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

Bottom line: FHA wins on access: lower credit score minimums (580 vs 620) and a lower down payment (3.5% vs 3–5%). Conventional wins on long-term cost, since PMI cancels once you reach 20% equity while FHA's 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.

Quick answer

Choose FHA when access is the constraint: it accepts credit scores down to 580 with 3.5% down and allows higher debt-to-income ratios. Choose conventional when you qualify comfortably: with 620+ credit and at least 5% down, conventional usually costs less over time because its PMI cancels at 20% equity while FHA's mortgage insurance premium typically lasts the life of the loan. For borrowers in the 620 to 679 credit band, the honest answer is to get quotes for both and compare total cost including insurance over your expected holding period, not just the advertised rate.

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 and 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%, where FHA is more flexible
• You are buying a fixer-upper that needs work (FHA 203k rehab loans)

When Conventional Makes More Sense

• Credit score 680+, where 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.

As of today, the average 30-year conventional rate runs near 6.72% APR, and FHA rates typically land slightly below that. On a $350,000 loan at a 680 credit score with 5% down, add FHA's 0.55%-a-year MIP or conventional's roughly 0.9%-a-year PMI to whichever base rate you are quoted to see the real effective cost, not just the advertised rate.

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

Decision Guide

Model your own numbers with the FHA loan calculator and the PMI calculator, then check what monthly payment fits with the home affordability calculator. If you are weighing this against other financial moves, Money Map puts the mortgage decision in context.

Quick answers

What is the main difference between FHA and conventional loans? FHA is government-backed with easier qualification and permanent mortgage insurance on most loans; conventional has stricter requirements but insurance that cancels at 20% equity.

Can I switch from FHA to conventional later? Yes, by refinancing. Once you have roughly 20% equity and qualifying credit, refinancing into a conventional loan removes FHA's MIP.

Do FHA loans have lower rates? Often slightly lower (0.1 to 0.3 points) because of the government guarantee, but the lifetime MIP usually more than offsets the rate advantage for borrowers who could qualify for conventional.

Is FHA only for first-time buyers? No. Any qualifying borrower can use FHA. First-time buyer assistance programs are a separate layer that can combine with either loan type.

Sources

• HUD FHA single-family loan program requirements for FHA qualification and MIP rules.
• FHFA conforming loan limits for the current conventional loan limits by county.
• CFPB guidance on private mortgage insurance cancellation for PMI removal rights under the Homeowners Protection Act.
• SwitchWize mortgage rate tracking, reviewed against lender and market data on the date below.

Rates referenced on this page were verified on July 9, 2026. FHA loan limits, MIP rates, and conventional conforming limits are updated annually; verify current figures with lenders before applying. This article is educational information, not individualized financial advice.