FHA Loan vs Conventional Loan: 7 Key Differences That Could Save You $40,000 in 2026
FHA loans require 3.5% down and lifetime MIP; conventional loans need 3–20% down but drop PMI at 20% equity. The gap can hit $40,000 over a 30-year loan.
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On a $350,000 home, choosing FHA over conventional can cost you $38,000–$42,000 extra over 30 years. Almost all of it comes from mortgage insurance. Most buyers pick FHA for the low down payment without running the long-term math. For more on this topic, see our guide: $150,000 Mortgage at 5.5%: Monthly Payment, Amortization & Total Interest.
Here are the 7 differences that actually move the needle.
1. Down Payment: The Gap Is Smaller Than You Think
FHA requires 3.5% down with a credit score of 580 or higher. Drop below 580 and you need 10%.
Conventional loans go as low as 3% down through Fannie Mae’s HomeReady or Freddie Mac’s Home Possible. The difference between 3% and 3.5% on a $350,000 home? $1,750. Not nothing — but not the deciding factor.
What actually matters: what happens to your mortgage insurance after closing.
2. Mortgage Insurance: Where the $40,000 Comes From
This is the one. FHA charges two layers of mortgage insurance.
Upfront MIP: 1.75% of the loan amount, rolled into your loan at closing. On a $343,875 loan (after 3.5% down on $350k), that’s $6,018 added to your balance.
Annual MIP: 0.55% of the loan balance per year for most 30-year loans — roughly $158/month at the start.
The hard part: FHA MIP never cancels if your down payment is under 10%. You pay it for the life of the loan. Conventional PMI disappears automatically when you hit 22% equity — or you can request removal at 20%. On a typical mortgage, that’s 8–10 years of PMI. After that, zero. For more on this topic, see our guide: $150,000 Mortgage at 6.0%: Monthly Payment, Amortization & Total Interest.
📊 Mortgage Insurance Cost Comparison — $350,000 Home, 30-Year Loan
FHA (3.5% down) Conventional (5% down) Conventional (10% down) Down payment $12,250 $17,500 $35,000 Upfront MIP/fee $6,018 $0 $0 Monthly MI ~$158 ~$145 ~$110 MI cancels? Never (< 10% down) Yes — at 22% equity Yes — at 22% equity Total MI over loan life ~$56,880 ~$15,660 ~$11,880 Estimated · FHA MIP rates per HUD Mortgagee Letter 2023-05 · Conventional PMI based on Freddie Mac PMMS averages · Single-family, 30-year fixed
Quick math: FHA total MI ~$56,880 vs. conventional ~$15,660 — a $41,220 gap over 30 years on a $350,000 purchase. Estimated · HUD MIP schedule · conventional PMI assumes cancellation at 22% equity.
FHA borrowers pay roughly $41,000 more in mortgage insurance on this scenario. No income difference. No rate difference. Just the insurance structure.
3. Credit Score Requirements
FHA is built for borrowers with imperfect credit. The floor is 580 for 3.5% down.
Conventional loans allow scores down to 620 on paper. Below 680, though, your PMI rate climbs fast. Below 640, most lenders price you out of competitive rates.
Most buyers comparing FHA vs. conventional have scores between 650 and 720. That range qualifies for both. Conventional is cheaper long-term if you can reach 5%–10% down.
Most borrowers in this credit range don’t realize their PMI rate at 660 is nearly double what it is at 740 — that’s another $80–$100/month on a $300,000 loan.
4. Loan Limits
FHA sets county-level limits. For 2026, the baseline is $524,225 for a single-family home in low-cost areas. High-cost markets like San Francisco and New York go up to $1,209,750.
Conventional conforming limits are $806,500 at baseline and up to $1,209,750 in high-cost areas — matching FHA at the ceiling.
Buying above $806,500 in a standard market means jumbo financing either way. Different conversation.
5. Debt-to-Income Ratio
FHA allows a DTI up to 57% in some cases. Conventional tops out at 50% — most lenders prefer 45% or below.
Say you’re a nurse in Phoenix carrying $600/month in student loans, a $400/month car payment, and a $1,800 proposed mortgage. That’s $2,800 on $6,000/month gross income — a 46.7% DTI. FHA accepts it. Many conventional lenders won’t.
If your DTI is the binding constraint, FHA may be your only real option. Under 45%? Run both scenarios before deciding.
6. Property Condition Standards
FHA appraisers flag issues that conventional appraisers often pass. Peeling paint, a roof with less than two years of life, missing handrails, HVAC problems — all potential FHA deal-killers.
This matters most on older homes and fixer-uppers. A conventional loan gives you more flexibility on condition. FHA works best on move-in-ready properties.
Buying a 1960s split-level with some deferred maintenance? Budget an extra $1,000–$3,000 for repairs the FHA appraiser may require before closing.
7. Refinancing Out of FHA
Many FHA borrowers plan to refinance into a conventional loan once they hit 20% equity — canceling their MIP. The plan works. But it has costs.
Refinancing runs 2%–5% of the loan balance in closing costs. On a $340,000 balance, that’s $6,800–$17,000. And you need to qualify for a new conventional loan at the prevailing rate, which may be higher than your FHA rate.
Most borrowers with solid payment history pull this off within 5–8 years of buying. But it adds friction and cost that conventional buyers skip entirely.
Common Mortgage Questions on FHA vs. Conventional
What credit score do I need for a conventional loan? Technically 620, but below 680 your PMI costs rise sharply. At 660, PMI runs near 1.2% of the loan annually — about $161/month on a $322,000 balance.
Is FHA better if I have a 620 credit score? Often yes. FHA MIP rates don’t vary by credit score. Conventional PMI pricing is heavily score-driven. At 620, FHA’s flat MIP frequently beats conventional PMI costs in the first 5–7 years.
Can I avoid PMI on a conventional loan without 20% down? Yes — through a piggyback loan (80/10/10) or lender-paid PMI, which rolls the cost into a slightly higher rate. Neither is free. Lender-paid PMI makes sense if you plan to sell or refinance within 5 years.
How long does FHA MIP last? For loans with less than 10% down originated after June 2013: the life of the loan. No cancellation. With 10% or more down, MIP drops after 11 years.
Should I choose FHA if I’m planning to put 20% down eventually? No. Saving toward 20% and using conventional with a smaller down payment now is almost always better. Put 5% down on a conventional loan, build equity, hit 20%, and PMI cancels. FHA doesn’t work that way.
Three Moves Before You Decide
1. Pull your actual credit score — not the free estimate. Lenders use FICO Score 2, 4, and 5. Scores from Credit Karma use VantageScore, which can differ by 20–40 points. A $15 MyFICO report shows exactly what lenders see. Above 680, conventional is usually cheaper over time.
2. Run the break-even on refinancing out of FHA. If you’re choosing FHA and planning to refi in year 5, calculate total closing costs on that future refinance against the MIP savings. The math often surprises people — $10,000 in refi costs can wipe out 2–3 years of MI savings.
3. Check the conforming loan limit for your county. FHA limits by county are at HUD’s loan limit lookup tool. Buying right at or above the conforming limit narrows your options fast.
Run Your Own Numbers
The right loan depends on your down payment, credit score, how long you’ll stay in the home, and current rates. Run both scenarios:
- Mortgage Calculator — compare monthly payments for FHA vs. conventional structures
- Mortgage Affordability Calculator — see your max purchase price under both loan types
- Refinance Calculator — model the cost of refinancing out of FHA into conventional in year 5 or 7
Sources: HUD Mortgagee Letter 2023-05 · Freddie Mac PMMS · FHFA 2026 Conforming Loan Limits · IRS Publication 15-T