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FHA vs Conventional Loans: Costs Compared
Quick answer
FHA loans (insured by the Federal Housing Administration, under HUD) are designed for access: lower down payments and more flexible credit criteria than most conventional loans. Conventional loans (not government-insured; often conforming to Fannie Mae/Freddie Mac standards) are designed for borrowers who can meet stricter criteria — and their mortgage insurance, where required, can be cancelled. The right choice is usually decided by lifetime cost, not by the monthly payment in year one.
Key takeaways
- FHA minimum down payment: 3.5% with credit score 580+; 10% with scores 500–579. Upfront MIP 1.75%; annual MIP 0.55% for >95% LTV 30-year loans.
- FHA MIP below 10% down lasts the life of the loan; at 10%+ down it lasts 11 years. Conventional PMI can be cancelled (80% request / 78% automatic).
- 2026 conforming baseline for conventional loans: $832,750 for one-unit properties (FHFA), $1,249,125 high-cost ceiling.
- FHA county loan limits are NOT stated here — they vary by county and are not stated here. Conventional PMI rates for any specific borrower are not quoted.
Access vs. lifetime cost
FHA loans (insured by the Federal Housing Administration, under HUD) are designed for access: lower down payments and more flexible credit criteria than most conventional loans.
Conventional loans (not government-insured; often conforming to Fannie Mae/Freddie Mac standards) are designed for borrowers who can meet stricter criteria — and their mortgage insurance, where required, can be cancelled.
The right choice is usually decided by lifetime cost, not by the monthly payment in year one.
Worked example: the upfront premium
With 3.5% down ($10,500) on a $300,000 purchase, the base loan is $289,500.
Upfront MIP: $289,500 × 1.75% = $5,066.25 — often financed, raising the loan balance to about $294,566 and incurring interest on the premium itself.
Annual MIP at 0.55%: $289,500 × 0.55% ÷ 12 ≈ $133 per month, for the life of the loan if down payment is below 10%.
That permanence is the decisive FHA cost. A conventional borrower with PMI that cancels at 80%/78% of original value stops paying insurance; an FHA borrower below 10% down does not, unless they refinance.
When FHA wins — and when conventional wins
FHA is often the better fit when: credit is below conventional pricing thresholds, the down payment is limited to 3.5%, or gift funds / down-payment assistance cover the down payment. FHA MIP does not vary by credit score in the way conventional PMI does, which can favor lower-credit borrowers.
Conventional is often the better fit when: you qualify at a competitive rate, you can put down enough to minimize or avoid PMI, or you expect to reach 20% equity and cancel PMI — because lifetime insurance cost is then far lower than FHA's life-of-loan MIP.
The exit strategy FHA borrowers should plan at closing
If you take an FHA loan with less than 10% down, plan from day one for the refinance into conventional once you reach 20% equity and meet conventional credit/income criteria. That refinance has its own closing costs and rate risk — it is not free — but it is the mechanism that ends life-of-loan MIP. Do not assume appreciation alone removes MIP; for FHA, it does not.
Disclosure and disclaimer
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Disclaimer: Educational only — not financial advice and not a mortgage offer. Loan limits, MIP, and eligibility vary by county, lender, and program; verify current HUD and lender terms before deciding. FHA county loan limits (vary by county; not stated); conventional PMI rate for any specific borrower (not quoted).
At a glance
| Feature | FHA | Conventional (conforming) |
|---|---|---|
| Insurer | FHA / HUD | Private mortgage insurance (PMI), if required — or none |
| Minimum down payment | 3.5% with credit score 580+; 10% with scores 500–579 | Varies by program; commonly 3%–5% for qualified first-time/eligible buyers, 20% to avoid PMI — lender/program-specific, confirm in writing |
| Credit flexibility | More flexible (500 minimum per FHA floor) | Generally stricter; pricing worsens as credit falls |
| Loan limit (2026, conforming baseline) | County-based FHA limits apply (not stated here; check your county) | $832,750 for one-unit properties in most areas (FHFA 2026); $1,249,125 high-cost ceiling |
| Upfront mortgage insurance | 1.75% of base loan amount (often financed into the loan) | None as a separate upfront premium |
| Ongoing mortgage insurance | Annual MIP, paid monthly — 0.55% per year for >95% LTV 30-year loans | PMI, rate varies by credit/down payment; cancellable |
| How mortgage insurance ends | Below 10% down: life of the loan. At 10%+ down: after 11 years. Otherwise, refinance into conventional | Request cancellation at 80% of original value; automatic termination at 78% (Homeowners Protection Act, conditions apply) |
| Property standards | Must meet FHA minimum property standards; FHA appraisal required | Lender/appraisal standards apply; generally less prescriptive |
FHA vs conventional (conforming) loans side by side
What this means for you
FHA buys access; conventional buys a cancellable insurance cost. If you can reach 20% equity and cancel PMI, conventional usually wins on lifetime cost — and if you take FHA below 10% down, plan the refinance out of MIP from day one.
FAQ
What is the minimum down payment on an FHA loan?
3.5% with a credit score of 580 or higher; 10% with scores from 500 to 579.
Does FHA mortgage insurance ever end on its own?
Below 10% down, MIP lasts the life of the loan; at 10% or more down, it lasts 11 years. Otherwise the usual exit is refinancing into a conventional loan.
Why might a conventional loan be cheaper over time than FHA?
Conventional PMI can be cancelled at 80% (on request) and terminates automatically at 78% of original value under federal law, while FHA MIP below 10% down does not end without a refinance.
Sources
- HUD Handbook 4000.1 / HUD Mortgagee Letter 2023-05 premium schedule, via corroborated summaries — see a current HUD source for the authoritative schedule
- FHFA — 2026 conforming loan limit values (fhfa.gov): $832,750
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