Conventional Loan vs FHA: Which Is Better for Bad Credit?

Your credit score could cost you - or save you - tens of thousands of dollars on a mortgage. The loan type you choose matters just as much as the interest rate. And most people get this wrong.

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The Short Answer (Before We Get Into the Weeds)

FHA wins for bad credit. Not even close.

If your score is under 620, you're going to have a miserable time trying to qualify for a conventional loan. FHA lets you in at 580 with 3.5% down - or even 500 if you can scrape together 10% down. Conventional lenders will technically say 620, but I've seen plenty of borrowers with 625 get denied because the lender's overlay kicks in at 640 or 660.

That said, FHA isn't always the better long-term deal. Once your credit improves, conventional can be significantly cheaper. So the real question isn't just "which loan can I get?" - it's "which loan should I get, given where my credit actually is right now?"

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FHA vs. Conventional: The Core Differences

What FHA Is

FHA loans are backed by the Federal Housing Administration, which is part of HUD. Because the government insures the loan, lenders take on less risk. That's why they can afford to approve borrowers with lower scores and thinner credit files.

What Conventional Is

Conventional loans aren't government-backed. Most of them are conforming loans sold to Fannie Mae or Freddie Mac. If you don't meet their guidelines, the loan doesn't get sold, and lenders don't like holding loans on their books.

That's why conventional lenders are stricter. It's not personal. It's just how the money works.

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Credit Score Minimums: What the Numbers Actually Mean

Here's where people get confused by official guidelines versus real-world approvals.

FHA:

580+ credit score → 3.5% minimum down payment

500–579 credit score → 10% minimum down payment

Below 500 → you're not eligible under standard FHA underwriting, period

Conventional:

Official minimum is often cited as 620

In practice, many lenders want mid-600s to low-700s

Below 640, you'll pay higher rates AND more for mortgage insurance, assuming you even get approved

I had a client last year with a 612. She tried three conventional lenders. All three said no. One FHA lender approved her in two weeks. Same income, same job, same house. The loan type was the entire difference.

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Mortgage Insurance: Where FHA's Real Cost Hides

FHA's big trade-off is mortgage insurance. And it's not cheap.

FHA mortgage insurance has two components:

Upfront MIP: 1.75% of the loan amount, rolled into your loan balance at closing

Annual MIP: Typically 0.15%–0.75%+ depending on your term, loan size, and LTV

On a $300,000 loan, that's $5,250 upfront. Then roughly $1,200–$2,250 per year on top of that.

Here's the part that kills people: if you put less than 10% down on an FHA loan, that annual MIP stays for the life of the loan. You can't cancel it just by reaching 80% LTV the way you can with conventional PMI. To get rid of it, you'd need to refinance into a conventional loan once your credit and equity improve.

If you put 10% or more down on an FHA loan, MIP drops off after 11 years. Better, but still not as clean as conventional.

Conventional PMI works differently:

You can request removal when you hit 80% LTV

It automatically terminates at 78% LTV (subject to payment history rules)

With decent credit, it's usually cheaper than FHA's MIP to begin with

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When FHA Makes More Sense

Go FHA if any of these apply to you:

Score under 620. You may not have a choice, honestly.

Recent late payments or collections. FHA underwriters are more forgiving on recent credit events.

High debt-to-income ratio. FHA can go up to 43% DTI on the front end, sometimes higher with compensating factors. Conventional gets rigid fast above 43%.

Thin credit file. If you have fewer than three tradelines, conventional lenders often won't touch you. FHA has more flexibility.

Limited down payment. FHA's 3.5% minimum is accessible. Some conventional programs offer 3%, but weak credit makes those harder to get approved for.

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When Conventional Makes More Sense

Don't automatically assume FHA is the answer just because your credit isn't perfect.

Go conventional if:

Your score is 640–680 or above. You're in range, and the long-term costs will likely be lower.

You can put 5%–20% down. More equity at closing improves your conventional approval odds and reduces PMI cost.

You hate the idea of lifetime mortgage insurance. With conventional, there's a clear exit. With FHA under 10% down, there isn't.

You're buying a property that FHA might not like. FHA has stricter property condition standards. Fixer-uppers, certain condos, and some investment properties don't qualify.

If your score is sitting at 650 today but you've been working on your credit for six months, it might make sense to wait until you hit 680 before applying. A 680 conventional loan could save you more over 30 years than an FHA loan with lifetime MIP.

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Your FCRA Rights Matter Here - More Than Most People Realize

Before you apply for any mortgage, pull your credit reports and go through them line by line. I've seen more mortgage denials caused by credit report errors than by actual credit problems.

Under 15 U.S.C. § 1681i, you have the right to dispute inaccurate or incomplete information directly with the credit bureaus. They generally have 30 days to investigate - that window extends to 45 days if you submit additional information during the investigation. Bureaus love to drag their feet. Shocking, I know.

Here's what catches people off guard: mortgage underwriters may require open disputes to be closed before closing. If you're disputing a $400 collection and it's still in dispute status when you're trying to close, your lender may hit the brakes. Disputes flag in underwriting software and can freeze loan files.

Disputed items can also temporarily suppress the score impact of negative items, which can actually inflate your score during the dispute period. If the dispute closes and the item is re-scored, your number can drop - right before closing.

Also worth knowing: under 15 U.S.C. § 1681c, most negative items - late payments, collections, charge-offs - can only stay on your report for 7 years. Chapter 7 bankruptcy is 10 years; Chapter 13 is generally 7 years from the filing date. If anything is reporting past its legal window, dispute it immediately.

If you want help running through this yourself before applying, Credit Booster AI can help you identify errors and prioritize what to dispute. It's designed specifically for people who want to handle credit repair without paying someone else to do it.

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The Hard Truth About Loan Limits

Both FHA and conventional loans have county-based limits that adjust annually. If your purchase price pushes you into jumbo territory - meaning above the conforming limit for your area - you're in a different world entirely.

Jumbo loans typically require stronger credit than either FHA or conforming conventional. We're usually talking 700+, sometimes 720+. If you're working with bad credit and shopping in a high-cost market, that's a real problem. Know your county's limits before you fall in love with a house that requires a jumbo loan.

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The Bankruptcy and Foreclosure Question

Bad credit often comes with bigger events - not just missed payments, but bankruptcies and foreclosures.

Here's how the waiting periods shake out:

FHA:

Chapter 7 bankruptcy: 2 years from discharge

Chapter 13 bankruptcy: 1 year into repayment with court approval (sometimes)

Foreclosure: 3 years from completion

Conventional (Fannie Mae guidelines):

Chapter 7 bankruptcy: 4 years from discharge

Chapter 13 bankruptcy: 2 years from discharge, 4 years from dismissal

Foreclosure: 7 years (3 years with extenuating circumstances, with restrictions)

FHA wins here by a wide margin. If you've had a foreclosure or bankruptcy in the past 4–5 years, FHA is likely your only realistic path.

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Real Strategy: Use FHA to Get In, Then Refinance

This is what I tell clients who are frustrated about FHA's lifetime MIP. Don't think of FHA as your forever loan.

Use FHA to buy the house now. Spend the next 2–3 years building credit aggressively - pay everything on time, reduce balances, dispute errors. Once your score is in the 680–720 range and you've built some equity, refinance into a conventional loan. At that point, you kill the MIP, possibly lower your rate, and free yourself from FHA restrictions.

It's a two-step strategy, not a permanent commitment.

The Join Credit Club community has a ton of resources on this exact approach - building post-purchase credit and timing a refi smartly. Worth bookmarking if you're playing the long game.

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One More Trap to Avoid

Don't apply to multiple lenders in a panic before you know your numbers. Each hard inquiry hits your score. One client came in with 12 hard inquiries from shopping lenders over three months. His score dropped 22 points. That pushed him below one lender's cutoff, which triggered more shopping, which meant more inquiries.

Mortgage inquiries within a short window (typically 14–45 days depending on the scoring model) are usually treated as a single inquiry. But spread out over months, they stack up.

Know your score, know which loan you're targeting, then shop smartly within a compressed window.

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What to Do Right Now

Pull your three credit reports at AnnualCreditReport.com. Look for anything reporting inaccurately - wrong balances, duplicate accounts, late payments on accounts that were paid on time. If you find errors, dispute them before you apply. Give yourself 60–90 days to clean up your file.

If your score is under 580, FHA at 10% down is your path. If it's 580–619, FHA at 3.5% down. If it's 620+, start running both loan types side-by-side with a mortgage broker who knows how to model the full cost - not just the interest rate.

The difference between the right loan and the wrong one isn't just paperwork. Over 30 years, it can easily be $20,000–$40,000 in mortgage insurance alone.

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