FHA vs. Conventional: Down Payment, Mortgage Insurance, and the Break-Even That Decides It

The FHA vs. conventional decision comes down to mortgage insurance. FHA is easier to qualify for and allows 3.5% down with a modest credit score, but its mortgage insurance carries an upfront premium and an annual premium that, with less than 10% down, lasts for the life of the loan. Conventional loans price their mortgage insurance by credit score and drop it once you reach 20% equity. A buyer with strong credit usually pays less on a conventional loan within a few years; a buyer with a lower score often pays less on FHA at first, then refinances out once equity passes 20%.

What an FHA loan and a conventional loan actually are

An FHA loan is a mortgage made by an ordinary private lender and insured by the Federal Housing Administration, a federal agency. If the borrower defaults, the agency reimburses the lender, and the borrower pays for that insurance through premiums. The insurance is why the lender can accept a smaller down payment and a weaker credit file: the risk it cannot price is covered. FHA loans are for primary residences only, and they can be used on two- to four-unit properties with the same low down payment as long as you live in one unit.

A conventional loan is any mortgage without government insurance. Most are conforming loans, which meet the size limits and underwriting standards that let lenders sell them to the two government-sponsored mortgage buyers; non-conforming loans, including jumbo loans above the size limit, follow the lender's own rules. Conventional loans work for primary homes, second homes, and rentals, and they are the only route for a property that fails FHA's condition standards. Both types come in 15- and 30-year fixed terms.

Down payment minimums are program rules, not advice

FHA allows 3.5% down with a credit score at or above the program floor, currently 580, and requires 10% down for scores below the floor and above the program minimum. Conventional programs aimed at first-time and moderate-income buyers allow 3% down; 5% is the common minimum otherwise, and 20% is the point where mortgage insurance disappears. On a $350,000 home those percentages are $12,250 at 3.5%, $10,500 at 3%, $17,500 at 5%, and $70,000 at 20%. Gift funds from family are allowed on both, and FHA allows the entire down payment to be a gift. State and local down payment assistance programs pair with both loan types.

The minimum is a program rule about what the lender will accept, not a recommendation about what you should put down. The cash left after closing matters as much as the cash at closing; the first-time buyer checklist sets out the reserve to keep, and the smaller the down payment, the longer the mortgage insurance runs on either loan.

Credit score and debt-to-income: where FHA forgives more

Conventional loans generally require a score of at least 620, and the pricing is tiered: the rate and the PMI premium both step up as the score steps down, so a 640 borrower pays a noticeably higher rate and a much higher insurance premium than a 760 borrower on the same house. FHA pricing is flat. The mortgage insurance premium is the same at 600 and at 800, and the rate varies far less with score, which is the whole reason FHA is often the cheaper loan for a borrower with a bruised file and the more expensive one for a borrower with a clean one.

FHA underwriting also accepts a higher debt-to-income ratio with compensating factors than conventional underwriting typically will, and its waiting periods after a bankruptcy or foreclosure are shorter. If a student loan payment or a car loan pushes your ratio past what conventional will take, FHA is often the loan that closes. What the ratio should be for your own budget, rather than what a lender will allow, is the question how much house can I afford works through.

Mortgage insurance is the whole decision

On a conventional loan with less than 20% down you pay private mortgage insurance, a monthly premium set by your credit score and your loan-to-value ratio (the loan balance divided by the home's value). It is cancellable: you can request removal once the balance reaches 80% of the original value, with a clean payment history, and many lenders allow a new appraisal after a seasoning period to prove the value has risen; the lender must cancel it automatically at 78% on the original amortization schedule. The mechanics and the request letter are in PMI explained, and the PMI calculator estimates the premium for your score and down payment.

On an FHA loan you pay the FHA mortgage insurance premium, in two parts. An upfront premium, a percentage of the loan amount, is due at closing and is almost always financed into the balance, so you pay interest on it for the life of the loan. An annual premium, also a percentage of the balance, is paid monthly. With less than 10% down, the annual premium lasts for the life of the loan; with 10% or more, it ends after 11 years. There is no request letter and no appraisal that removes it. The only exit is paying off the loan or refinancing into a conventional one.

Three asymmetries follow. Conventional insurance is temporary and priced by risk; FHA insurance is permanent (below 10% down) and priced flat. Conventional insurance rewards a strong score; FHA insurance ignores it. And FHA adds an upfront cost that conventional does not, which raises the balance and slows the climb toward 20% equity. The comparison below puts numbers on all three.

A worked comparison on a $350,000 home over seven years

The home costs $350,000, the down payment is 3.5% ($12,250) on both loans, the term is 30 years, and the rate is an illustrative 6.5% on both (FHA rates often run somewhat lower for the same borrower, which is addressed after the table). Home values are assumed to rise 3% a year. All premiums are illustrative and are labeled as such; run your own on the mortgage calculator and the PMI calculator.

Why 60 months on the conventional side: the balance on $337,750 at 6.5% falls to about $316,000 after five years of payments, and the home at 3% annual appreciation is worth about $405,700, so the loan-to-value ratio crosses 80% during year five and an appraisal-backed request removes the PMI. Without appreciation, scheduled payments alone take about eleven years to reach 80%, and the conventional totals grow, though they still end while the FHA premium does not.

Now the rate offset. If the FHA quote is a quarter point lower than the conventional quote, that is worth roughly $800 a year in interest early in the loan, or about $5,500 over seven years. Against the 760-score borrower, that narrows the gap but leaves conventional ahead by more than $10,000 over seven years and by the entire annual premium every year after. Against the 640-score borrower, whose conventional rate would also carry a risk adjustment, the seven-year totals land close to even, and the right answer is whichever lender quote is lower on the day, with a plan to refinance out of FHA once equity allows.

Loan limits, appraisals, and what sellers think

Both loan types have maximum loan amounts set each year by county. FHA limits are lower than conforming limits in most of the country, so an expensive market can rule FHA out on price alone; above the conforming limit, the conventional path becomes a jumbo loan with its own underwriting. The current limits are published by the federal housing agencies and any lender can quote them for your county.

The FHA appraisal does two jobs: it values the home, and it checks the property against minimum condition standards for safety, security, and structural soundness. Peeling paint on an older home, a missing handrail, a roof near the end of its life, or a non-working system can trigger a required repair before closing, and condominiums must be on the approved list or qualify for single-unit approval. A conventional appraisal is mostly about value. This difference is what drives seller perception: in a multiple-offer situation, some sellers and their agents prefer conventional offers because they fear repair demands and a higher chance of the financing failing. The perception is partly outdated, and it fades in a slower market, but it is real enough that an FHA buyer should lead with a strong pre-approval and a clean offer.

The refinance-out-of-FHA path

Because the FHA premium never cancels on its own below 10% down, the standard plan is to refinance into a conventional loan once the loan-to-value ratio reaches 80%, through payments, appreciation, or both. In the example above that happens during year five, when the $155 monthly premium becomes the amount you save by refinancing. The trade is closing costs, typically a few percent of the loan amount, and a new rate at whatever the market offers that year. If rates have fallen or held, the refinance usually pays for itself within a couple of years; if they have risen a point or more, the higher rate can cost more than the premium it removes, and the exit waits. The refinance calculator gives the break-even in months. An FHA streamline refinance is a different product: it lowers the rate with light paperwork but keeps you inside FHA, premium and all.

The decision rule

• Score in the 700s and at least 3% to 5% down: conventional, almost always. PMI is cheap at that score and it ends.
• Score in the 600s, a high debt-to-income ratio, or a recent credit event: FHA is often the loan that gets approved, and at that score its flat premium may cost less than conventional PMI. Plan the refinance out once equity passes 20%.
• 10% or more down: conventional unless credit forces FHA; FHA's premium still runs 11 years at that down payment, while PMI at 90% loan-to-value is cheaper and has a much shorter road to 80%.
• 20% down: no mortgage insurance either way, so conventional.
• Buying a two- to four-unit property to live in: FHA's low down payment on multi-unit homes is a specific advantage conventional programs rarely match.
• In every case: get both quotes from the same lender on the same day and compare total seven-year cost (principal and interest, insurance, and the financed upfront premium), not the headline rate.

The rest of the path, from the reserve to keep after closing to the inspection contingency, is collected in the buy your first home collection.

Whichever loan you choose, the line to watch afterward is the same: the mortgage balance against the home's value, because that ratio is what ends PMI or unlocks the refinance. Stoia keeps the mortgage and the home value side by side in one live picture, launching 2026, so the day you cross 80% is a number you see rather than one you guess.