Conventional vs FHA Loan: Which Is Right for You?
Choosing between a conventional and FHA loan is one of the first major decisions you'll make as a homebuyer. Both can get you into a home — but they're built for different borrowers, and the costs vary more than most people realize. Here's a clear breakdown.
The Key Differences at a Glance
| Feature | Conventional | FHA |
|---|---|---|
| Down Payment | 3% (first-time), 5–20%+ | 3.5% (580+ credit), 10% (500–579) |
| Credit Score Min. | 620+ | 500+ |
| Mortgage Insurance | PMI (removable at 20% equity) | MIP (life of loan if < 10% down) |
| Loan Limits 2024 | $766,550 (standard) | $498,257 (standard) |
| Property Condition | Standard appraisal | Stricter FHA appraisal standards |
| Loan Types | Fixed, ARM, jumbo | Fixed only (standard FHA) |
Who Should Choose Conventional?
- ✓You have a credit score of 680+ (you'll get the best rates)
- ✓You can put down at least 10–20% (avoids PMI entirely)
- ✓You're buying a higher-priced home (above FHA limits)
- ✓You want the flexibility to refinance or remove PMI later
- ✓You're buying an investment property or second home
Who Should Choose FHA?
- ✓Your credit score is between 580–679 (FHA offers better rates in this range)
- ✓You have limited savings and want to put down just 3.5%
- ✓You have a recent bankruptcy or foreclosure (FHA has shorter waiting periods)
- ✓Your DTI is higher than 45% (FHA is more flexible on DTI)
- ✓You're a first-time buyer needing a more accessible path to homeownership
The Mortgage Insurance Trap
This is where FHA often loses the long-term comparison. FHA requires two types of mortgage insurance:
- →Upfront MIP: 1.75% of the loan amount (added to loan balance)
- →Annual MIP: 0.15%–0.75% of the loan amount per year (varies by LTV and term)
The critical difference: FHA MIP stays for the life of the loan if you put down less than 10%. Conventional PMI is eliminated once you reach 20% equity — either through payments, appreciation, or a new appraisal.
⚠ On a $400,000 FHA loan with 3.5% down: Upfront MIP = $6,790 (added to loan) + Annual MIP ≈ $2,800/yr ($233/mo) — for the entire loan term unless you refinance into conventional.
The Rate Comparison
Conventional rates are generally lower than FHA rates for borrowers with good credit (720+). But for borrowers with credit scores in the 580–680 range, FHA often offers better rates because the government guarantee reduces lender risk.
💡 Rule of thumb: If your credit score is above 680, compare actual rate quotes from both loan types before deciding. The math often surprises people.
FHA vs Conventional: Side-by-Side Example
Home price $400,000, 3.5% down ($14,000), credit score 640
| Conventional | FHA | |
|---|---|---|
| Loan Amount | $386,000 | $386,000 |
| Interest Rate | ~7.5% (estimated) | ~6.875% (estimated) |
| Monthly P&I | $2,703 | $2,537 |
| Monthly MIP/PMI | $0 (PMI = $96 with 3.5% down at 740 credit) | $233 (FHA MIP) |
| Total Monthly | ~$2,799 | ~$2,770 |
| MIP/PMI Removal | At 20% equity (≈ year 7–8) | Never (unless refinanced) |
| 5-Year Extra Cost (MIP) | ~$5,760 | ~$13,980 |
In this example, FHA has a slightly lower monthly payment today — but costs significantly more long-term due to permanent MIP.
The Hybrid Strategy
Many borrowers start with FHA (lower barrier to entry) and refinance into conventional once they've built equity and improved their credit score. This strategy can make sense if you expect your income or credit to improve significantly within 3–5 years.
Get a Side-by-Side Rate Comparison
Our loan officers will quote you actual rates for both conventional and FHA based on your credit and down payment. Free, no obligation.
Compare My Rates*Rate examples are illustrative and subject to change. Contact Tiger Loans, Inc. NMLS #1169300 for current rates and personalized analysis.