Two Buyers, One $340,000 House
Two households make offers on identical three-bedroom homes on the same street in a Columbus suburb. Both buyers have credit scores around 640 and about $20,000 in the bank. One closes with an FHA loan, the other with a conventional loan. Their monthly housing payments land roughly $120 apart, and over seven years that gap quietly adds up to more than $20,000.
That’s the real shape of the conventional vs FHA mortgage decision. It isn’t a contest where one program is simply better. It’s a question of which loan fits your credit score, your cash, and how long you plan to keep the house.
The Structural Difference That Drives Everything
Conventional loans come from lenders and get sold to Fannie Mae or Freddie Mac. Until that sale happens the lender is exposed, so it prices your risk into both the interest rate and the mortgage insurance. FHA loans are insured by the Federal Housing Administration, so lenders accept lower scores, thinner credit files, and higher debt-to-income ratios. They charge for that leniency through mortgage insurance premiums that are considerably harder to escape than conventional private mortgage insurance.
Every other difference between these two loans flows from that one tradeoff: easier approval in exchange for a longer, stickier insurance bill.
Where Conventional Loans Win
Your credit score is 700 or better
Conventional pricing falls fast as scores climb. Borrowers at 740 and above get the best advertised rates and face small loan-level price adjustments. At 640, those same adjustments can add three-quarters of a point or more to your rate, which is exactly why FHA so often beats conventional for mid-credit buyers.
You’re putting 20% down, or you’ll get there
Conventional PMI usually runs 0.3% to 1.5% of the loan balance each year. On a $323,000 loan that’s roughly $80 to $400 a month. The important part is that it stops. You can ask the servicer to remove it at 80% loan-to-value, and it must terminate automatically at 78% based on your original amortization schedule. No refinance required.
You’re borrowing above the FHA limit
FHA caps vary by county, from roughly $541,000 in low-cost areas up to about $1.2 million in expensive metros. Above that ceiling you’re looking at a jumbo mortgage, which follows its own underwriting rules and usually rewards strong credit and larger cash reserves.
What conventional costs you
- Score floor: 620 at most lenders, though plenty add overlays of 640 or 660.
- Debt-to-income limits: automated approvals generally top out near 50%, and manual underwriting sits closer to 43%.
- No assumability: if you lock in a low rate, a future buyer can’t take over the loan. On an FHA loan, they can.
Where FHA Loans Win
Credit scores between 500 and 680
A 580 score gets you in with 3.5% down. Between 500 and 579, you’ll need 10% down. FHA also allows a non-occupant co-borrower, such as a parent, to help you qualify, which is much harder to arrange on a conventional loan. If you’re near the edge of qualifying, the FHA mortgage guide walks through the specific documents and thresholds underwriters review.
Thin or bruised credit files
FHA underwriting gives weight to rental payment history in ways conventional automated systems don’t. A buyer with two years of clean rent and no credit cards can often qualify FHA and get declined conventional.
You need help with cash to close
FHA lets the seller contribute up to 6% of the purchase price toward your closing costs, compared with about 3% on a low-down-payment conventional loan. Gift funds from family are allowed with a simple letter. Combined with a 3.5% down payment, that’s why FHA stays the most realistic path for many first-time buyers, though it’s worth checking whether you can buy a home with no money down through state and nonprofit programs.
What FHA costs you
You pay an upfront premium of 1.75% of the base loan amount, which is $5,742 on a $328,100 loan, and it gets rolled into what you finance. Then there’s an annual premium of 0.55% for most 30-year loans with less than 5% down. Put down 10% or more and the annual premium drops to 0.50% and expires after 11 years. Put down less than 10% and it lasts for the life of the loan.
FHA also appraises more strictly. Peeling paint, a broken stair rail, or a missing porch handrail can stall a closing, and sellers with multiple offers sometimes skip FHA buyers for that reason alone.
Running the Numbers on That $340,000 House
Here’s the same purchase price with two different borrower profiles. Rates are illustrative, but the relationships hold in most markets.
640 score, FHA, 3.5% down
- Loan amount with upfront MIP financed: $333,842 at 6.5%
- Principal and interest: about $2,110
- Annual mortgage insurance premium: about $150
- Total: roughly $2,260 per month
640 score, conventional, 5% down
- Loan amount: $323,000 at 7.25%
- Principal and interest: about $2,203
- PMI at 0.65%: about $175
- Total: roughly $2,378 per month
760 score, conventional, 5% down
- Loan amount: $323,000 at 6.25%
- Principal and interest: about $1,989
- PMI at 0.30%: about $81
- Total: roughly $2,070 per month
For the 640-score borrower, FHA wins by about $118 a month, and that advantage grows because FHA insurance doesn’t go away without a refinance. For the 760-score borrower, conventional wins by nearly $200 a month and gets cheaper again once PMI drops off. Same house, very different math.
When Each Loan Is the Obvious Choice
- Go FHA if your score is under 680, you have less than 10% to put down, your debt-to-income ratio is above 45%, or you need the seller to cover closing costs.
- Go conventional if your score is 740 or higher, you can put 10% to 20% down, you’re buying above the FHA loan limit, or you’re purchasing a second home or investment property.
- Price both if your score sits between 680 and 720. This band is genuinely close, and the answer depends on the rate quote you get that day.
Getting Out of FHA Insurance Later
The exit door exists, and it’s a refinance into a conventional loan. Once you have 20% equity through paydown or appreciation, most lenders will move you across with no PMI. FHA streamline rules require six payments made and 210 days of seasoning, so the earliest realistic window is about seven months after closing.
That timeline matters when you compare costs. A borrower planning to refinance in year three or four should treat FHA insurance as a temporary expense rather than a permanent one. Borrowers stretching payments with a 40-year mortgage should be more careful, since slower principal reduction delays the point where refinancing makes sense.
Assumability Is the FHA Advantage Nobody Prices In
FHA loans are assumable, meaning a buyer can take over your mortgage at your existing rate with the lender’s approval. Conventional loans mostly are not. If you bought or refinanced at 3%, that feature is worth real money to a future buyer, potentially tens of thousands of dollars, and it gives you leverage in a slow market. It cuts the other way too: whoever assumes your FHA loan inherits the mortgage insurance premium.
Questions to Ask Before You Lock
Ask your loan officer for side-by-side Loan Estimates on the same house, one FHA and one conventional, priced at your actual credit score. Then ask four specific things: the exact monthly mortgage insurance figure on each, the loan-to-value percentage where conventional PMI drops off, whether you’d qualify for a lower-rate conventional loan after 12 months of on-time payments, and how seller concession limits differ on each offer you plan to write. Those four answers decide what you’ll actually pay, and they beat any general rule about which program is better.