Two loan programs, two very different cost structures, and a decision that can swing a household's housing cost by $200–$400 per month for the same purchase price. The right choice depends less on which program is "better" and more on which one fits the borrower's down payment, credit profile, and time horizon.
The headline difference
An FHA loan is a mortgage insured by the Federal Housing Administration. It allows lower down payments and lower credit scores than conventional loans, in exchange for mandatory mortgage insurance that the borrower pays on top of principal and interest. A conventional loan is any mortgage not backed by a government program — typically conforming to Fannie Mae or Freddie Mac guidelines. Conventional loans are generally cheaper for borrowers who qualify for them; the question is who qualifies.
Where FHA wins
Lower down payment floor
FHA requires 3.5% down with a credit score of 580 or higher, or 10% down with scores between 500 and 579. Conventional loans technically allow 3% down on some first-time-buyer programs, but the practical floor for most borrowers is 5%. For a household sitting on $20,000 of savings looking at a $400,000 home, the FHA floor of $14,000 is reachable; the conventional 5% floor of $20,000 leaves no margin for closing costs or reserves.
More forgiving credit standards
FHA approves credit scores down to 580 routinely and 500–579 with larger down payments. Conventional underwriting typically requires 620 minimum, with the best pricing reserved for 740+. Borrowers rebuilding credit after a setback often qualify for FHA when conventional won't approve.
More forgiving DTI
FHA allows debt-to-income ratios up to 50% with compensating factors (reserves, residual income, stable employment). Conventional pushes harder against 45% as a soft ceiling. Borrowers with student loans or auto debt often hit conventional DTI walls before FHA does.
Where conventional wins
Mortgage insurance ends
This is the single biggest structural difference. Conventional PMI (private mortgage insurance) terminates automatically at 78% loan-to-value per federal law, and borrowers can request removal at 80%. FHA mortgage insurance, on most modern FHA loans (originated after June 2013 with less than 10% down), persists for the life of the loan. The only way out is to refinance into conventional once you have 20% equity.
On a $340,000 loan with 0.85% FHA MIP, that's $241/month forever. Over 30 years it's $87,000 in mortgage insurance the borrower never recovers. Conventional PMI on the same loan at 0.75% would run $213/month and end at month 60–80, depending on amortization and price appreciation — total cost roughly $13,000–$17,000.
Upfront mortgage insurance premium (UFMIP)
FHA charges a 1.75% upfront MIP at closing — financed into the loan, but still a real cost. On a $340,000 loan that's $5,950 added to the principal, accruing interest over 30 years. Conventional PMI has no upfront premium.
No property condition restrictions
FHA appraisals enforce HUD's Minimum Property Standards. Peeling paint on a pre-1978 home, missing handrails, exposed wiring, broken windows — any of these can trigger required repairs before closing. The seller has to fix them or the deal dies. Conventional appraisals are concerned with value, not habitability standards. For a fixer-upper or estate sale, conventional is usually the only path.
Higher loan limits in expensive markets
FHA loan limits are typically lower than conventional conforming limits, especially in high-cost areas. In some metros the FHA ceiling is below median sale price, which forces buyers into jumbo or conventional financing.
The decision framework
Use FHA if
- Credit score is below 660, especially below 620
- Down payment is below 5% and you can't wait to save more
- DTI is above 43% and you need flexible underwriting
- You plan to refinance into conventional within 5 years (the 4–6 year refinance is the FHA play)
Use conventional if
- Credit score is 680+ and especially 740+
- You can put 5%+ down (and ideally 10–20%)
- You plan to hold the loan long-term without refinancing
- The home has condition issues that won't pass FHA appraisal
- The purchase price exceeds local FHA limits
The "FHA today, conventional tomorrow" play
The most common sophisticated use of FHA is a deliberate two-step: get into a home now with 3.5% down on an FHA loan, then refinance into conventional in year 3–5 once equity has built and credit has improved. This works when:
- The home appreciates enough to push LTV under 80% by the refinance window
- The borrower's credit and income have improved (justifying better conventional pricing)
- Rates haven't risen so much that the refinance erases the savings
This is a real strategy and is how a non-trivial share of FHA borrowers actually use the program. It's also a strategy that depends on rate environment — if rates rise after the original purchase, the refinance window may close.
What loan officers usually push and why
FHA is often the path of least resistance for loan officers. The underwriting is more forgiving, the approval rate is higher, and the borrower experience is smoother in marginal cases. None of this is wrong — it's just not optimized for the borrower's lifetime cost. Borrowers with conventional-eligible profiles (credit 700+, 5%+ down, clean DTI) should ask explicitly for both quotes and compare lifetime cost, not just monthly payment.
Common edge cases
The 10%-down FHA case
FHA borrowers who put 10% or more down are subject to a different MIP termination rule: insurance ends after 11 years on loans with 10%+ down. This narrows the structural FHA disadvantage considerably. For a borrower with 10–15% down and credit just below conventional thresholds, the gap is small.
The "credit will improve" case
If credit will plausibly cross into conventional territory within 12–24 months, waiting may be the right move. The lifetime cost difference between an FHA loan and a conventional loan held long-term is usually larger than the cost of renting for another year.
The condo case
FHA financing on condos requires the project to be FHA-approved. Many condos aren't. This narrows FHA-eligible inventory in some markets significantly. Conventional has no equivalent restriction.