Two buyers make an offer on the same $325,000 house. Both have 620 credit scores. One uses an FHA loan, the other goes conventional. The FHA buyer puts 3.5% down and pays a 1.75% upfront mortgage insurance premium. The conventional buyer puts 3% down and pays monthly private mortgage insurance. Their monthly payments land within $40 of each other. Five years later, one has a much cheaper path to dropping mortgage insurance.
Neither loan program is universally better. The right answer changes based on your credit score, cash savings, how long you’ll keep the home, and the property you’re buying. Here’s how to figure out which mortgage actually costs less for your situation.
The core difference: government-backed vs. lender-backed
An FHA loan is insured by the Federal Housing Administration. If you default, the lender gets paid by the government. That insurance lets lenders approve borrowers with lower credit scores, smaller down payments, and higher debt-to-income ratios.
A conventional loan isn’t government-insured. Most are conforming loans sold to Fannie Mae or Freddie Mac. Lenders take on more risk, so they price loans based on your credit score and down payment. Strong credit gets a great rate. Weak credit gets expensive fast.
- Minimum down payment: FHA 3.5% with a 580 score; conventional 3% for qualified first-time buyers, often 5% or more otherwise.
- Credit score: FHA 580 for 3.5% down, 500 with 10% down; conventional usually 620 minimum, with better pricing at 740+.
- Mortgage insurance: FHA charges an upfront premium plus annual MIP; conventional charges monthly PMI with no upfront premium, and PMI can be canceled.
- DTI: FHA often allows up to 50% with compensating factors; conventional generally caps around 45% to 50% with strong reserves.
- Seller concessions: FHA allows up to 6%; conventional often caps at 3% for low-down-payment loans.
The down payment math doesn’t end at the down payment
Say you’re buying a $300,000 home. An FHA loan with 3.5% down requires $10,500. Your base loan is $289,500. FHA adds an upfront mortgage insurance premium of 1.75%, or $5,066, which you can finance. Your total loan becomes $294,566.
A conventional loan with 3% down requires $9,000, leaving a $291,000 loan. No upfront mortgage insurance premium. On paper, conventional looks cheaper already.
Then monthly costs show up. FHA annual MIP on a 30-year loan with less than 10% down is 0.55% of the base loan. That’s $132 per month. Conventional PMI depends on your credit score. With a 620 score and 97% loan-to-value, PMI might run 1.5% annually, or $364 per month. With a 760 score, it could be 0.3%, or $73 per month.
Mortgage insurance: the real long-term cost
FHA MIP vs. conventional PMI
FHA mortgage insurance comes in two pieces. The upfront premium is 1.75% of the base loan, paid at closing or financed. The annual MIP is paid monthly. For a 30-year FHA loan with less than 10% down, that annual MIP usually lasts the life of the loan. Put 10% down and the annual MIP drops to 0.50% and ends after 11 years. The only way to remove FHA MIP sooner is to refinance into a conventional loan.
Conventional PMI has no upfront premium. It’s a monthly cost that can be removed. Once you reach 20% equity, you can ask your lender to cancel PMI. At 22% equity based on the original amortization schedule, the lender must automatically terminate it. Some lenders also allow cancellation based on a new appraisal if your home value has risen, though rules vary.
If you put 3.5% down on an FHA loan, you’re signing up for mortgage insurance until you sell, refinance, or pay off the loan. On a conventional loan, PMI is temporary by design.
Credit score: the biggest fork in the road
FHA loans are more forgiving. A 580 score gets you 3.5% down. A 500 to 579 score can still qualify with 10% down. FHA also allows non-traditional credit histories, like rent and utility payments, and stretches DTI further with compensating factors such as cash reserves.
Conventional loans are stricter. Most lenders want a 620 score for a 3% down conventional loan. Below that, you’re likely looking at FHA. Once your score crosses 700, conventional pricing improves quickly. At 740 or higher, conventional loans often beat FHA on rate and mortgage insurance combined.
Past credit events matter too. FHA allows a new loan 2 years after a Chapter 7 bankruptcy and 3 years after a foreclosure. Conventional waiting periods are typically 4 years after bankruptcy and 7 years after foreclosure. If you’re 3 years out from a foreclosure, FHA may be your only mainstream option.
When an FHA loan is the better mortgage
FHA wins in specific situations:
- Your credit score is between 580 and 649, and you need to buy before it improves.
- You have limited savings and need seller-paid closing costs to get to the table.
- Your debt-to-income ratio is above 45%, but you have compensating factors.
- You had a bankruptcy 2 to 3 years ago or a foreclosure 3 to 4 years ago.
- You’re buying in a lower-price market where the home fits under the FHA loan limit.
In these cases, FHA flexibility can get you into a home years earlier. The upfront MIP and lifetime annual MIP are the price of admission. If you plan to refinance into a conventional loan in 2 or 3 years, FHA can be a bridge rather than a destination.
When conventional is the smarter bet
Conventional usually wins when your credit is strong and your down payment is at least 5%:
- Your credit score is 700 or higher.
- You can put 5% to 20% down.
- You want mortgage insurance to end automatically.
- You’re buying a home above the FHA loan limit.
- You’re buying an investment property or second home, which FHA doesn’t allow.
Run a real example. A $400,000 home with 10% down and a 740 score. FHA base loan is $360,000. Upfront MIP is $6,300. Annual MIP at 0.50% is $1,800 per year, or $150 per month for 11 years. Conventional PMI at 0.3% is $1,080 per year, or $90 per month, and it can cancel after about 4 years. Conventional saves $60 per month, avoids the $6,300 upfront premium, and ends PMI years sooner. Over five years, that’s close to $10,000 in savings.
Loan limits and property rules
For 2025, the FHA loan limit floor is $524,225 in low-cost areas, with a ceiling of $1,209,750 in high-cost markets. The conventional conforming limit is $806,500 in most of the country, also up to $1,209,750 in high-cost areas. If the home costs more than the FHA limit, you’ll need a conventional or jumbo loan.
Property condition matters too. FHA appraisals are stricter about peeling paint, missing handrails, roof condition, and safety issues. That can slow a purchase or force repairs. FHA also requires the home to be your primary residence, and condos must be in an FHA-approved project. Conventional loans offer more flexibility for condos, second homes, and investment properties.
How to compare offers without getting lost
Get a Loan Estimate from two or three lenders on the same day. Ask each one to quote both an FHA and a conventional loan using your actual credit score and down payment. Then compare the monthly payment including principal, interest, taxes, insurance, and MIP or PMI. Compare upfront costs, including the FHA upfront MIP and closing costs. Compare total cost over 5 years and 10 years, and ask when mortgage insurance ends.
A lower interest rate means nothing if the mortgage insurance is $200 more per month and never goes away. Ask each lender to show the PMI or MIP cost separately, and ask what you’d need to do to remove it.
The refinance escape hatch
Some buyers take FHA now and refinance to conventional later. That can work well if your credit score improves and your home value rises. But it’s not free. Closing costs on a refinance often run 2% to 3% of the loan amount. If you pay $4,000 to refinance and save $150 per month, your break-even is about 27 months. Move before then, and you’ve lost money.
If you expect to stay in the home for 10 years and you qualify for conventional today, conventional is usually the better mortgage from day one. If you won’t qualify for conventional for another two years, FHA may still be the fastest path to homeownership.
What actually decides it
If your credit score is below 650, FHA is often the only realistic path. If it’s 700 or higher, conventional usually wins after you add up the mortgage insurance savings. Between 650 and 699, get both quotes and compare the five-year total cost, not just the interest rate.
The better mortgage is the one that gets you to closing with cash left over and a payment you can handle if property taxes or insurance rise. A slightly lower rate is not worth signing up for mortgage insurance that lasts forever. Run your numbers, ask about the exit plan, and choose the loan that fits the next five years of your life, not just the next five minutes at the closing table.