FHA vs Conventional Loan

FHA vs conventional: the short answer

FHA is the easier loan to get and the more expensive one to keep. It asks for 3.5% down with a 580 credit score, accepts thin credit files and recent credit events, and in exchange charges 1.75% upfront plus 0.55% a year in mortgage insurance. Put down less than 10% and that annual premium never ends. On a $400,000 purchase at 6.5% over 30 years the total comes to $2,659.40 a month.

Conventional is the harder loan to get and the cheaper one to keep. Expect 3% to 5% down, a 620 floor with best pricing above 700, and private mortgage insurance that cancels itself: automatically at 78% of the original value and on your request at 80%. On the same purchase at 5% down it runs $2,544.36 a month, $115.04 less than FHA.

The rule of thumb holds. Take conventional when your credit is 700 or better and you have 5% down, because PMI ends and the pricing improves. Take FHA when your score is under 660, you have a foreclosure or bankruptcy inside the last three years, or the conventional quote comes back with a rate and PMI stack that FHA beats. If you have VA entitlement, neither applies: start with the VA vs FHA comparison.

What is an FHA loan? What is a conventional loan?

An FHA loan is made by a private lender and insured by the Federal Housing Administration against default. The insurance, not the government, is what lets the lender accept a 3.5% down payment and a 580 credit score. It costs two ways. First, an upfront mortgage insurance premium of 1.75% of the base loan amount, $6,755 on $386,000, which is almost always financed and therefore amortized for the whole term. Second, an annual premium of 0.55% collected monthly, $176.92 on that same loan. The removal rule is the one that surprises people: with 10% or more down the annual premium ends after 11 years, and with less than 10% down, which is exactly where the 3.5% minimum puts you, it stays for the life of the loan unless you refinance. FHA also sets county loan limits starting at $541,287 for 2026, requires the home to be your primary residence with occupancy inside 60 days, and permits seller concessions up to 6% of the sale price.

A conventional loan is not insured or guaranteed by any federal agency. It follows the underwriting guidelines that Fannie Mae and Freddie Mac buy, which is why it is called conforming above the 2026 limit of $832,750 for a single-family home, and everything above that is a jumbo with its own rules. The lender takes the risk directly and prices it into two places: the note rate and private mortgage insurance. PMI applies below 20% down and is cancelable. The Homeowners Protection Act requires your servicer to drop it automatically on the next payment date after your scheduled balance hits 78% of the original purchase price, and lets you request removal once you reach 80% of the current value, which counts appreciation. Conventional also sets the higher loan limits, allows any property type including second homes and rentals, and has no upfront insurance charge at all.

Side-by-side comparison

Ten criteria, priced on a $400,000 purchase at 6.5% over 360 months with 3.5% down on the FHA side and 5% down on the conventional side.

The insurance-removal row is the single largest lifetime difference. FHA's premium on this loan runs $63,690 of annual charge plus $6,755 upfront, a total of $70,445, and it does not stop. Conventional PMI at 0.45% costs $142.50 a month and ends at payment 124 on a flat value, or earlier if the home appreciates: $17,670 total. That is a $52,775 spread on insurance alone.

Where each loan wins

When an FHA loan is the better choice

• Your credit score is between 580 and 669. Conventional will approve some of these files, but the rate tier plus a PMI price above 0.70% often costs more than FHA's fixed 0.55%. At the 0.70% tier that applies from 660 to 699, conventional is still $35.87 cheaper at $2,623.53 against FHA's $2,659.40, but the 1.05% tier below 660 pushes conventional to $2,734.36 and flips the comparison.
• You had a foreclosure inside three years. FHA's 3-year seasoning against conventional's 7-year standard is the difference between closing in 2026 and closing in 2030. Chapter 7 bankruptcy is a 2-year wait on both, but FHA's overall tolerance for a rebuilt file is wider.
• You need the seller to fund your closing costs. FHA allows up to 6% in seller concessions, which is $24,000 on a $400,000 purchase. For a buyer short on cash, that beats a conventional loan with a lower rate and no room to negotiate.
• You have 10% or more to put down. Cross the 10% line and the annual MIP ends after 11 years instead of running forever, capping the premium near $23,353 instead of $63,690 on this loan.
• Your debt-to-income ratio runs high. FHA's guidelines and the Automated Underwriting System regularly approve files at 45% to 50% back-end with documented compensating factors where conventional overlays stop at 43% to 45%.

When a conventional loan is the better choice

• Your credit is 700 or better. PMI prices at 0.30% for a 760+ borrower at 95% loan-to-value, which is $95 a month instead of FHA's $176.92, and the note rate is typically better too. Total monthly lands at $2,496.86 against $2,659.40.
• You can put 20% down. $80,000 on a $400,000 home gives a $320,000 loan at $2,022.62 with no insurance of any kind, $636.78 a month below FHA and $408,142 of lifetime interest instead of $500,937.
• You expect to drop the insurance. PMI ends automatically at 78% of the original value, month 135 on this loan with a flat value, and earlier with appreciation or extra principal. FHA's premium at 3.5% down ends only at payoff or refinance.
• You are buying a second home or a rental. FHA is primary-residence-only with a 60-day occupancy requirement. Conventional finances all three occupancy types at the same guidelines.
• You need a loan above $541,287 in a low-cost county. Conventional's 2026 conforming limit is $832,750, roughly $291,000 of extra headroom before you reach jumbo territory.

Cost comparison with real numbers

A $400,000 purchase at 6.5% over 360 months, FHA with 3.5% down, conventional with 5% down.

FHA: down payment 400,000 × 3.5% = $14,000, base loan $386,000, UFMIP 386,000 × 1.75% = $6,755, financed balance $392,755. P&I = 392,755 × 0.005416667 × 6.9917980 ÷ 5.9917980 = $2,482.48. Annual MIP 386,000 × 0.55% ÷ 12 = $176.92. Total = $2,659.40.

Conventional: down payment 400,000 × 5% = $20,000, loan $380,000. P&I = 380,000 × 0.005416667 × 6.9917980 ÷ 5.9917980 = $2,401.86. PMI at the 0.45% tier for a 700-759 score at 95% loan-to-value: 380,000 × 0.0045 ÷ 12 = $142.50. Total = $2,544.36.

The monthly gap is 2,659.40 − 2,544.36 = $115.04 in conventional's favor, and it costs $6,000 more cash at closing. PMI removal is where the distance grows: 78% of the $400,000 purchase price is a $312,000 balance, which this loan reaches at payment 135, and 80% of current value is $320,000, reached at payment 124. From payment 125 the conventional payment drops to $2,401.86 while the FHA payment stays at $2,659.40 for the remaining 236 months.

Conventional is ahead on every line at both checkpoints: $9,663 less paid by year 7 and $13,804 less by year 10, while holding a balance $10,813 lower at year 10 despite starting with $6,000 more cash down. The final row is the one that keeps going. Over the full 360 payments FHA totals $957,382 against conventional's $882,339 with PMI ending at payment 124, a difference of $75,043 in conventional's favor. Work your own terms through the FHA loan calculator and the mortgage calculator.

Eligibility and requirements

• FHA credit floor: 580 or better for 3.5% down, 500 to 579 with 10% down, ineligible below 500. On a $400,000 home the 3.5% program needs $14,000 of cash and the 10% program needs $40,000.
• Conventional credit floor: 620 to underwrite at all, with best pricing at 740 and above. A 760 borrower pays 0.30% PMI at 95% loan-to-value and a 660 borrower pays 0.70%, a $126.67 monthly spread on $380,000.
• Waiting periods: FHA requires 3 years after foreclosure, short sale, or deed in lieu and 2 years after a Chapter 7 discharge. Conventional requires 7 years after foreclosure, or 4 with documented extenuating circumstances, and 2 years after a Chapter 7 discharge.
• Debt-to-income: both target 28% front-end and 36% back-end. On this example FHA needs $9,498 of gross monthly income and conventional needs $9,087 at the 28% guideline, a $411 difference.
• Reserves: typically two to six months of the housing payment after closing, higher on multi-unit and investment conventional purchases. FHA allows gifted funds from family, an employer, or a charity to cover the entire down payment and closing costs.
• Loan limits: FHA 2026 range is $541,287 to $1,249,125 by county. Conventional conforming is $832,750 for a single-family home and $1,249,125 in high-cost areas, with jumbo guidelines above that.
• Mortgage insurance triggers: FHA charges it at any loan-to-value and only releases it on the 11-year rule with 10%+ down. Conventional charges it below 80% loan-to-value and releases it at 78% automatically or 80% on written request.

Mistakes people make when choosing

• Comparing the note rate and ignoring the insurance. FHA quotes often land a quarter-point below conventional, worth about $60 a month, while FHA's MIP is $176.92 and a 740 borrower's PMI is around $100. Compare the full monthly figure, not the rate line on the Loan Estimate.
• Assuming PMI ends the moment you hit 20%. The automatic cutoff is 78% of the original purchase price on the scheduled balance, payment 135 on this loan. Reaching it requires a written request at 80% of current value, and many servicers will not act if you had a 30-day late in the past 12 months.
• Choosing FHA because it is easier, when you qualify for both. Qualifying is half the comparison. On a $400,000 purchase the easier loan costs $75,043 more over the term because the insurance never stops.
• Putting 3.5% down on FHA with 10% available. Crossing 10% moves the annual MIP from life-of-loan to 11 years, a swing of about $40,337 in premium. Run the trade in the down payment calculator before you commit the cash.
• Shopping FHA and conventional with different lenders. Some shops write one and not the other, so a weak quote tells you nothing about the program. Take both numbers from at least two lenders on the same day, or use the mortgage comparison tool.
• Forgetting that FHA loans are not assumable in practice for most buyers. The assumption right exists, but the assumption must be creditworthy and rates rarely cooperate. Never build a strategy around escaping the MIP later; refinance on its own break-even instead, using the refinance calculator.
• Letting the down payment decide alone. FHA saves $6,000 of cash at 3.5% down versus conventional's 5%. That $6,000 buys roughly five years of the $115.04 monthly gap before considering the lifetime insurance difference.

Frequently asked questions

Can I switch from FHA to conventional later? Yes, and it is the standard escape route from lifetime MIP. Once your equity reaches 80% and your credit has recovered, refinance into conventional. On a $392,755 balance, closing costs of 2.5% are $9,819, so run the break-even against the $176.92 monthly premium you eliminate.

Are FHA rates higher than conventional rates? Usually FHA is quoted slightly lower, often by 0.15% to 0.25%. On $400,000 that is worth roughly $60 a month, which is far less than FHA's $176.92 annual premium, so the all-in FHA payment still tends to land higher.

How much does PMI cost on a conventional loan? Between 0.30% and 1.05% of the loan amount a year, set by credit score and starting loan-to-value. On a $380,000 loan that is $95 a month at 760+, $142.50 at 700-759, $221.67 at 660-699, and $332.50 at 620-659.

When does FHA mortgage insurance fall off? After 11 years if you put down 10% or more. If you put down less than 10%, which includes the 3.5% minimum, it runs for the life of the loan. The only exits are a refinance or paying the loan off in full.

Which loan is better with 5% down and a 700 credit score? Conventional, on these numbers. It runs $2,544.36 a month against FHA's $2,659.40, and PMI ends automatically at payment 135 while FHA's premium continues to payoff, a $75,043 lifetime difference on a $400,000 purchase at 6.5%.

Can I use an FHA loan for a second home or investment property? No. FHA requires you to occupy the home as your principal residence within 60 days of closing. Conventional finances second homes and investment properties at the same guidelines, with slightly higher down payment and reserve requirements.

What credit score do I need for the best conventional rate? Most lenders reserve their top conventional pricing for 740 and above. Below 700 you will pay more in both rate and PMI, and below 660 the PMI tier usually pushes the conventional total above FHA's.

Does either loan allow gifted down payment funds? Both do. FHA permits gifts from family members, an employer, or a charitable organization with a simple gift letter. Conventional allows gifts from family and, with conditions, from employers and down payment assistance programs; a 5%-down conventional gift still requires you to contribute 5% of your own funds in some programs.