates
One advantage of conventional loans is the ability to negotiate lender credits or buy down the rate with discount points. This flexibility can make conventional loans more competitive in the FHA vs conventional loan interest rates debate, especially for financially strong borrowers.
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Rate Trends Over the Past 5 Years
Looking at historical data from 2019 to 2024 reveals important patterns in how FHA and conventional loan interest rates have evolved.
- In 2019, average FHA rates were around 3.8%, while conventional loans averaged 3.9%
- During the pandemic (2020–2021), both rates dropped below 3% at their lowest points
- By 2022–2023, rising inflation caused rates to climb sharply, with both loan types exceeding 7%
- In 2024, rates have stabilized slightly but remain significantly higher than pre-pandemic levels
Throughout this period, FHA loans consistently offered marginally lower rates for borrowers with credit scores below 700. However, for borrowers with excellent credit, conventional loans often matched or beat FHA pricing, especially when PMI could be avoided with a 20% down payment.
Factors That Influence FHA vs Conventional Loan Interest Rates
Interest rates aren’t set in stone—they’re dynamic and influenced by a mix of borrower-specific and macroeconomic factors. Understanding these can help you predict which loan type might offer better terms for your situation.
Credit Score Impact on Rates
Your credit score is one of the most significant determinants of your mortgage rate. The difference between a 620 and a 760 credit score can mean hundreds of dollars in monthly payments.
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- FHA loans are more forgiving: borrowers with scores as low as 580 can qualify for the 3.5% down payment option
- Conventional loans typically require a minimum of 620, but rates improve dramatically above 700
- For a borrower with a 640 score, FHA rates may be 0.25% to 0.5% lower than conventional options
A study by Ellie Mae found that in Q1 2024, the average rate for FHA borrowers with scores between 620–659 was 6.42%, while conventional borrowers in the same range paid 6.68%. That 0.26% difference can save over $30,000 in interest over 30 years on a $300,000 loan.
Down Payment Requirements and Rate Effects
The size of your down payment affects both your eligibility and your interest rate. Larger down payments reduce lender risk, which can lead to better rates.
- FHA: 3.5% minimum down payment with a 580+ credit score; 10% with a score between 500–579
- Conventional: As low as 3% down with special programs (e.g., HomeReady, HomePossible)
- Borrowers who put down 20% or more on a conventional loan avoid PMI and often get rate discounts
Interestingly, even with a small down payment, conventional loans can sometimes offer lower rates than FHA if the borrower has excellent credit. However, for those with limited savings, FHA’s low down payment combined with competitive FHA vs conventional loan interest rates makes it a compelling option.
Debt-to-Income Ratio and Loan Pricing
Your debt-to-income (DTI) ratio measures how much of your monthly income goes toward debt payments. Lenders prefer lower DTI ratios, as they indicate financial stability.
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- FHA allows DTI ratios up to 50% in some cases, especially with strong compensating factors
- Conventional loans typically cap DTI at 45%, though some lenders allow up to 50%
- Higher DTI can result in higher interest rates or loan denial
Borrowers with high DTI ratios may find FHA loans more accessible and potentially cheaper in terms of interest rates. The FHA’s flexible underwriting standards can offset some of the risk pricing that would otherwise increase conventional loan rates.
Mortgage Insurance: The Hidden Cost in FHA vs Conventional Loan Interest Rates
While interest rates are a major factor, mortgage insurance can significantly impact your total borrowing cost. It’s essential to compare not just the rate, but the full monthly payment including insurance.
FHA Mortgage Insurance Premiums (MIP)
FHA loans require two types of mortgage insurance: an upfront MIP (UFMIP) and an annual MIP paid monthly.
- Upfront MIP: 1.75% of the loan amount, typically financed into the loan
- Annual MIP: Ranges from 0.45% to 1.05% depending on loan term, LTV, and down payment
- MIP usually lasts for the life of the loan if you put down less than 10%
This means that even if the FHA vs conventional loan interest rates are lower, the added cost of MIP can make the total monthly payment higher. For example, on a $300,000 loan with 3.5% down, the annual MIP could add $1,500–$2,500 per year to your cost.
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Conventional Private Mortgage Insurance (PMI)
PMI is required on conventional loans when the down payment is less than 20%. Unlike FHA MIP, PMI can be canceled once you reach 20% equity in your home.
- PMI cost: Typically 0.3% to 1.5% of the loan amount annually
- Can be removed automatically or upon request when equity reaches 20%
- No upfront premium (though some lenders may charge a fee)
For borrowers planning to build equity quickly or expecting income growth, PMI may be a more cost-effective option than FHA’s lifelong MIP. This is a critical consideration when comparing FHA vs conventional loan interest rates over the long term.
Comparing Total Monthly Payments
To truly understand which loan is cheaper, you must compare the total monthly payment, not just the interest rate.
- Calculate principal, interest, taxes, insurance, and mortgage insurance
- Use online mortgage calculators to simulate scenarios
- Consider how long you plan to stay in the home
For instance, a borrower with a $300,000 loan, 3.5% down, and a 6.3% FHA rate might pay $1,850/month including MIP. The same borrower with a 6.6% conventional rate and PMI might pay $1,820/month. In this case, the slightly higher interest rate is offset by lower insurance costs, making the conventional loan cheaper overall.
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Loan Limits and Their Impact on FHA vs Conventional Loan Interest Rates
Loan limits determine how much you can borrow and vary by location and loan type. Exceeding these limits can push you into jumbo loan territory, which often comes with higher rates.
FHA Loan Limits by County
FHA loan limits are set by county and adjusted annually based on median home prices. In 2024, the baseline FHA loan limit for most areas is $498,257, with higher limits in high-cost areas (up to $1,149,825 in places like San Francisco or New York City).
- High-cost areas have higher limits to reflect local housing prices
- Counties with lower home values have lower limits
- Exceeding the FHA limit means you cannot use an FHA loan
In high-cost markets, borrowers may find that FHA loan limits are still too low, forcing them into conventional or jumbo financing. This can affect FHA vs conventional loan interest rates, as jumbo conventional loans often carry higher rates than conforming ones.
Conforming Loan Limits for Conventional Loans
Conventional loan limits are set by the FHFA and align closely with FHA limits. For 2024, the baseline conforming loan limit is $766,550, with higher limits in high-cost areas (up to $1,149,825).
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- Loans above the conforming limit are considered “jumbo” and have different underwriting standards
- Jumbo loans often require higher credit scores and larger down payments
- Interest rates on jumbo loans can be 0.25% to 0.75% higher than conforming loans
This means that in expensive markets, borrowers who exceed FHA limits may have to choose between a jumbo conventional loan (with higher rates) or a conforming conventional loan with a piggyback second mortgage. Both options can affect the overall cost comparison with FHA loans.
How Loan Size Affects Interest Rates
Even within conforming limits, loan size can influence your rate. Larger loans may be priced slightly higher due to increased risk exposure for lenders.
- Both FHA and conventional loans use “loan level price adjustments” (LLPAs) for risk-based pricing
- Higher loan amounts, lower credit scores, or smaller down payments can trigger rate increases
- Lenders may offer better rates on smaller loans due to lower default risk
For borrowers near the upper end of the loan limit, it’s crucial to shop around and compare quotes. A seemingly small difference in FHA vs conventional loan interest rates can compound into significant savings or costs over time.
Eligibility and Credit Requirements: Who Qualifies for What?
Your eligibility for FHA or conventional loans depends on several factors, including credit history, income, employment, and property type. Understanding these can help you determine which loan offers the best rate for your profile.
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FHA Loan Eligibility Criteria
FHA loans are designed to be inclusive, but they still have specific requirements.
- Credit score: Minimum 500 (10% down) or 580 (3.5% down)
- Steady income and employment history (typically 2 years)
- Primary residence only—no investment properties
- Home must meet FHA appraisal standards
One advantage of FHA loans is that they allow for gift funds to cover the entire down payment and closing costs. This makes them ideal for first-time buyers who may not have significant savings.
Conventional Loan Eligibility Criteria
Conventional loans are more rigid but offer greater flexibility in other areas.
- Credit score: Typically 620 minimum, but 700+ for best rates
- DTI ratio: Usually below 45%, though some lenders allow up to 50%
- Down payment: 3%–20%, depending on program
- Property types: Primary residences, second homes, and investment properties
Conventional loans also allow for more flexibility in debt reserves and asset verification. Borrowers with strong financial profiles often find conventional loans easier to qualify for, especially if they have multiple properties or complex income structures.
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How Eligibility Affects Your Interest Rate
Even if you qualify for both loan types, your eligibility profile will influence the rate you’re offered.
- Borrowers with credit scores below 680 often get better rates with FHA loans
- Those with scores above 720 typically benefit more from conventional loans
- Lenders use automated underwriting systems (AUS) to assess risk and set rates
For example, Fannie Mae’s Desktop Underwriter (DU) and FHA’s Compass Underwriting system evaluate your application differently. A borrower with a 660 score and 10% down might receive a lower rate through FHA due to government backing, while the same borrower might face higher LLPAs on a conventional loan.
Pros and Cons of FHA vs Conventional Loan Interest Rates
Every loan type has trade-offs. Let’s weigh the advantages and disadvantages of each when it comes to interest rates and overall cost.
Advantages of FHA Loans
- Lower interest rates for borrowers with credit scores below 700
- Low down payment option (3.5%) makes homeownership accessible
- More lenient credit and DTI requirements
- Financing of upfront MIP into the loan reduces out-of-pocket costs
- Allows gift funds for down payment and closing costs
FHA loans are particularly beneficial for first-time buyers, those rebuilding credit, or individuals in transitional financial situations. The lower FHA vs conventional loan interest rates for subprime borrowers can make a meaningful difference in affordability.
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Disadvantages of FHA Loans
- Mortgage insurance (MIP) is typically required for the life of the loan
- Loan limits may be too low in high-cost areas
- Property must meet strict FHA appraisal standards
- Cannot be used for investment properties
- Some lenders charge higher origination fees on FHA loans
The lifelong MIP is often the biggest drawback. Even if the interest rate is lower, the added insurance cost can make FHA loans more expensive over time compared to conventional loans with cancellable PMI.
Advantages of Conventional Loans
- Better interest rates for borrowers with strong credit (700+)
- PMI can be removed once 20% equity is reached
- Higher loan limits (up to $1.1M in high-cost areas)
- Available for primary, second, and investment properties
- More flexibility in loan terms and features
For financially stable borrowers, conventional loans offer greater long-term savings and flexibility. The ability to eliminate PMI and access higher loan amounts makes them ideal for those planning to stay in their homes for many years.
Disadvantages of Conventional Loans
- Stricter credit and income requirements
- Higher down payment needed to avoid PMI
- Less forgiving of past credit issues
- May require private mortgage insurance for smaller down payments
- Fewer options for low-income borrowers
While conventional loans offer lower rates for top-tier borrowers, they can be out of reach for those with imperfect credit or limited savings. This makes FHA loans a vital alternative in the FHA vs conventional loan interest rates landscape.
How to Choose the Right Loan for Your Situation
There’s no one-size-fits-all answer to the FHA vs conventional loan interest rates debate. The best choice depends on your financial profile, goals, and housing market.
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When to Choose an FHA Loan
Consider an FHA loan if:
- Your credit score is below 680
- You have limited savings for a down payment
- You’re a first-time homebuyer
- You need flexible DTI requirements
- You plan to stay in the home for less than 7 years (avoiding long-term MIP impact)
FHA loans can be a smart stepping stone to homeownership, especially if you’re working on improving your credit or building equity.
When to Choose a Conventional Loan
Opt for a conventional loan if:
- Your credit score is 700 or higher
- You can make a 20% down payment (to avoid PMI)
- You want to eliminate mortgage insurance over time
- You’re buying a high-value home in a high-cost area
- You plan to stay in the home for 10+ years
For long-term homeowners with strong finances, conventional loans often provide the best value, even if the initial interest rate isn’t the lowest.
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Steps to Compare Loan Offers
To make the best decision:
- Get pre-approved for both FHA and conventional loans
- Compare Loan Estimates from multiple lenders
- Calculate total cost over 5, 10, and 30 years
- Consider how long you plan to stay in the home
- Consult a mortgage advisor or financial planner
Don’t just focus on the interest rate—look at the full picture, including fees, insurance, and long-term costs.
What is the main difference between FHA and conventional loan interest rates?
The main difference lies in how they are priced based on borrower risk. FHA loans often have lower interest rates for borrowers with credit scores below 680 due to government backing, while conventional loans typically offer lower rates for borrowers with scores above 700. However, FHA loans come with mandatory mortgage insurance that usually lasts the life of the loan, which can increase the total cost despite a lower interest rate.
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Can I get a lower rate with a conventional loan if I have good credit?
Yes, borrowers with credit scores of 700 or higher often qualify for lower interest rates on conventional loans compared to FHA loans. Additionally, conventional loans allow you to cancel private mortgage insurance (PMI) once you reach 20% equity, potentially reducing your long-term costs.
Is FHA always cheaper than conventional?
Not always. While FHA loans may have lower interest rates for borrowers with lower credit scores, the lifelong mortgage insurance (MIP) can make them more expensive over time. For borrowers with strong credit and a down payment of 20%, conventional loans are often cheaper both monthly and over the life of the loan.
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Do FHA loans have adjustable interest rates?
Yes, FHA offers adjustable-rate mortgages (ARMs), though they are less common than fixed-rate FHA loans. FHA ARMs typically have a fixed rate for the first 5 or 7 years, then adjust annually. These can offer lower initial rates but come with the risk of future rate increases.
How do I decide between FHA and conventional?
Consider your credit score, down payment, how long you plan to stay in the home, and total monthly payment. Get quotes for both loan types, compare Loan Estimates, and calculate long-term costs. If you have lower credit or a small down payment, FHA may be better. If you have strong finances, conventional is likely the smarter long-term choice.
Choosing between FHA and conventional loan interest rates isn’t just about finding the lowest number—it’s about understanding how each loan fits your financial life. FHA loans offer accessibility and lower rates for those with credit challenges, while conventional loans reward strong financial health with better long-term savings. By comparing both options side by side, factoring in mortgage insurance, loan limits, and your personal goals, you can make a confident, informed decision. The right mortgage isn’t just about today’s rate—it’s about building a stable financial future.
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