Short answer: With a credit score in the mid-700s and at least 5% down, a conventional loan usually costs less over time because its mortgage insurance is cheaper and goes away. With a score in the 500s or low 600s, a very small down payment, or recent credit events, FHA is often the loan that actually closes, and its mortgage insurance is priced the same for everyone. In the middle (roughly 620 to 720 with 3 to 5% down) it is a real comparison that has to be run both ways with your numbers; no rule of thumb replaces that.
Written by Eric Peterson, Mortgage Loan Originator · NMLS #620962
The Lending Dad, powered by NEXA Lending — NEXA Mortgage, LLC · NMLS #1660690. In the mortgage industry since 2001, originating since 2003. Based in North Texas; licensed in TX, CA, FL, OK & AR. About Eric →
What the two loans actually are
An FHA loan is a mortgage insured by the Federal Housing Administration, part of HUD. The lender still makes the loan; FHA insures it, and you pay for that insurance. Because of the insurance, FHA tolerates lower scores and smaller down payments than most conventional programs.
A conventional loan is not government-insured. Most are "conforming" loans sold to Fannie Mae or Freddie Mac under their rules. When you put down less than 20%, the lender requires private mortgage insurance (PMI) from a private insurer, priced on your credit and down payment.
Program rules vs. lender requirements
Keep these two layers separate; mixing them up causes most of the bad advice online.
- Program rules are the floor set by HUD (FHA) or Fannie Mae and Freddie Mac (conventional). They say what is allowed.
- Lender requirements ("overlays") are stricter rules an individual lender adds on top. A lender can require a 620 score on FHA even though HUD allows 500. That is the lender's choice, not the program.
As a broker I can place a file with different wholesale lenders, which is exactly how I work around one lender's overlay when the program itself allows the loan. The figures below are the program rules unless marked otherwise.
1. Down payment
- FHA: 3.5% minimum with a credit score of 580 or higher. With a score of 500 to 579, the minimum is 10%. Below 500, FHA is not available. (HUD Handbook 4000.1.)
- Conventional: 3% minimum on standard 97% programs and on Fannie Mae HomeReady / Freddie Mac Home Possible for eligible buyers; 5% on most other conventional purchase loans. Second homes and investment properties need more.
- Gift funds: both programs allow the down payment to come from an eligible gift (family, in most cases). Documentation rules differ slightly; both are workable.
- Seller concessions toward closing costs: FHA allows the seller to pay up to 6% of the price. Conventional allows 3% when you put down less than 10%, 6% between 10% and 25%, and 9% above 25%.
2. Credit considerations
- FHA: the program minimum is 500 (with 10% down) or 580 (with 3.5% down). FHA pricing is less sensitive to score than conventional pricing, which is why a 620 borrower often gets a noticeably better FHA rate than a conventional one. Lenders commonly add overlays in the 580 to 640 range.
- Conventional: since November 2025, Fannie Mae's Desktop Underwriter no longer applies a fixed minimum credit score; the automated decision looks at the whole file (Selling Guide B3-5.1-01). Manually underwritten loans still carry minimums (generally 620, or 640 for some). The bigger effect of credit on conventional loans is price: the agencies' loan-level price adjustments and PMI premiums both rise as the score falls, so a lower-score borrower pays more every month.
- Recent credit events: FHA's waiting periods after a bankruptcy or foreclosure are generally shorter than conventional's. If you had one in the last few years, that alone can decide it.
3. Mortgage insurance: the deciding cost for most people
FHA mortgage insurance premium (MIP) has two parts, and the rates are set by HUD, not by your credit score:
- Upfront MIP: 1.75% of the base loan amount, almost always financed into the loan.
- Annual MIP (collected monthly): for a 30-year loan at or under the FHA base limit, 0.55% per year when the loan is above 95% of value (that is the 3.5%-down case) and 0.50% at 95% or below. Fifteen-year terms are lower (0.15% to 0.40%). Larger loans pay a little more.
- How long: with less than 10% down, annual MIP stays for the life of the loan. With 10% or more down, it ends after 11 years. The only way most FHA borrowers drop MIP is to refinance into a conventional loan later. (HUD Mortgagee Letter 2023-05.)
Conventional private mortgage insurance (PMI) is priced by a private insurer on your credit score, down payment and other factors, so it ranges from very cheap to expensive:
- Cost: there is no single rate. For a strong-credit borrower with 5 to 10% down it is commonly a fraction of the FHA figure; for a lower-score borrower with 3% down it can be higher than FHA's 0.55%.
- Cancellation: under the federal Homeowners Protection Act you can ask to cancel borrower-paid PMI once the balance reaches 80% of the original value (with a good payment history), and the servicer must cancel it automatically at 78%. With rising values, an earlier cancellation based on a new appraisal may be available under the investor's rules. There is no upfront premium on standard monthly PMI.
Illustrative example (not a quote)
A $350,000 purchase of a primary residence, 30-year term. Interest rate, taxes and homeowners insurance are deliberately left out so the mortgage-insurance difference is the only thing being compared. Actual MI premiums depend on your file.
| Item | FHA, 3.5% down | Conventional, 5% down |
|---|---|---|
| Down payment | $12,250 | $17,500 |
| Base loan | $337,750 | $332,500 |
| Upfront mortgage insurance | $5,911 (1.75%, financed; total loan $343,661) | $0 |
| Monthly mortgage insurance, first year | about $155 (0.55% per year) | roughly $80 to $250 depending on credit score (illustrative range, not a quote) |
| When it ends | Never, unless you refinance | Cancellable at 80% of original value; automatic at 78% |
Example figures are arithmetic on the stated assumptions only. Loan amounts are rounded. The conventional PMI range is illustrative; a real quote comes from the insurer for your score and down payment.
4. Upfront costs and property rules
- FHA adds the 1.75% upfront premium (usually financed, so it shows up as a bigger loan rather than cash at closing). FHA appraisals also check minimum property standards, so a home with peeling paint, a bad roof or a missing handrail may need repairs before closing.
- Conventional has no upfront insurance premium on standard PMI. Appraisals look at value and condition but with fewer prescribed repair items.
- Closing costs (title, escrow setup, lender fees, prepaid taxes and insurance) are similar in kind for both. The seller-concession limits above decide how much of that can be shifted to the seller.
5. Monthly payment
Your payment on either loan is principal and interest, property taxes, homeowners insurance, and mortgage insurance. Three things move the comparison:
- Rate: FHA note rates are often a little lower than conventional for the same borrower, more so at lower credit scores. But FHA's annual MIP usually erases that advantage for strong-credit borrowers.
- Mortgage insurance: see above. This is the swing factor.
- Loan size: the financed FHA upfront premium adds to the balance you pay interest on.
I never publish a rate on this page, because any rate I posted today would be wrong tomorrow and would not be your rate. A real comparison uses the same day's pricing for both loans on your actual file.
6. How long you expect to keep the home (and the loan)
- Keeping it a long time with less than 10% down: FHA's life-of-loan MIP is the cost that compounds. Conventional, if you qualify, usually wins over ten-plus years, and conventional PMI simply ends.
- Planning to refinance or sell within a few years: the upfront FHA premium matters more (you pay it even if you leave soon) but the life-of-loan issue matters less. FHA's lower rate and easier qualifying can make it the practical choice.
- Buying now with FHA, refinancing to conventional later: a common and legitimate path once credit and equity improve. It is a plan, not a promise: it depends on future rates, values and your credit at that time.
Other differences that can decide it
- Occupancy: FHA is for a primary residence only (including 2 to 4 unit homes you live in). Conventional also covers second homes and investment properties.
- 2026 loan limits: conforming conventional loans go up to $832,750 for a one-unit home in most counties. The FHA floor for 2026 is $541,287, with higher limits in higher-cost counties and a ceiling of $1,249,125. If the price is above the FHA limit for your county, FHA is off the table.
- Debt-to-income: both use automated underwriting; FHA tends to approve higher ratios with compensating factors.
- Condos: FHA requires the project or unit to meet HUD's condo rules; conventional has its own project review.
- Assumability: FHA loans are assumable by a qualified buyer, which can be a selling point later. Conventional loans generally are not.
Which one tends to fit
- Conventional usually fits when: credit is roughly 720 or better, you have 5% or more (or 3% with strong credit on an eligible program), and you plan to stay a while.
- FHA usually fits when: credit is in the 500s to mid-600s, you have 3.5% down, your debt ratio is on the high side, or there is a recent credit event.
- Run both when: credit is 620 to 720 with 3 to 5% down. The crossover depends on the PMI quote for your score and that day's pricing, and it moves.
None of this is an approval. Eligibility, pricing and the loan-to-loan comparison require a review of your actual credit, income, assets and the property.
Buyer comparison checklist
Gather these and the comparison takes about fifteen minutes. Print this section or save it as a PDF from your browser.
- Your middle credit score (or a recent report) and any late payments, collections, bankruptcy or foreclosure dates
- Down payment you can actually make, and whether any of it is a gift
- Price range and the county you are buying in (for the FHA limit)
- Primary residence, second home or investment property
- Monthly debts that will still exist after closing (car, student loans, cards, child support)
- How long you realistically expect to keep the home and the loan
- Whether the seller is likely to pay closing costs (and how much)
- Property type: single family, condo, 2 to 4 units, and its condition
- Two columns to fill in: FHA and conventional, each with down payment, upfront MI, monthly MI, when MI ends, estimated payment, and cash to close
Want it run both ways on your numbers?
Start with the purchase planner: it lays out total payment, cash to close and seller concessions for your price range without a hard credit pull. Then ask me to review the FHA and conventional versions side by side.
Sources (reviewed 2026-11-02)
- HUD Single Family Housing Policy Handbook 4000.1 (credit score and maximum financing: 580 and 500 to 579 tiers; seller concessions)
- HUD Mortgagee Letter 2023-05: FHA annual mortgage insurance premium rates and duration
- HUD: FHA mortgage limits (2026 floor and ceiling; county lookup)
- FHFA: 2026 conforming loan limit values ($832,750 baseline, one unit)
- Fannie Mae Selling Guide B3-5.1-01: credit score requirements (DU minimum score change for casefiles created on or after November 16, 2025)
- Fannie Mae Selling Guide B3-4.1-02: interested party contribution limits (3% / 6% / 9%)
- CFPB: when private mortgage insurance can be removed (Homeowners Protection Act: 80% request, 78% automatic)
This article is general education, not individualized financial, legal or tax advice, and not an offer or commitment to lend. Program rules change and lenders apply their own guidelines; confirm current requirements with a licensed mortgage professional. All loans are subject to credit approval, underwriting and property eligibility. Eric Peterson, Mortgage Loan Originator, NMLS #620962, originates through NEXA Mortgage, LLC dba NEXA Lending, NMLS #1660690, Equal Housing Lender.