FHA Loan vs Conventional Loan: Which Down Payment Option Saves More

The Short Answer

If your credit score sits below 680 and you only have 3-5% saved, FHA usually wins — it was built for exactly that buyer. If your score is 680 or higher and you can put down even 5%, conventional almost always costs less over time, because you can cancel the mortgage insurance once you build equity. FHA insurance, in most cases, doesn’t go away. That single rule — not the down payment percentage — is what actually separates these two loans financially.

What Actually Separates Them

Both loan types let you buy a home with a small down payment. FHA loans (insured by the Federal Housing Administration, part of HUD) allow as little as 3.5% down with a credit score of 580 or higher, according to HUD.gov. Conventional loans backed by Fannie Mae or Freddie Mac now allow as little as 3% down through programs like Fannie Mae’s HomeReady and Freddie Mac’s Home Possible — which cap borrower income at 80% of area median income but do not require first-time buyer status — and Fannie Mae’s standard 97% LTV and Freddie Mac’s HomeOne, which do carry first-time buyer requirements. So on down payment alone, they’re nearly tied.

The real difference is in how each loan protects the lender against default — and who pays for that protection, and for how long.

The Insurance Structure

Every low-down-payment loan carries mortgage insurance. The mechanics differ sharply.

FHA loans charge two separate premiums. There’s an upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount, which most borrowers roll into the loan balance rather than pay in cash. Then there’s an annual MIP, paid monthly, typically in the range of 0.15% to 0.75% of the loan balance depending on your loan term, loan size, and loan-to-value ratio — most 30-year borrowers putting less than 5% down pay 0.55% (check HUD.gov’s current MIP chart for 2026 figures, since these rates are adjusted periodically). The catch: if your down payment is under 10%, that annual MIP stays on the loan for the entire life of the mortgage. Paying it off faster or building equity through appreciation doesn’t remove it — only refinancing out of the FHA loan does.

Conventional loans use private mortgage insurance (PMI), priced by private insurers based on your credit score and down payment. A borrower with a 760 credit score putting 5% down might pay well under 0.5% annually, while a borrower with a 620 score could pay closer to 1.5%. But under the federal Homeowners Protection Act, PMI must automatically cancel once your loan balance reaches 78% of the home’s original value, and you can request cancellation at 80% of that original value. Both thresholds are measured against the original value — the lesser of purchase price or original appraised value — so appreciation does not count under the federal law. Fannie Mae and Freddie Mac separately allow borrower-requested cancellation based on a new appraisal showing current LTV of 75% or less after two years, or 80% or less after five years. That’s the mechanism that makes conventional loans cheaper long-term for borrowers who qualify: the insurance is temporary.

The Credit Score Math

FHA’s 3.5%-down tier requires a minimum credit score of 580. Below that, down to 500, FHA still insures the loan but requires 10% down. Conventional loans generally set the floor at 620, and that’s a hard cutoff at most lenders — there’s no version of a conventional loan for scores under 620.

But credit score also sets your price on a conventional loan, not just your eligibility. Fannie Mae and Freddie Mac use loan-level price adjustments, meaning your rate and PMI cost scale with your score. FHA pricing is far flatter — a 600 credit score and a 720 credit score pay close to the same FHA rate and the same MIP schedule. That flatness is exactly why FHA tends to be the better deal for borrowers with weaker credit, and the worse deal for borrowers with strong credit who would otherwise get rewarded with lower PMI and rate.

Side-by-Side Comparison

Source details on current premium rates, loan limits, and DTI guidelines should always be verified directly at HUD.gov and FHFA.gov, since both agencies update figures annually.

Which One Actually Fits Your Situation

The buyer rebuilding credit after a rough patch

A borrower with a 610 credit score, $12,000 saved, and a stable job but a couple of late payments from a few years back is a textbook FHA candidate. Conventional lenders at that score either decline the loan or price PMI so high it erases any savings. FHA’s flatter pricing and lower score floor make it the only realistic path to a competitive rate right now.

The first-time buyer with strong credit and a small down payment

A borrower with a 740 credit score and 5% to put down is usually better off conventional, even though the monthly PMI may look similar to FHA MIP at first glance. The difference shows up in year four or five: PMI on this loan can be cancelled once the balance hits 80% LTV, often within 5-7 years with normal payments and modest appreciation. The FHA borrower in the same scenario is often still paying MIP a decade later, because dropping it requires a refinance, with its own closing costs and rate risk.

The buyer who can scrape together 10% or more

Putting 10% down on an FHA loan shortens the MIP period to 11 years instead of the life of the loan — a meaningful improvement, but still longer than what many conventional borrowers experience. Meanwhile, 10% down on a conventional loan with a 680+ score often produces PMI cheap enough that it barely affects the monthly payment, and it still disappears at 78% LTV. At this down payment level, conventional is usually the stronger math unless the credit score is working against the borrower.

The buyer purchasing in a high-cost area

FHA loan limits are set lower than conforming conventional limits in most counties, though both scale up in designated high-cost areas (parts of California, the New York metro, Hawaii, and similar markets). If the home price is near or above the local FHA limit, conventional financing — or a combination loan — may be the only option regardless of credit score. Check the exact 2026 limit for your county at HUD.gov (for FHA) and FHFA.gov (for conventional) before assuming either loan covers the purchase price.

The buyer planning to sell or refinance within five years

For a short holding period, the upfront cost matters more than the long-term insurance structure. FHA’s 1.75% upfront premium is usually financed into the loan, so it doesn’t require more cash at closing — but it does increase the loan balance and the interest paid on it. A conventional loan with no upfront premium can be cheaper for someone who knows they won’t stay in the home long enough for PMI cancellation to matter either way.

The Trap: Assuming You Can Just Refinance Out Later

The most common mistake is treating FHA’s lifetime MIP as a temporary inconvenience — “I’ll just refinance to conventional once my credit improves.” That plan works, but only if two things hold up: your home has enough equity to qualify for conventional refinancing without PMI (usually 20%), and rates haven’t moved against you in the meantime. Borrowers who bought FHA loans at low rates in past years and later saw rates climb often found that refinancing to drop MIP meant trading a low rate for a higher one — erasing the savings they were chasing. Refinancing also costs money: appraisal fees, title fees, and closing costs typically run 2% to 5% of the loan amount, according to figures commonly cited by consumer finance resources. Run the break-even math before assuming the refinance will pay for itself.

The reverse trap happens too: buyers who qualify for conventional financing sometimes choose FHA anyway because the down payment requirement feels smaller or the process feels more familiar from a friend’s recommendation. If your credit score clears 680 and you can find even 5%, it’s worth getting a real conventional quote before defaulting to FHA — the lifetime insurance cost is usually the deciding factor once you see both numbers side by side.

Sources

• HUD.gov — U.S. Department of Housing and Urban Development, FHA loan programs and mortgage insurance premiums

• FHFA.gov — Federal Housing Finance Agency, conforming loan limits

• ConsumerFinance.gov — Consumer Financial Protection Bureau, mortgage insurance and PMI cancellation rules (Homeowners Protection Act)
• FannieMae.com and FreddieMac.com — HomeReady and Home Possible program guidelines

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