Key takeaways
- FHA loans accept lower credit scores (down to 500) and as little as 3.5% down. Conventional loans usually need better credit but allow as little as 3% down.
- The biggest long-run difference is mortgage insurance. FHA charges an upfront premium plus annual insurance that lasts for the life of the loan with less than 10% down. Conventional PMI can be canceled once you reach 20% equity.
- With good credit, conventional usually costs less over time. With lower credit, FHA’s flat pricing often wins.
- Many FHA borrowers later refinance into a conventional loan to drop mortgage insurance once they have enough equity.
FHA and conventional loans can both get you into a home with a small down payment, but they price risk very differently. FHA loans are insured by the Federal Housing Administration and charge every borrower roughly the same mortgage insurance, whatever their credit score. Conventional loans follow Fannie Mae and Freddie Mac rules, and their private mortgage insurance (PMI) costs depend heavily on your credit and down payment.
The rules side by side
| FHA loan | Conventional loan | |
|---|---|---|
| Minimum down payment | 3.5% with a 580+ score; 10% with 500–579 | 3% on some programs; 5% or more is common |
| Typical minimum credit score | 500 (many lenders want 580–620) | Around 620 |
| Upfront mortgage insurance | 1.75% of the loan, usually added to the balance | None |
| Annual mortgage insurance | Set by HUD, the same for everyone with the same loan size, down payment, and term | Priced by credit score and down payment |
| When mortgage insurance ends | 11 years with 10%+ down; otherwise the life of the loan | On request at 80% loan-to-value; automatically at 78% |
| Loan limits (one-unit home) | County-based: $541,287 to $1,249,125 in most of the country | Conforming limits set by the FHFA; higher “jumbo” loans exist |
| Property rules | Primary residence; must meet HUD property standards | Primary, second homes, and investment properties allowed |
What it costs: a worked example
Take a $350,000 home with 5% down ($17,500) and a 30-year fixed rate of 6.5% on both loans. Using the same rate isolates the difference in mortgage insurance. In real life, FHA rates are often a bit lower, especially for lower credit scores.
For the conventional loan we’ll assume PMI of 0.55% a year, a realistic figure for a borrower with good credit. (Freddie Mac says borrowers typically pay $30 to $70 a month per $100,000 borrowed.)
| FHA | Conventional (good credit) | |
|---|---|---|
| Base loan amount | $332,500 | $332,500 |
| Upfront mortgage insurance | $5,819 (financed) | $0 |
| Amount you actually borrow | $338,319 | $332,500 |
| First-year monthly P&I + mortgage insurance | $2,276.24 | $2,254.03 |
| Annual mortgage insurance rate | 0.5% | 0.55% |
| Mortgage insurance lasts | Life of the loan | 11 years and 3 months |
| Total mortgage insurance paid | $38,441 | $20,574 |
| Total interest over 30 years | $431,507 | $424,085 |
| Insurance + interest | $469,948 | $444,659 |
The monthly payments are close, but the conventional loan comes out about $25,288 cheaper over the full term. Two things drive that gap. FHA’s mortgage insurance never goes away here, while the PMI ends after about 11 years and 3 months. And the upfront premium is added to the loan, so you pay interest on it for 30 years.
When FHA can come out ahead
Change one assumption, the conventional PMI rate, and the picture changes. PMI pricing rises steeply as credit scores fall. If the same borrower’s PMI quote were 1.2% a year, the conventional loan’s monthly P&I plus PMI would be $2,434.63, about $158 a month more than the FHA loan until the PMI ends. Insurance plus interest over 30 years would total $469,040 against FHA’s $469,948, so the long-run advantage of conventional nearly disappears, and FHA is easier on the monthly budget. At even higher PMI quotes, or if the FHA lender offers a lower rate, FHA comes out ahead outright.
FHA also tends to be the better fit when:
- Your credit score is below about 620. Many conventional lenders won’t approve you, and the ones that do price the loan steeply.
- Your debt-to-income ratio is high. FHA underwriting often allows higher ratios with compensating factors.
- You have a recent credit event, like a bankruptcy or foreclosure. FHA’s waiting periods are generally shorter than conventional ones.
The refinance exit
FHA mortgage insurance with less than 10% down lasts for the life of the loan, but you’re not stuck with it forever. Once your balance falls to around 80% of the home’s value, through payments, appreciation, or both, you can refinance into a conventional loan with no PMI.
That’s a common strategy: use FHA to buy sooner, then refinance out. It carries risk, because it depends on future rates and home values, and refinancing has closing costs. Don’t count on it when deciding whether you can afford the payment. The refinance calculator shows the break-even point.
Putting 10% down on an FHA loan
Putting at least 10% down on an FHA loan limits annual MIP to 11 years. On the same home with 10% down, total FHA mortgage insurance would be about $21,522 (upfront plus 11 years of annual premiums). If you have 10% or more to put down and decent credit, compare that directly with a conventional quote, because conventional PMI at 10% down is often cheap and ends sooner.
How to decide
- Get quotes for both. Ask lenders for a Loan Estimate on each loan type with the same down payment. Compare the rate, the mortgage insurance, and the cash to close.
- Compare total cost over the time you’ll actually keep the loan, not just the monthly payment. If you expect to sell or refinance within 7–10 years, the life-of-loan MIP matters less.
- Check the property. FHA appraisals flag health and safety issues that must be fixed before closing, which can complicate buying a fixer-upper.
The FHA loan calculator shows your FHA payment, upfront and annual MIP, and a conventional comparison for the same home. To check whether the payment fits your budget, use the house affordability calculator.