Conventional vs. FHA Loan in Texas: Which One Is Right for You?
If you are buying a home in Texas, one of the first decisions you will face is choosing between a conventional loan and an FHA loan. Both are popular, widely available, and used every day by buyers across Austin, Dallas, and Houston. But they work differently, and the right choice depends on your credit profile, down payment, and long-term goals.
We help Texas buyers work through this decision every single day, and in this guide we are going to break it down clearly so you can walk into your home search knowing exactly which path makes the most sense for you.
What Is a Conventional Loan?
A conventional loan is a mortgage that is not backed by a government agency. It follows guidelines set by Fannie Mae and Freddie Mac, the two government-sponsored enterprises that purchase most conventional loans from lenders after closing.
Conventional loans are the most common mortgage type in Texas and nationwide. They are flexible, come in a wide range of terms, and offer competitive pricing for borrowers with solid credit.
Conventional Loan Basics
- Minimum credit score: Typically 620, though better pricing kicks in at 740 and above
- Minimum down payment: 3% for first-time buyers (HomeReady or Home Possible programs); 5% for repeat buyers
- Private mortgage insurance (PMI): Required if your down payment is less than 20%, but cancellable once you reach 20% equity
- Loan limits: Up to $806,500 for most Texas counties in 2025 (standard conforming limit)
- Property types: Primary residence, second home, or investment property
What Is an FHA Loan?
An FHA loan is insured by the Federal Housing Administration, a division of the U.S. Department of Housing and Urban Development. Because the government backs these loans, lenders can offer them to borrowers who might not qualify for conventional financing.
FHA loans were created to expand homeownership access, particularly for first-time buyers and those rebuilding their credit. They remain one of the most popular options for buyers in the sub-700 credit score range.
FHA Loan Basics
- Minimum credit score: 580 for 3.5% down; 500 for 10% down
- Minimum down payment: 3.5% with a 580+ score
- Mortgage insurance premium (MIP): Required for the life of the loan if your down payment is less than 10%
- Loan limits: Varies by county; most Texas metros fall in the $524,225 range for a single-family home
- Property types: Primary residence only; investment properties and second homes do not qualify
Conventional vs. FHA: Side-by-Side Comparison
Here is how the two programs stack up across the factors that matter most to Texas buyers:
Credit Score Requirements
FHA wins here for borrowers with lower scores. If your credit is in the 580 to 639 range, FHA is almost always the better option. If you are at 740 or above, conventional will typically give you better pricing and fewer restrictions.
The 640 to 699 range is where it gets interesting. Both programs are available, but you need to run the numbers on mortgage insurance costs to find the better deal for your specific situation.
Down Payment
Both programs offer low down payment options. FHA requires 3.5% at a 580 credit score. Conventional allows as low as 3% through programs like HomeReady (Fannie Mae) and Home Possible (Freddie Mac) for buyers at or below area median income.
On a $450,000 home in Austin, that difference is $2,250 less out of pocket with conventional at 3% versus FHA at 3.5%. Not huge, but worth knowing.
Mortgage Insurance
This is where the long-term math really matters. Conventional PMI is cancellable once you reach 20% equity, either through payments or appreciation. FHA mortgage insurance premium (MIP) stays on your loan for the full term if you put down less than 10%.
Over a 30-year loan, that difference in mortgage insurance costs can add up to tens of thousands of dollars. Buyers planning to stay in the home long-term should model both scenarios carefully.
Home Price Limits
For buyers shopping in the upper price ranges across Austin’s suburbs, conventional is often the only realistic option. FHA loan limits in most Texas counties cap out around $524,225 for a single-family home, while conventional conforming loans go up to $806,500.
If you are buying in a neighborhood like Steiner Ranch, Round Rock, or Georgetown where entry-level homes are pushing $500,000 and above, conventional gives you more room to work with.
Property Condition
FHA has stricter property condition requirements. The appraiser will flag things like peeling paint, missing handrails, or a roof with limited remaining life. These are not automatic deal-killers, but they can create complications in negotiations with sellers.
Conventional appraisals are generally less prescriptive about condition, making them more flexible when buying a home that needs some work.
When Conventional Is the Better Choice
- Your credit score is 680 or higher
- You have 5% or more to put down
- You plan to build equity and eventually cancel mortgage insurance
- You are buying a second home or investment property
- The home is priced above FHA loan limits in your county
- You want more flexibility on property condition
When FHA Is the Better Choice
- Your credit score is below 680
- You are making the minimum down payment and need the lowest barrier to entry
- You had a recent financial setback (bankruptcy, foreclosure) and are rebuilding
- You have higher debt-to-income ratio and need FHA’s more flexible guidelines
- You are a first-time buyer and want the additional consumer protections FHA offers
What About Texas-Specific Programs?
Texas buyers have access to down payment assistance through the Texas State Affordable Housing Corporation (TSAHC) and the Texas Department of Housing and Community Affairs (TDHCA). These programs can be layered on top of both FHA and conventional loans and are worth exploring if your savings are limited.
We work with these programs regularly and can walk you through what you qualify for based on your income, credit, and target purchase price. Reach out to us here and we will pull the numbers together.
The Bottom Line: Run Both Scenarios
The honest answer is that there is no universal right choice between conventional and FHA. The right loan depends on your numbers, your goals, and the specific property you are buying. What we always recommend is running both scenarios side by side before committing to either path.
That is exactly what we do when you work with us. We look at your credit profile, your purchase price, your down payment, and your plans for the property, and we model both options so you can make a fully informed decision.
If you are buying in Austin, Dallas, or Houston and want to understand which loan type fits your situation, let us know and we will walk through it together. You can also use our mortgage calculator to run some initial numbers on your own.
Frequently Asked Questions
Can I switch from an FHA loan to a conventional loan later?
Yes. Many buyers start with FHA and refinance into a conventional loan once their credit improves or they have built enough equity. This is a common strategy for removing the lifetime mortgage insurance requirement that comes with FHA loans.
Does my debt-to-income ratio matter more for FHA or conventional?
Both programs have DTI limits, but FHA tends to be more flexible. Conventional loans typically cap DTI at 45 to 50% depending on other compensating factors. FHA can go higher in some cases, which is why it is often the better fit for buyers with student loans or other recurring debts.
Can I use gift funds for my down payment on either loan?
Yes on both. FHA allows 100% of the down payment to come from a gift from a family member. Conventional loans also allow gift funds, though the rules can vary depending on down payment percentage and whether it is a Fannie Mae or Freddie Mac product.
Are FHA loan rates lower than conventional rates?
Not necessarily. While FHA rates can sometimes be slightly lower, the required mortgage insurance premium often makes the total monthly payment higher than a conventional loan with PMI. Always compare total monthly cost, not just the interest rate.
Do I need to be a first-time homebuyer to use an FHA loan?
No. FHA loans are available to all buyers who meet the credit and income requirements, not just first-time buyers. However, you must plan to use the property as your primary residence.
Ferrando Financial LLC | Mortgage Austin | NMLS# 2403080 | Licensed in Texas. This content is for educational purposes only and does not constitute a commitment to lend. All loans subject to credit approval. Rates and terms vary.
