FHA vs Conventional Loan: Which Mortgage Is Right for You?

FHA vs Conventional Loan: A Complete Comparison

When buying a home, one of the first decisions you’ll face is which type of mortgage to choose. For most buyers, the choice comes down to an FHA loan (backed by the Federal Housing Administration) or a conventional loan (not government-backed). Both let you buy a home, but they differ significantly in down payment requirements, mortgage insurance costs, credit score thresholds, and total long-term expense.

Requirements Comparison

Feature	FHA Loan	Conventional Loan
Minimum Down Payment	3.5% (580+ score) or 10% (500-579 score)	3% (first-time) or 5% (repeat)
Minimum Credit Score	500 (with 10% down) / 580 (with 3.5% down)	620 (most lenders require 640+)
Debt-to-Income Ratio	Up to 43% (sometimes 50% with compensating factors)	Up to 45% (sometimes 50%)
Loan Limits (2026)	$498,257 (standard) / $1,149,825 (high-cost)	$766,550 (conforming) / $1,149,825 (high-cost)
Mortgage Insurance	Required for life of loan (with <10% down)	Required until 20% equity, then removable
Property Standards	Must meet FHA minimum property standards	Standard appraisal only
Occupancy	Primary residence only	Primary, second home, or investment

Mortgage Insurance: The Biggest Cost Difference

Mortgage insurance is where FHA and conventional loans diverge most dramatically, and it’s the factor that often tips the long-term cost comparison.

FHA Mortgage Insurance Premium (MIP):

• Upfront MIP: 1.75% of loan amount (can be rolled into the loan)
• Annual MIP: 0.55% of loan amount (paid monthly)
• Duration: Life of the loan if you put down less than 10%. If you put down 10%+, MIP drops off after 11 years.
• On a $400,000 loan: $7,000 upfront + $183/month ongoing

Conventional Private Mortgage Insurance (PMI):

• No upfront premium (usually)
• Annual PMI: 0.20-1.50% depending on credit score and down payment
• Duration: Automatically removed at 78% LTV; can request removal at 80% LTV
• On a $400,000 loan with good credit: roughly $80-$160/month, removable once you have 20% equity

Total Cost Comparison Over Time

Let’s compare a $400,000 home with minimum down payments:

FHA Loan: 3.5% down ($14,000)

• Loan amount: $386,000 + $6,755 upfront MIP = $392,755
• Monthly P&I at 6.50%: $2,483
• Monthly MIP: $180
• Total monthly: $2,663
• MIP paid over 30 years: $64,800
• Total cost: $948,000 + $64,800 = $1,012,800

Conventional Loan: 5% down ($20,000)

• Loan amount: $380,000
• Monthly P&I at 6.75%: $2,465
• Monthly PMI (0.70%): $222
• PMI removed after ~8 years (at 80% LTV)
• Total PMI paid: $21,312
• Total cost: $887,400 + $21,312 = $908,712

Difference: The conventional loan saves approximately $104,000 over 30 years, primarily because PMI drops off while FHA MIP does not.

When FHA Loans Win

1. You have a lower credit score (580-640)

If your credit score is between 580 and 640, FHA is often your only option. Conventional lenders typically require 620 minimum, and at that score your PMI rates will be very high (1.0-1.5%), narrowing the cost gap with FHA.

2. You have limited savings for a down payment

FHA’s 3.5% minimum down payment is $14,000 on a $400,000 home versus $20,000 for conventional at 5%. That $6,000 difference matters when you’re also saving for closing costs and an emergency fund.

3. You have a higher debt-to-income ratio

FHA is more lenient with DTI ratios, sometimes approving borrowers up to 50% DTI with compensating factors (significant savings, minimal payment increase from current housing, etc.).

4. You’re a first-time buyer with less-than-perfect credit

FHA was designed for exactly this scenario. The program exists to help first-time buyers who might not qualify for conventional financing.

5. You’ve had past credit events

FHA has shorter waiting periods after bankruptcy (2 years for Chapter 7) and foreclosure (3 years) compared to conventional loans (4 years for Chapter 7, 7 years for foreclosure).

When Conventional Loans Win

1. You have a credit score above 700

With good credit, conventional PMI rates are much lower than FHA MIP — and they drop off entirely once you reach 20% equity. Over the life of the loan, this saves tens of thousands of dollars.

2. You can put down 20%

With 20% down on a conventional loan, you avoid mortgage insurance entirely. FHA loans still charge the 1.75% upfront MIP even with large down payments.

3. You plan to stay in the home long-term

The longer you stay, the more FHA’s permanent MIP hurts. After year 8-10 (when conventional PMI would have dropped off), every FHA MIP payment is pure excess cost.

4. You want to buy a second home or investment property

FHA loans are restricted to primary residences. Conventional loans can finance second homes, vacation properties, and investment properties.

5. The property doesn’t meet FHA standards

FHA has minimum property requirements (functioning heating, safe electrical, no peeling paint in pre-1978 homes, etc.). Fixer-uppers that need work may not pass FHA inspection, while conventional loans are more flexible.

The Refinancing Path: Start FHA, Move to Conventional

A common strategy for buyers with lower credit scores:

1. Purchase with an FHA loan (lower credit requirements)
2. Spend 2-3 years building credit and equity
3. Refinance into a conventional loan (eliminating permanent MIP)
4. Enjoy lower costs for the remaining 25+ years

This strategy works particularly well if your credit score was 580-640 at purchase and improves to 700+ within a few years. The refinance closing costs (typically $3,000-$8,000) are usually recouped within 1-2 years through MIP savings.

Down Payment Comparison at Different Levels

Down Payment	FHA Monthly Cost	Conventional Monthly Cost	Winner
3.5% (FHA) / 3% (Conv)	$2,663	$2,738	FHA (lower monthly)
5%	$2,626	$2,593	Conventional
10%	$2,444	$2,373	Conventional
15%	$2,262	$2,175	Conventional
20%	$2,080	$1,977	Conventional (no MI)

At the minimum down payment level, FHA can be slightly cheaper monthly because of its lower interest rate. But remember: FHA MIP never goes away (with less than 10% down), while conventional PMI drops off.

2026 FHA Loan Limits

FHA loan limits increased for 2026:

Area Type	2026 Limit	2025 Limit
Standard (most counties)	$498,257	$472,030
High-cost areas	$1,149,825	$1,089,300

If your home price exceeds these limits, you’ll need a conventional loan (or jumbo loan for amounts exceeding conventional limits).

Decision Flowchart

Start here: What is your credit score?

• Below 580: FHA with 10% down (or work on credit first)
• 580-619: FHA is likely your only option
• 620-679: Compare both; FHA may have lower total costs in the short term
• 680-719: Conventional likely wins, especially if you can put down 10%+
• 720+: Conventional is almost certainly cheaper

Next: How much can you put down?

• Less than 5%: FHA at 3.5% is the lowest option
• 5-19%: Run the numbers; conventional PMI rates vary by credit score
• 20%+: Conventional (no mortgage insurance)

Frequently Asked Questions

Can I switch from FHA to conventional later?

Yes, through refinancing. You’ll need to qualify for the new loan (credit score, income, equity) and pay closing costs. Most borrowers who start with FHA refinance to conventional within 3-5 years once their credit improves and they’ve built equity.

Is FHA mortgage insurance tax-deductible?

The deductibility of FHA MIP has been extended and expired multiple times by Congress. As of 2026, check current tax law or consult a tax professional. When deductible, it reduces the effective cost of MIP for borrowers who itemize.

Do sellers prefer conventional offers over FHA?

In competitive markets, yes. FHA appraisals have stricter property requirements, and sellers worry about deals falling through due to FHA inspection issues. Some sellers explicitly prefer conventional offers. In a buyer’s market, this matters less.

What are FHA minimum property standards?

The home must be safe, sound, and secure. Specific requirements include: functional heating and electrical, no lead paint hazards (in pre-1978 homes), adequate roof life remaining, no structural damage, safe water supply, and working plumbing. Cosmetic issues like worn carpet or outdated kitchens are fine.

Can I use gift money for an FHA down payment?

Yes. FHA allows 100% of the down payment to come from gifts from family members, employers, or charitable organizations. Conventional loans also allow gifts but may require some of the down payment to come from your own funds depending on the down payment percentage and property type.