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

Bottom line: FHA wins on access — lower credit score minimums (580 vs 620) and lower down payment (3.5% vs 3%). Conventional wins on long-term cost — PMI cancels once you reach 20% equity, while FHA mortgage insurance premium (MIP) lasts the life of the loan for most borrowers. If you have 620+ credit and 5%+ down, run the numbers on both — conventional often wins on total cost within a few years.

FHA loans are backed by the Federal Housing Administration; conventional loans are not government-backed and conform to Fannie Mae and Freddie Mac guidelines. Both finance home purchases, but they serve different borrower profiles and have meaningfully different costs over time.

Requirements at a Glance

The Mortgage Insurance Difference — This Is the Key Cost Driver

FHA MIP: Two components — an upfront premium of 1.75% of the loan amount (typically rolled into the loan) plus an annual premium of 0.55–1.05% of the loan balance, paid monthly. For most FHA loans with less than 10% down, MIP lasts the entire loan term — it never cancels.

Conventional PMI: Charged only if you put down less than 20%. Rates typically 0.5–1.5% annually. Automatically cancels when your loan balance reaches 78% of the original purchase price, or you can request cancellation at 80%.

Real cost example on a $350,000 FHA loan:

• Upfront MIP: $6,125 (rolled in, so loan = $356,125)
• Annual MIP at 0.55%: ~$163/month
• Over 7 years before you'd hit 20% equity: ~$13,700 in MIP payments
• Total MIP cost if held 30 years: ~$49,000+

A conventional borrower who hits 20% equity in year 5 might pay $7,000–10,000 in PMI total before it cancels — then nothing.

When FHA Makes Sense

• Your credit score is below 620 and you cannot qualify for conventional
• Your credit is 620–679 and FHA offers a meaningfully lower rate in your scenario
• Your down payment is limited to 3.5% and you need every dollar
• Your DTI is above 45% — FHA is more flexible here
• You are buying a fixer-upper that needs work (FHA 203k rehab loans)

When Conventional Makes More Sense

• Credit score 680+ — conventional rates become competitive or better
• You have 5–20% for a down payment
• You plan to stay in the home long enough to reach 20% equity and cancel PMI
• The property does not meet FHA's minimum property standards (older homes, condition issues)
• The purchase price is above FHA loan limits in standard-cost areas

The Rate Comparison

FHA rates are often 0.1–0.3% lower than conventional for the same borrower profile because the government guarantee reduces lender risk. But the MIP premium (0.55% annually) more than offsets the rate advantage for most borrowers.

Net cost comparison for a 680 credit score borrower, $350,000 loan, 5% down:

• FHA: Rate 6.4%, MIP 0.55%/year → effective total cost ~6.95%
• Conventional: Rate 6.65%, PMI ~0.9%/year → effective total cost ~7.55% initially, drops to 6.65% after PMI cancels

At year 7 when PMI cancels on the conventional loan, the FHA borrower is still paying 0.55% annually with no end in sight. The conventional loan becomes cheaper on a cumulative basis somewhere between years 5–10 for most borrowers.

FHA loan limits, MIP rates, and conventional conforming limits are updated annually. Verify current figures with lenders before applying.