FHA vs Conventional Loans

The two most common mortgage types — FHA and conventional — differ mainly in down payment, credit requirements and mortgage insurance. The choice usually comes down to one question: are you buying with strong credit and a decent down payment, or do you need a more forgiving path in the door? Here is a straight, numbers-first comparison.

Model both scenarios on the HomeMath mortgage calculator — mortgage insurance is a real line item in your PITI, and it is where the true cost difference hides.

What each loan is

An FHA loan is insured by the Federal Housing Administration. The government does not lend you the money — an approved private lender does — but the FHA guarantees the loan, which lets lenders take on borrowers they would otherwise reject. That guarantee is why FHA allows low down payments and lower credit scores.

A conventional loan is any loan not backed by a government agency. Most are "conforming" loans that follow the rules set by Fannie Mae and Freddie Mac. Because there is no government guarantee, the borrower carries more of the risk — which is why conventional loans want higher credit scores and, below 20% down, charge private mortgage insurance.

Down payment: 3.5% vs 3–20%

FHA's headline number is a 3.5% down payment, available to borrowers with a credit score of 580 or higher. With a score between 500 and 579, FHA still works but requires 10% down. On a $400,000 home, 3.5% is $14,000; 10% is $40,000.

Conventional loans have a floor of 3% down through programs like HomeReady and Home Possible, but 3% programs have income or first-time-buyer requirements and a 620 minimum score. In practice, most conventional buyers put down 5% to 20%. On that same $400,000 home, 5% is $20,000 and 20% is $80,000.

The down payment is not just about qualifying — it changes your monthly cost in two ways: a larger loan balance (more interest) and mortgage insurance (added below 20%). Weigh both.

Credit score: how lenient each is

FHA is the clear winner for thin or damaged credit. You can get an FHA loan with a score in the 500s, and the interest rate does not punish you as steeply as conventional rates do at the low end. FHA was designed precisely for first-time and recovering-credit borrowers.

Conventional loans generally want a 620 or higher, and the best conventional rates go to borrowers at 740 and above. Below roughly 660, conventional pricing deteriorates quickly, and at some point FHA becomes cheaper even with its mortgage insurance. If your score is under 700, run the numbers on both before assuming conventional is cheaper.

The real differentiator: mortgage insurance

This is where FHA and conventional truly diverge, and where the lifetime cost difference lives.

FHA mortgage insurance has two parts. First, an upfront premium of 1.75% of the loan amount, which is typically rolled into the loan balance. On a $386,000 loan (3.5% down on $400,000), that is $6,755 added to the principal before you make a single payment. Second, an annual premium of 0.55% of the loan, paid monthly. That is about $177 a month on that same loan.

The catch: on most FHA loans with under 10% down, that annual mortgage insurance lasts for the entire life of the loan. You do not shed it at 20% equity the way you do with conventional PMI. The only way out is to refinance into a conventional loan later, or to have put at least 10% down, in which case it drops after 11 years.

Conventional PMI is simpler. If you put down less than 20%, you pay private mortgage insurance — typically 0.5% to 1.5% of the loan per year, with the exact rate driven by your credit score and down payment. A strong borrower with 10% down might pay around 0.5%; a weaker borrower with 3% down might pay 1% or more. On a $360,000 loan, 0.5% is $150 a month and 1% is $300 a month.

The advantage: PMI drops automatically once your loan reaches 78% of the original home value, and you can request removal at 80% — typically 20% equity. FHA's premium, by contrast, often never drops. That is the single biggest reason conventional is usually cheaper over the long run for buyers who can qualify.

Head-to-head summary

Factor	FHA	Conventional
Minimum down payment	3.5% (580+ score)	3% (HomeReady/Home Possible)
Minimum credit score	500–579 (10% down)	620 typical
Upfront insurance	1.75% of loan	None
Monthly insurance	0.55%/year, often for life	0.5–1.5%/year, drops at 20% equity
Best for	Low credit, small down payment	Strong credit, 5%+ down

A worked cost comparison

Assume a $400,000 home and a 6.5% rate on a 30-year term.

FHA with 3.5% down ($14,000 down, $386,000 loan):

• Upfront MIP rolled in: about $6,755
• Monthly principal and interest: about $2,440
• Monthly MIP: about $177
• Total P&I + MIP: about $2,617 a month, and the MIP never leaves

Conventional with 10% down ($40,000 down, $360,000 loan):

• No upfront premium
• Monthly principal and interest: about $2,276
• Monthly PMI (0.5%, strong credit): about $150
• Total P&I + PMI: about $2,426 a month, and PMI disappears around year 8

The conventional borrower pays about $190 less a month despite borrowing only $26,000 less, and their insurance eventually vanishes. The FHA borrower pays a lower entry cost ($14,000 vs $40,000 down) but carries insurance forever. Which is "better" depends entirely on how much cash you have today versus what you can afford monthly.

Which to pick

Choose FHA if your credit score is under 660, you have only 3.5% to 5% to put down, or you have a recent credit event that blocks conventional approval. FHA gets you into a home when the conventional door is shut, and you can refinance out of it later once your equity and credit improve.

Choose conventional if your score is 660 or higher and you can put down at least 5% — and especially if you can reach 20% and skip PMI entirely. For a strong borrower, conventional is almost always cheaper over the life of the loan, largely because the insurance drops off.

The decisive test is the total monthly PITI on each, not just the down payment. Plug both into the HomeMath calculator with your state's tax and insurance and compare the full number — including the insurance line that FHA never sheds.

Frequently asked questions

Can I get rid of FHA mortgage insurance?

Only by refinancing into a conventional loan, or by having put down at least 10%, in which case it drops after 11 years. With under 10% down it lasts the life of the loan.

Is 3% down conventional better than 3.5% down FHA?

For a strong-credit borrower, usually yes, because conventional PMI drops at 20% equity while FHA MIP often does not. But 3% conventional programs have income or first-time-buyer limits, so check eligibility.

What credit score do I need for FHA?

580 for a 3.5% down payment. Between 500 and 579, you need 10% down. Many lenders set their own overlays above these FHA minimums.

Does FHA have a maximum loan amount?

Yes, FHA loan limits vary by county, with a national floor around $498,000 for 2025 and higher limits in expensive areas. Conventional conforming loans have a similar county-based ceiling around $806,500 for 2025.

Compare FHA and conventional on your own numbers with the HomeMath mortgage calculator — the difference is often larger than it first appears.