Conventional vs. FHA Loans in Texas: Which One Is Right for You?
If you are buying a home in Texas and trying to decide between a conventional loan and an FHA loan, you are not alone. This is one of the most common questions we hear from buyers, and the honest answer is: it depends on your situation. Both loan types have real advantages, and the best choice comes down to your credit score, down payment, and long-term goals.
At Mortgage Austin, we walk buyers through this comparison every single day. Here is a straightforward breakdown to help you understand your options before you get pre-approved.
What Is a Conventional Loan?
A conventional loan is a mortgage that is not backed by a government agency. These loans follow guidelines set by Fannie Mae and Freddie Mac, and they are the most common type of home loan used in the United States.
Conventional loans are a great fit for buyers with strong credit and stable income. They tend to offer more flexibility in terms of property types, loan amounts, and down payment options. Many buyers do not realize that you can put as little as 3% down on a conventional loan if you qualify for programs like Fannie Mae HomeReady or Freddie Mac Home Possible.
Key Features of Conventional Loans
- Down payment as low as 3% (for qualifying buyers)
- No upfront mortgage insurance premium
- Private mortgage insurance (PMI) cancels automatically at 80% loan-to-value
- Loan limits follow conforming limits (currently $806,500 in most Texas counties for 2026)
- Available for primary residences, second homes, and investment properties
- Strong pricing for buyers with 740+ credit scores
If you have a 740 credit score and a stable W-2 income, conventional is almost always going to give you the best pricing and the cleanest long-term picture. The PMI on a conventional loan is not forever. Once you have built enough equity, it goes away. That is a big deal.
What Is an FHA Loan?
An FHA loan is backed by the Federal Housing Administration. Because of that government backing, lenders are willing to approve borrowers with lower credit scores and smaller down payments. FHA loans are a powerful tool for first-time buyers who are still building their credit or do not have a large down payment saved up.
The trade-off is mortgage insurance. FHA loans come with an upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount, plus an annual mortgage insurance premium (MIP) that stays for the life of the loan in most cases. That changes the long-term cost picture significantly.
Key Features of FHA Loans
- Down payment as low as 3.5% with a 580+ credit score
- Down payment of 10% required for credit scores between 500-579
- Upfront MIP of 1.75% of the loan amount (financed into the loan)
- Annual MIP typically ranges from 0.55% to 0.85% depending on loan terms
- More flexible debt-to-income ratio guidelines
- Primary residence only
- FHA loan limit in Travis County is $524,225 for a single-family home in 2026
Conventional vs. FHA: A Side-by-Side Comparison
Let us put these two loan types next to each other for a typical Austin buyer scenario.
Picture a buyer purchasing a $450,000 home in Austin with a 5% down payment:
- Loan amount: $427,500
- Conventional PMI estimate: varies by credit score, but cancels when equity reaches 20%
- FHA upfront MIP: $7,481 added to the loan balance
- FHA annual MIP: added to monthly payment for the life of the loan
For a buyer with a 740 credit score, the conventional loan will almost always win on total cost over time. For a buyer at 620, FHA may be the only real path forward, and that is completely fine. Getting into a home you can afford beats waiting on the sidelines.
When Does an FHA Loan Make More Sense?
FHA loans are not a consolation prize. They are a smart, strategic tool in the right situations. Here are the scenarios where FHA tends to be the better fit:
- Credit score below 680: FHA pricing stays relatively stable at lower credit scores. Conventional pricing gets significantly worse below 680.
- Higher debt-to-income ratio: FHA is more flexible here, which matters for buyers carrying student loans or car payments alongside a mortgage.
- Recent credit events: If you had a bankruptcy, short sale, or foreclosure in the past few years, FHA has shorter waiting periods than conventional.
- Gift funds for down payment: FHA allows 100% of the down payment to come from a gift. Conventional has more restrictions depending on the program.
When Does a Conventional Loan Make More Sense?
For buyers who qualify, conventional tends to be the stronger long-term choice:
- Credit score of 700 or higher: Conventional pricing rewards strong credit. The higher your score, the better the deal gets.
- Buying a second home or investment property: FHA is strictly for primary residences. Conventional is your only path for those property types.
- Buying above FHA loan limits: If your purchase price exceeds the FHA limit for your county, conventional or jumbo financing is the answer.
- Planning to build equity fast: If you expect to gain equity quickly through appreciation or extra principal payments, PMI on a conventional loan will go away faster than FHA MIP.
What About Texas-Specific Programs?
Texas buyers have access to some excellent down payment assistance programs through TSAHC (Texas State Affordable Housing Corporation). These programs can be layered with both conventional and FHA loans, which means even buyers who are light on cash at closing have options. We can walk you through whether you qualify and how these programs stack up in your specific scenario.
Tarrant County, Travis County, Harris County, and Dallas County each have their own programs too. If you are buying in one of those markets, it is worth asking about local assistance options before you assume you cannot afford the down payment.
Explore your full loan options here, including FHA, conventional, VA, and more.
The Bottom Line: Which Loan Is Right for You?
There is no universal answer, which is exactly why we take the time to run the numbers for every buyer before recommending a path. The right loan is the one that fits your credit, your cash, and your goals, not just the one that gets you to the closing table fastest.
Our job is to make sure you understand both options clearly so you can make a confident decision. We do not push you toward a product because it is easier on our end. We show you the full picture and let you decide.
If you are ready to see which loan type makes the most sense for your situation, get a free quote here or reach out to us directly. We will run a real comparison with your numbers, not just generic estimates.
Already have a Loan Estimate from another lender? Upload it through our Second Look program and we will show you exactly where you stand.
Frequently Asked Questions
Can I switch from an FHA loan to a conventional loan later?
Yes. Many buyers start with an FHA loan and refinance into a conventional loan once their credit score improves or they have built enough equity. This is a common and smart strategy. The goal is to get into the home, then optimize the financing when it makes sense.
Is it harder to get approved for a conventional loan?
Generally, yes. Conventional loans have tighter credit and income requirements. But if you qualify, you will typically get better pricing over the life of the loan, especially if your credit score is 700 or higher.
Do I need 20% down for a conventional loan?
No. That is one of the biggest myths in mortgage lending. Conventional loans are available with as little as 3% down through programs like HomeReady and Home Possible. The 20% figure is the threshold at which PMI goes away, not a requirement to get approved.
How long does FHA mortgage insurance last?
For most FHA loans with less than 10% down, the annual mortgage insurance premium stays for the life of the loan. If you put 10% or more down, MIP falls off after 11 years. This is one reason buyers with strong credit often prefer conventional, where PMI cancels at 80% LTV.
Can I use down payment assistance with a conventional loan in Texas?
Yes. TSAHC and several county-level programs in Texas can be paired with conventional loans. Eligibility depends on income, purchase price, and location. We can check your eligibility as part of your pre-approval process.
Ferrando Financial LLC | NMLS# 2403080 | Licensed in Texas | This is not a commitment to lend. All loans subject to credit approval. Rates and terms vary by applicant. Contact us for current pricing specific to your situation.
