FHA vs Conventional Loans: Which Costs Less?

FHA and conventional loans both let you buy with a small down payment, but they charge for risk differently. Which one costs less depends on your credit score, down payment and how long you will keep the loan.

The basics side by side

	FHA	Conventional
Backed by	Federal Housing Administration insurance	Private lenders, often sold to Fannie Mae or Freddie Mac
Minimum down payment	3.5% with a 580+ credit score	As low as 3% on some programs, often 5%
Credit score	Lower scores can qualify; 500 to 579 needs 10% down	Typically higher; pricing rises as scores fall
Mortgage insurance	Upfront premium of 1.75% plus an annual premium	PMI, usually monthly, only below 20% down
Can the insurance go away?	Only after 11 years with 10%+ down; otherwise it generally stays for the life of the loan	Yes, at 80% to 78% loan-to-value
Occupancy	Primary residence only	Primary, second home or investment

How FHA mortgage insurance works

FHA loans carry two premiums. The upfront premium is 1.75% of the base loan and is usually financed into the loan. The annual premium is paid monthly. For loans with terms over 15 years and a base loan up to $726,200, the annual premium is 0.50% at a loan-to-value ratio of 95% or less and 0.55% above that. These rates come from HUD Mortgagee Letter 2023-05, and your lender can confirm current figures. With less than 10% down, the annual premium lasts for the life of the loan.

How conventional PMI works

Conventional PMI has no upfront premium in the usual monthly structure, and its cost depends on your credit score and loan-to-value ratio. With strong credit, it can be much cheaper than FHA insurance. It can be cancelled when you reach 80% of the original value, and it ends automatically at 78%. See PMI explained.

When each usually wins

FHA tends to cost less when:

• Your credit score is lower, which makes conventional PMI expensive.
• You have a small down payment and limited savings.
• Your debt-to-income ratio is higher than conventional lenders prefer.

Conventional tends to cost less when:

• Your credit score is good to excellent.
• You can put down 5% or more.
• You expect to keep the loan a long time, since FHA insurance can last the whole term.

A practical way to decide

Run both side by side. In the mortgage calculator, choose Conventional and then FHA with the same price, down payment and rate (use a quoted rate, since FHA and conventional rates differ). Compare the full monthly payment and the total cost over the years you plan to stay. Remember that an FHA borrower can later refinance into a conventional loan once there is enough equity, which removes the insurance. The FHA loan calculator opens the calculator with FHA preselected.

Other differences to know

• FHA requires the property to meet minimum standards, and appraisals can be stricter.
• Loan limits for FHA and conventional loans are set separately and vary by county.
• FHA is assumable in some cases, which can be an advantage when rates rise.

Common questions

Is an FHA loan only for first-time buyers?

No. FHA loans are open to repeat buyers too, as long as the home will be your primary residence and you meet the credit and income requirements. There are some limits on holding more than one FHA loan at the same time.

Can I get rid of FHA mortgage insurance?

If you put less than 10% down, the annual premium generally lasts as long as the loan. The usual way to remove it is to refinance into a conventional loan once you have at least about 20% equity, or to pay the loan off. With 10% or more down, it ends after 11 years.

Which has the lower interest rate?

It varies. FHA loans can carry lower rates than conventional loans for borrowers with lower credit scores, but the mortgage insurance makes the total cost higher. Compare the full monthly payment and the APR from actual quotes, not just the rate.

Key takeaways

• FHA suits lower credit scores and small down payments; conventional often wins with strong credit.
• FHA insurance can last the whole loan; conventional PMI can be cancelled.
• Run both in the mortgage calculator with your real numbers.