FHA vs Conventional Loan: A Complete Side-by-Side Comparison
Updated 30 March 2026
FHA and conventional loans are the two most common mortgage types, and choosing between them can save or cost you thousands of dollars over the life of the loan. The right choice depends on your credit score, down payment size, and how long you plan to stay in the home. FHA loans are more accessible (lower credit score and down payment requirements) but carry permanent mortgage insurance. Conventional loans require stronger credit but allow you to eliminate mortgage insurance once you reach 20% equity.
| Feature | FHA Loan | Conventional Loan |
|---|---|---|
| Minimum credit score | 580 (3.5% down) or 500 (10% down) | 620 (most lenders) |
| Minimum down payment | 3.5% | 3% (some programs) |
| Mortgage insurance | MIP: 1.75% upfront + 0.55%/yr (permanent) | PMI: 0.5-1.5%/yr (removable at 20% equity) |
| DTI limit | Up to 50% (with compensating factors) | Usually 43% max |
| Loan limits (2026) | $498,257 (standard) to $1,149,825 (high-cost) | $766,550 (standard) to $1,149,825 (high-cost) |
| Property requirements | Must meet FHA minimum standards | Less restrictive |
| Interest rates | Often 0.125-0.25% lower than conventional | Slightly higher but depends on credit |
| Assumable? | Yes (buyer can take over your loan) | No |
| Best for | Credit score 580-679, limited down payment | Credit score 680+, 10-20% down payment |
The Mortgage Insurance Cost Difference
This is the single biggest factor in the FHA vs conventional decision. FHA mortgage insurance premium (MIP) has two components: an upfront premium of 1.75% of the loan amount (usually rolled into the loan) and an annual premium of 0.55% of the loan amount (paid monthly). On a $300,000 FHA loan, upfront MIP is $5,250 and annual MIP is $1,650/year ($137.50/month). Critically, FHA MIP is permanent for loans with less than 10% down. It never goes away unless you refinance into a conventional loan.
Conventional PMI typically costs 0.5% to 1.5% of the loan amount annually, depending on credit score and down payment percentage. On a $300,000 conventional loan with 5% down and a 720 credit score, PMI is approximately $125/month. The key advantage: conventional PMI is automatically removed when your loan balance reaches 78% of the original home value (or you can request removal at 80%). On a 30-year loan, this typically happens in year 7-10, saving decades of insurance payments compared to FHA.
Example: $350,000 Home, 5% Down, 700 Credit Score
FHA Loan ($337,750 loan + $5,910 upfront MIP)
Conventional Loan ($332,500 loan)
Conventional saves $42,552 in mortgage insurance over 30 years despite the slightly higher interest rate.
When FHA Is the Better Choice
Credit score below 680
FHA rates are less sensitive to credit score than conventional. A 620-score borrower may get a 6.75% FHA rate vs 7.5% conventional, a difference that exceeds the MIP cost on shorter hold periods.
High DTI ratio (43-50%)
FHA allows DTI up to 50% with compensating factors (significant cash reserves, minimal payment shock). Conventional usually caps at 43%. If your debts push you above 43%, FHA may be your only option.
Short hold period (under 5 years)
If you plan to sell or refinance within 3-5 years, the lower FHA rate and lower upfront cost may save more than the MIP costs during that period. Run the numbers for your specific timeline.
When Conventional Is the Better Choice
Credit score 680 or higher
At 680+, conventional rates are competitive with FHA, and the ability to remove PMI at 20% equity makes conventional the clear winner for long-term savings.
Down payment of 10% or more
With 10%+ down on a conventional loan, PMI is lower (around 0.3-0.5% annually) and drops off sooner. At 20% down, there is no PMI at all. FHA MIP applies regardless of down payment size (though it drops from 0.55% to 0.50% annual at 10%+ down, and terminates after 11 years instead of being permanent).
Long-term hold (10+ years)
Over 10+ years, the cumulative cost of permanent FHA MIP significantly exceeds conventional PMI that drops off at the 20% equity mark. On a $300,000 loan, the 30-year MIP cost is $55,800 vs approximately $13,000 for conventional PMI that ends in year 8.