FHA vs Conventional Loans
FHA loans accept lower credit scores and smaller down payments. Conventional loans cost less long-term but require stronger credit. The right choice depends on three numbers: your credit score, your down payment, and how long you plan to keep the loan.
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Quick Comparison
| FHA Loan | Conventional Loan | |
|---|---|---|
| Min down payment | 3.5% (with 580+ credit) | 3% (some programs); typical 5-20% |
| Min credit score | 580 (3.5%) or 500 (10% down) | 620 typical; 660+ for best rates |
| Max debt-to-income | 43% standard, up to 57% with compensating factors | 36-45% typical, max 50% |
| Mortgage insurance | MIP for life of loan (if <10% down) or 11 years | PMI cancelable at 20% equity |
| Upfront fee | 1.75% upfront MIP (financed) | None |
| 2026 loan limit (single-family) | $524,225 baseline | $766,550 conforming |
| Property requirements | FHA-approved appraisal (stricter) | Standard appraisal |
Down Payment Reality
FHA's 3.5% minimum down payment is the headline. On a $400,000 home, that is $14,000. Conventional has a 3% First-Time Homebuyer program (Fannie Mae HomeReady, Freddie Mac Home Possible), but most conventional loans practically require 5%, with 20% being the threshold to avoid PMI.
On the same $400,000 home: FHA at 3.5% is $14,000 down. Conventional at 5% is $20,000. Conventional at 20% is $80,000 (no PMI). The cash difference at the start matters when you have limited savings.
The Mortgage Insurance Trap
This is the biggest hidden difference. FHA loans charge two types of mortgage insurance:
- Upfront MIP: 1.75% of the loan amount, financed into the loan ($7,000 on a $400,000 loan).
- Annual MIP: 0.55% of the loan balance, divided by 12 and added to monthly payment.
Critically: if your down payment is less than 10%, FHA MIP lasts for the LIFE of the loan. You cannot cancel it even when you reach 20% equity. The only way out is to refinance into a conventional loan.
Conventional PMI is different. It runs roughly 0.5-1.5% of the loan annually. By law (Homeowners Protection Act), it automatically cancels at 78% loan-to-value (22% equity). You can request cancellation earlier at 80% LTV. So a typical conventional buyer pays PMI for 5-12 years, then keeps the savings forever.
Real Cost Example
$400,000 home, 30-year fixed, 7% interest rate. Compare FHA at 3.5% down vs Conventional at 5% down (both with insurance):
- FHA: $14,000 down + $7,000 financed upfront MIP. Monthly: ~$2,567 (P&I + tax + insurance + ~$176 MIP). After 30 years if MIP stays: total cost ~$928,000.
- Conventional 5% down: $20,000 down. Monthly: ~$2,727 with PMI for ~9 years (until 22% equity), then $2,548. After 30 years: total cost ~$919,000.
- Conventional 20% down: $80,000 down. No PMI. Monthly: ~$2,396. After 30 years: total cost ~$863,000.
FHA looks competitive monthly but loses on lifetime cost when MIP stays. The crossover point is around 7-10 years: if you plan to stay longer, refinancing FHA to Conventional once you have 20% equity recovers the difference.
Credit Score Thresholds
FHA is the obvious choice when conventional is unavailable. Your FICO score determines which programs you qualify for and what rate you will pay:
- 500-579 credit: only FHA qualifies, and only with 10% down (not 3.5%)
- 580-619 credit: FHA at 3.5% down, conventional rarely available
- 620-659 credit: both available, conventional rates are higher; FHA may be cheaper monthly
- 660-739 credit: conventional becomes more attractive due to better PMI rates
- 740+ credit: conventional almost always wins (lower rates, cancelable PMI)
FHA Property Requirements (Stricter Appraisals)
FHA requires the home to meet HUD's Minimum Property Requirements. The appraiser checks: working heating and electrical, no peeling lead-based paint (homes built before 1978), no major safety hazards, sound roof, working plumbing, no termite damage, accessible attic and crawl space.
This trips up homebuyers buying older or fixer-upper properties. Conventional loans are flexible and will lend on homes that need work, with the buyer responsible for repairs after closing. FHA may require repairs BEFORE closing, putting the deal in jeopardy if the seller refuses.
Loan Limits 2026
FHA's baseline single-family limit is $524,225 nationally, with high-cost areas going up to $1,209,750 (Hawaii, Alaska, parts of California, NYC). Conventional conforming limit is $766,550 baseline, $1,149,825 high-cost. Above that, you need a jumbo loan, which has its own underwriting standards.
If you are buying a $700,000 home in most US markets, FHA is not an option. Conventional or jumbo is required.
When FHA Wins
- Credit score 580-639 with limited cash for down payment
- Single-family home under $524k in your area
- Plan to refinance within 5-7 years (out of MIP via conventional refi)
- Down payment 10%+ (eliminates lifetime MIP)
- Multifamily property up to 4 units (FHA-approved condos and 1-4 unit rentals)
When Conventional Wins
- Credit score 660+ (rate spread overcomes higher PMI)
- 20% down available (no PMI period)
- Plan to stay 10+ years (PMI cancellation pays off)
- Buying outside FHA loan limits (most homes over $525k)
- Property may not pass FHA appraisal (older homes, fixer-uppers)
- Investment property or vacation home (FHA is owner-occupied only)
Compare Both Loan Types
Run your specific home price, down payment, and rate through the Mortgage Calculator. Adjust the PMI/MIP rate field to test FHA's 0.55% vs typical conventional 0.5-1.5% to see your true monthly cost.
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