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FHA vs. Conventional: Which Loan Fits You?

A side-by-side look at credit, down payment, and mortgage insurance - with real math on which loan actually costs less.

10 min
Read time
2026-06-02
Last updated
FHA Loans
Topic
On this page01The Short Version02Head-to-Head at a Glance03When FHA Is the Right Answer04When Conventional Is the Right Answer05The Math That Actually Matters: Cost over the Hold06A Common Third Path: Refinance Out of FHA Later
01

The Short Version

FHA and conventional loans are the two mainstream options for buyers who don't qualify for VA or USDA. The right choice comes down to your credit score, your down payment, and whether you plan to keep the loan long enough for conventional's dropping mortgage insurance to win the long-term math.

As a rough rule: below 680 credit or under 5% down, FHA usually wins. At 700+ credit with 5%+ down, conventional usually wins. Between those ranges, it's a real calculation.

What you'll learn in this guide
  1. 02Head-to-Head at a Glance
  2. 03When FHA Is the Right Answer
  3. 04When Conventional Is the Right Answer
  4. 05The Math That Actually Matters: Cost over the Hold
  5. 06A Common Third Path: Refinance Out of FHA Later
Level

Plain-English

No jargon, real examples

Written by

Licensed advisors

Quick Mortgage Loans

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FHA Loans

Buyers & homeowners

02

Head-to-Head at a Glance

Every dimension below matters, but the ones that most often decide the outcome are minimum credit, mortgage insurance behavior over time, and whether the seller can help with closing costs.

FHA vs. Conventional - the Categories That Matter
Minimum down paymentFHA: 3.5% (at 580+ score) | Conventional: 3% (first-time buyers)
Minimum credit scoreFHA: 580 typical, 500 with 10% down | Conventional: 620 typical
Mortgage insurance up frontFHA: 1.75% UFMIP financed | Conventional: none
Monthly mortgage insuranceFHA: 0.55% annual, life of loan in most cases | Conventional: varies by credit + LTV, drops off at 80% LTV
Max DTI (typical)FHA: 45%–56.9% | Conventional: 45%–50%
Seller credit capFHA: up to 6% | Conventional: 3% (LTV > 90%), 6% (LTV 75%–90%)
Property condition standardsFHA: strict (safety, security, soundness) | Conventional: lender/appraiser judgment
Program parameters as of 2026 general lending guidelines - verify current terms with a loan advisor before making decisions.
03

When FHA Is the Right Answer

FHA was designed to widen access to homeownership. If your credit is in the 580–680 range, if you've had a recent late payment, a bankruptcy that just seasoned out, or a higher DTI than a conventional lender is comfortable with, FHA's flexibility is often the difference between qualifying and not.

FHA is also friendlier when the seller is contributing significantly to closing costs (up to 6% vs conventional's 3% at high LTV) and when the property needs the appraiser to check for basic safety and soundness - a mild feature for buyers, not a bug.

Key points
  • Credit score 580–679, or a recent credit event.
  • Higher DTI (48%–56% back-end).
  • You need a large seller credit for closing costs.
  • You plan to refinance out of FHA in the next few years anyway (e.g., after building equity).
04Section 4

When Conventional Is the Right Answer

The single biggest cost difference between the two programs is that FHA mortgage insurance sticks with the loan for its life in most cases (any loan with less than 10% down). Conventional PMI drops off automatically at 80% loan-to-value based on original value. Over a five- to ten-year hold, that can be tens of thousands of dollars.

Conventional also prices better at high credit scores. At 740+ credit with 20% down, the effective rate + insurance cost is almost always lowest on conventional.

  • Credit score 700+ and at least 5% down.
  • You expect to stay in the home more than five years.
  • You have 20% down and want to skip mortgage insurance entirely.
  • The property has cosmetic issues that might snag on FHA's minimum property standards.
05

The Math That Actually Matters: Cost over the Hold

Comparing rate alone is a mistake. The right comparison is total monthly PITI + MI at each program, plus when (if ever) the mortgage insurance drops. A conventional loan with slightly higher rate but MI that ends in year six can cost less than a slightly-cheaper FHA loan that carries MIP for 30 years.

We'll run this comparison for you at application. As a shortcut, if you're at 680–700 credit and 5%–10% down, ask specifically for a side-by-side quote - that's where the two programs are close enough that a small change in market pricing tips the answer.

$400,000 Purchase, 5% Down, 720 Credit - Illustrative

Conventional at 6.75% ≈ $2,464 P&I + $132 PMI = $2,596 mo., with PMI ending around year 8. FHA at 6.25% ≈ $2,346 P&I + $175 MIP = $2,521 mo., with MIP for the life of the loan. Over 10 years, the conventional loan saves roughly $8,000 despite the higher starting payment - because PMI dropped.

06

A Common Third Path: Refinance Out of FHA Later

If FHA is the only way to get into a home today, that's fine. Once you've built to 20% equity through payments and appreciation - often within a few years in appreciating markets - you can refinance into a conventional loan and drop mortgage insurance entirely. This is a routine and very common progression.

Just do the refinance math when the time comes: the savings on MI have to outweigh the closing costs on the refi, using the same break-even framework we use for any refinance decision.

FAQ

Frequently Asked

Conventional at 3% is technically lower than FHA at 3.5%, but only first-time buyers qualify for the 3% conventional option. FHA's 3.5% is available regardless of buyer history.
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