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FHA vs conventional loan

FHA vs conventional mortgage: down payment, credit score, PMI rules, and total cost. Use our free FHA and mortgage calculators to model your own numbers.

Updated April 2026 · 7 min read
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FHA and conventional are the two dominant US mortgage categories for first-time buyers, and they attract fundamentally different profiles. FHA loans are government-backed, meant to help lower-credit and lower-down-payment buyers into homeownership. Conventional loans are privately issued, usually require stronger credit and larger down payments, and reward that stronger profile with lower long-term costs. The choice often isn't really a choice — it's determined by your credit score, cash on hand, and debt-to-income ratio — but when you do have both options, the tradeoffs are subtle enough that people genuinely get it wrong.

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Option 1

FHA loan

FHA-insured, lower credit/down-payment bar, but you pay mortgage insurance for the life of the loan in most cases.

Best for

First-time buyers with credit scores between 580–680, limited down payment (3.5–10 percent), and debt-to-income ratios at or slightly above conventional limits.

Pros

  • Minimum credit score of 580 (vs 620–640 for conventional at most lenders).
  • Down payment as low as 3.5% of purchase price.
  • More lenient debt-to-income limits (up to 57% with compensating factors).
  • Assumable — a future buyer can take over your loan at its original rate, which is a big bonus if rates rise.
  • Great for buyers with recent credit recovery (post-bankruptcy/short-sale).

Cons

  • Mortgage Insurance Premium (MIP) is usually required for the life of the loan — adds 0.55% annually to your payment, forever.
  • Plus an upfront MIP of 1.75% financed into the loan.
  • Loan limits are lower than conventional in many counties.
  • Sellers sometimes prefer conventional offers (perception of fewer contingencies).
  • Stricter property condition requirements — the home must pass an FHA appraisal.

Option 2

Conventional loan

Private loan backed by Fannie Mae or Freddie Mac, better long-term cost for qualified borrowers.

Best for

Buyers with 680+ credit, 5–20% down payment ready, debt-to-income under 43–45%, and a plan to build equity (so PMI drops off).

Pros

  • Private Mortgage Insurance (PMI) drops off automatically at 78% loan-to-value — unlike FHA's lifetime MIP.
  • Better interest rates for good-credit borrowers.
  • No upfront insurance premium.
  • Higher loan limits — useful in expensive markets.
  • More flexible on property condition.

Cons

  • Minimum 620+ credit (most lenders), 680+ for best rates.
  • Minimum 5% down for primary residence (3% via specific programs).
  • Stricter debt-to-income requirements.
  • PMI rates are often higher than FHA's MIP for borrowers with sub-700 credit — partially offsetting the 'drops off' advantage.

The verdict

The simplest rule: if you have a credit score of 700+ and at least 5% down, conventional almost always wins long-term because of the dropping-off PMI. Below 680 credit, FHA is usually cheaper in the short term and more likely to get you approved. Between 680 and 700 with 5-10% down, run both scenarios in a calculator — the break-even depends heavily on how long you plan to keep the loan. If you plan to refinance within 5 years anyway (which is common), the FHA's lifetime-MIP disadvantage matters less.

The refinance escape hatch

A common strategy: take out an FHA loan to get into the house, then refinance into a conventional once you have 20% equity — either through appreciation or principal payments. This gets you into homeownership with a low down payment, then removes the lifetime MIP. Downside: two sets of closing costs, and refinances depend on rates being favorable when you want to move.

What about VA and USDA loans?

If you're eligible for a VA loan (military service/spouse) or USDA loan (rural property), those typically beat both FHA and conventional — VA has no down payment and no PMI, USDA has no down payment and lower PMI-equivalent costs. Check eligibility before defaulting to FHA or conventional.

Run the numbers yourself

Plug your own inputs into the free tools below — no signup, works in your browser, nothing sent to a server.

Free toolFHA Loan CalculatorEstimate monthly payments on an FHA loan with mortgage insurance premium (MIP) factored in. First-time homebuyer friendly.Open tool →Free toolMortgage CalculatorEstimate your monthly mortgage payment, total interest, and payoff schedule. Free, fast, and mobile-friendly.Open tool →

Frequently asked questions

Can I remove MIP on an FHA loan later?

Only if you took out the loan with 10%+ down (in which case MIP drops off after 11 years) or you refinance into a conventional loan. The default lifetime MIP is why many FHA borrowers eventually refinance.

Is PMI or MIP tax deductible?

As of 2026, the mortgage insurance deduction has expired at the federal level and is not guaranteed to return. State rules vary.

What credit score do I need for each?

FHA: 580 minimum for 3.5% down, 500–579 for 10% down. Conventional: 620 minimum, 660–680 for decent rates, 740+ for best rates.

Do sellers actually discriminate against FHA offers?

In competitive markets, yes — appraisal standards are stricter. In normal markets, the loan type rarely matters if your offer is otherwise strong.

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