First-time buyers hear "FHA" and "conventional" thrown around like everyone knows the difference. Here is the plain-English breakdown, including the cost traps most articles gloss over.

The quick comparison

| | FHA loan | Conventional loan | |---|---|---| | Backed by | Federal Housing Administration | Fannie Mae / Freddie Mac (private lenders) | | Min down payment | 3.5% (with 580+ credit) | 3–5% (some programs 3%) | | Min credit score | 580 (500 with 10% down) | 620 | | Mortgage insurance | MIP (upfront + annual, often for life of loan) | PMI (drops at 20% equity) | | Loan limits | Lower (varies by county) | Higher | | Property rules | Must be primary residence; stricter appraisal standards | Primary, second home, or investment |

When FHA wins

  • Low credit score (580–620): FHA is often the only approval path. Conventional lenders price low scores punitively or decline outright.
  • Small down payment with weaker credit: 3.5% down at 580 is FHA's signature advantage.
  • Higher DTI: FHA tolerates back-end ratios up to 50%+ with compensating factors; conventional usually caps around 45%.

The MIP trap most buyers miss

Here is what changes the math: FHA's mortgage insurance premium (MIP) has two parts, an upfront fee (1.75% of the loan, usually rolled into the balance) and an annual premium (around 0.55% for most borrowers) — and for most FHA loans originated today, the annual MIP lasts for the entire life of the loan. You cannot drop it at 20% equity like conventional PMI.

On a $350,000 loan, that is roughly $160/month in MIP that never goes away unless you refinance into a conventional loan later. Over 10 years, that is over $19,000 in insurance premiums alone.

Conventional PMI, by contrast, automatically terminates at 78% loan-to-value and can be removed at 80% on request. For a buyer who will build equity, conventional is usually cheaper long-term.

When conventional wins

  • Credit score 680+: You will get competitive pricing and droppable PMI.
  • 20% down available: No mortgage insurance at all. This is always the cheapest path.
  • Buying above FHA loan limits: In high-cost areas, FHA caps may not cover the home you need.
  • Investment or second home: FHA is primary-residence only.

The smart first-timer strategy

If your credit is the barrier, consider this path: buy with FHA now, refinance to conventional later once your score is 700+ and you have 20% equity. You get the home sooner with FHA's lenient approval, then escape the lifetime MIP with a refinance. Just make sure the numbers work: refinancing costs 2–5% of the loan in closing costs, so run the breakeven.

The bottom line

FHA = easier approval, lifetime insurance cost. Conventional = harder approval, cheaper long-term. If you qualify for both, conventional almost always wins on total cost. Compare payments with our mortgage calculator, check what you can afford with our home affordability calculator, and learn how PMI works in our PMI guide.

Estimates for planning only, not financial advice.