FHA vs Conventional Loan

FHA or conventional? This is the first real decision most homebuyers face, and the answer isn’t always obvious. Both have low down payment options. Both work for first-time buyers. But the long-term cost difference — driven almost entirely by mortgage insurance rules — can be tens of thousands of dollars. Here’s the head-to-head comparison with actual numbers.

Quick Comparison

Mortgage Insurance: Where the Real Difference Lives

This is the biggest factor in the FHA vs. conventional decision, and it’s where most comparisons get lazy. Let’s use real numbers.

FHA Mortgage Insurance Premium (MIP)

• Upfront MIP: 1.75% of the loan amount, usually rolled into the loan balance. On a $350,000 loan, that’s $6,125 added to your balance (so you’re actually borrowing $356,125).
• Annual MIP: 0.55% of the loan balance for most borrowers (those putting down less than 5% on a 30-year term). On a $350,000 loan, that’s about $160/month in the first year, declining slowly as you pay down the principal.
• Duration: For the entire life of the loan if you put down less than 10%. Put down 10%+ and MIP drops off after 11 years. Since most FHA borrowers put down 3.5%, MIP never goes away.

Conventional Private Mortgage Insurance (PMI)

• No upfront fee (unless you choose lender-paid PMI, which is rolled into the rate)
• Monthly PMI: Varies by credit score and LTV. At 5% down with a 720 credit score: roughly 0.5% annually, or about $146/month on a $350,000 loan. At 5% down with a 660 score: roughly 1.0% annually, or about $292/month.
• Duration: Automatically cancelled when you reach 78% LTV based on the original amortization schedule. You can request cancellation at 80% LTV. You can also get a new appraisal to prove you’ve hit 80% LTV due to appreciation — some servicers allow this after 2 years.

The Math on a $350,000 Home

Scenario: Buyer with 700 credit score, 3.5% FHA vs 5% conventional, 30-year term.

FHA: $337,750 loan + $5,911 upfront MIP = $343,661 financed. Monthly MIP: ~$155. Total MIP over 30 years: approximately $55,800. This never goes away.

Conventional: $332,500 loan, no upfront fee. Monthly PMI at ~0.7%: approximately $194/month. But PMI drops off around year 7-8 when LTV hits 78%. Total PMI cost: approximately $17,500.

Difference: $38,300 in mortgage insurance savings with conventional. That’s a new car.

But wait — the FHA borrower might get a lower interest rate (typically 0.25-0.5% lower than conventional for the same credit profile). Let’s factor that in:

FHA at 6.25% vs. Conventional at 6.5% on comparable loan amounts: the rate savings partially offsets the MIP cost. But not enough. Over 30 years, the 0.25% rate advantage saves roughly $18,000 in interest. That still leaves conventional ahead by about $20,000 in total cost.

When FHA Is the Better Choice

• Credit score below 680: Conventional PMI gets expensive below 680 (1.0-1.5% annually), and approval may require a higher down payment. FHA’s rate advantage is larger at lower credit scores, and FHA is more forgiving of credit blemishes.
• High debt-to-income ratio: FHA allows back-end DTI up to 57% with compensating factors (significant cash reserves, minimal payment increase from current housing). Conventional caps at 50% and is practically harder to approve above 45%.
• Recent credit event: FHA allows borrowers 2 years after a bankruptcy discharge and 3 years after a foreclosure. Conventional requires 4 years after bankruptcy and 7 years after foreclosure.
• Gift funds for entire down payment: FHA explicitly allows 100% of the down payment to come from a gift. Some conventional 3% programs restrict this or require a minimum borrower contribution.
• Smaller loan amounts: The upfront MIP and ongoing costs are proportionally less painful on a $200,000 loan than a $500,000 loan. For lower-priced homes, FHA’s flexible qualification can matter more than the insurance cost.

When Conventional Is the Better Choice

• Credit score above 700: Your PMI rate is low enough that conventional’s cancellation provision creates huge long-term savings.
• Planning to stay 5+ years: The longer you’re in the home, the more the PMI cancellation matters. Conventional borrowers stop paying insurance when they hit 78-80% LTV. FHA borrowers pay forever.
• Buying a higher-priced home: On a $500,000 home, FHA upfront MIP is $8,750 and annual MIP is about $2,300/year. Conventional PMI might be similar initially but drops off — FHA doesn’t. The dollar amounts make the choice starker.
• Condo purchase: FHA has a condo approval list — the entire complex must be FHA-approved, which eliminates many condo buildings. Conventional loans have no such requirement.
• Investment property or second home: FHA is for primary residences only. Conventional covers primary, second home, and investment properties.

Which Should You Choose?

Answer these questions:

1. Is your credit score above 700? → Conventional is almost certainly better.
2. Is your credit score 620-680? → Run the numbers both ways. FHA may win on rate but lose on lifetime insurance cost. Ask your lender for a side-by-side comparison on the Loan Estimate.
3. Is your credit score below 620? → FHA is likely your only option at 3.5% down.
4. Is your DTI above 45%? → FHA has more room.
5. Are you buying a condo? → Check FHA approval first. If it’s not approved, conventional is your path.
6. Can you put 5%+ down? → Conventional at 5% down with a good credit score often has cheaper PMI than FHA’s MIP.

Ready to Move Forward?

Once you’ve chosen your loan type, get pre-approved before you start house hunting. Compare rates from our top lenders offering both FHA and conventional options. Use our mortgage calculator to see how your monthly payment differs between the two loan types. For a complete overview of the buying process, see our home buying guide.

The Hybrid Strategy

Some smart borrowers use FHA to get into the house, then refinance to conventional once they’ve built equity and/or improved their credit score. If you buy with FHA at 3.5% down and 650 credit, then after 2-3 years your credit is 720+ and your equity is at 15-20% (from payments + appreciation), a conventional refinance drops the mortgage insurance entirely.

The cost: refinance closing costs ($3,000-$6,000) plus whatever rate is available at that time. But eliminating $155/month in MIP saves $1,860/year. If refinance costs are $4,000, you break even in just over 2 years.

Frequently Asked Questions

Can I switch from FHA to conventional without refinancing?

No. FHA MIP is tied to the loan. The only way to remove it is to refinance into a conventional loan. You’ll need sufficient equity (at least 5% for most programs, 20% to avoid PMI entirely on the new loan) and a qualifying credit score.

Is FHA only for first-time buyers?

No. Anyone can use FHA regardless of homeownership history, as long as it’s for a primary residence and they meet the credit and income requirements. The “first-time buyer” association comes from FHA’s lenient qualification, which tends to attract first-time buyers.

What are FHA minimum property standards?

FHA appraisers check for health and safety issues that conventional appraisals might overlook: peeling paint (lead risk on pre-1978 homes), broken windows, missing handrails, water damage, roofing with less than 2 years remaining life. If the property doesn’t meet standards, the seller must make repairs before the loan closes — which can complicate negotiations.

Can I use FHA for a duplex or multi-family?

Yes — FHA allows financing for 1-4 unit properties, as long as you live in one unit as your primary residence. This is an excellent strategy for first-time investors: buy a duplex with 3.5% down, live in one unit, rent the other. The rental income can even help you qualify for the loan (75% of the projected rent is counted as income).