Conventional Loan vs FHA
FHA allows 3.5% down with lower credit scores. Conventional avoids permanent mortgage insurance. The cheaper option depends on your credit score and down payment.
Total Cost Calculator
Compare the true cost of conventional vs FHA including mortgage insurance over the full loan term.
Conventional
CheaperFHA
Conventional saves you $34,623 over 30 years at these inputs.
Side-by-Side Comparison
Key differences between conventional and FHA loans.
| Factor | Conventional | FHA |
|---|---|---|
| Min Down Payment | 3% (some programs), 5% standard | 3.5% (580+ credit), 10% (500-579 credit) |
| Min Credit Score | 620 (680+ for best rates) | 580 (500 with 10% down) |
| Mortgage Insurance | PMI: removable at 80% LTV | MIP: upfront 1.75% + annual for life of loan |
| Interest Rates | Higher for low credit scores | Often slightly lower base rate |
| Max DTI Ratio | 43-45% typical | Up to 50% with compensating factors |
| Loan Limits (2026) | Conforming: $766,550 | Varies by county, often lower |
| Property Standards | Standard appraisal | Stricter FHA-specific requirements |
| Seller Concessions | Up to 3-6% of price | Up to 6% of price |
The Mortgage Insurance Difference
This is the single most important factor most articles underexplain.
Conventional PMI
- +Costs 0.3% to 1.5% of loan annually
- +Automatically cancels at 78% LTV
- +Can request removal at 80% LTV
- +Lower rates for higher credit scores
- +No upfront premium
FHA MIP
- !1.75% upfront premium (rolled into loan)
- !0.55% annual premium on top
- !Stays for the life of the loan if down payment is under 10%
- !11 years if down payment is 10% or more
- !Same rate regardless of credit score
On a $300,000 FHA loan with 3.5% down, the upfront MIP is $5,063 and the annual MIP adds $1,589 per year ($132/month) for 30 years. That is $47,670 in MIP alone, on top of the regular mortgage payment. Conventional PMI on the same loan would total roughly $12,000 to $20,000 before cancelling.
When FHA Is Better
Credit score 580 to 660
Conventional rates are punitive or unavailable at these scores. FHA rates are much more competitive.
Only 3.5% available for down payment
FHA's 3.5% minimum is lower than most conventional programs' practical minimum of 5%.
Higher debt-to-income ratio
FHA allows up to 50% DTI with compensating factors. Conventional typically caps at 43 to 45%.
Recent credit events
FHA is more forgiving of bankruptcy (2 years) or foreclosure (3 years) than conventional loans.
When Conventional Is Better
Credit score 700+
Lower rates and lower PMI. The rate advantage grows as your score increases.
5 to 19% down payment
PMI is much cheaper than MIP and will be removed. The savings add up significantly over the loan term.
20% or more down payment
No PMI at all. No upfront premiums. This is the strongest case for conventional.
Keeping the home long-term
Permanent MIP on FHA becomes extremely expensive over 20 to 30 years. PMI cancellation gives conventional a major advantage.
FHA Appraisal Requirements
FHA has stricter property standards than conventional. The following can delay or derail an FHA purchase:
- !Peeling paint on homes built before 1978 (lead paint concern)
- !Missing handrails on stairs or elevated areas
- !Electrical or plumbing issues visible during appraisal
- !Structural concerns: foundation cracks, roof damage, water intrusion
- !Non-functioning appliances or systems included in the sale
- !Access to attic, crawl space, and mechanical systems required
Some sellers refuse FHA offers because of these inspection requirements. This can be a disadvantage in competitive markets.
The FHA-to-Conventional Strategy
Many buyers start with FHA and refinance to conventional once they build equity. Here is how the strategy works:
Buy with FHA at 3.5% down. Get into the home now.
Build equity through payments and home appreciation. Improve your credit score.
Refinance to conventional once you reach 20% equity (typically 3 to 7 years).
Eliminate MIP entirely. Save hundreds per month for the remaining loan term.
Refinancing costs $3,000 to $6,000 in closing costs. Factor this into the break-even calculation. In most cases, the MIP savings pay back the refinancing cost within 1 to 2 years.