FHA vs Conventional Loan: Which Is Better?

FHA Loan Requirements and Benefits

FHA loans allow down payments as low as 3.5% and accept credit scores around 580. They are insured by the FHA and popular with first-time buyers. The trade-off is mortgage insurance premium (MIP), which you pay for the life of the loan in most cases.

Conventional Loan Requirements and Benefits

Conventional loans require higher credit scores (usually 620+) but reward strong borrowers with lower rates and no mortgage insurance when you put down at least 20%. With a smaller down payment, private mortgage insurance (PMI) drops off once you reach 20% equity.

Comparison Table: FHA vs Conventional

Here is a quick side-by-side comparison of FHA and conventional loans:

Feature	FHA Loan	Conventional Loan
Down payment	3.5% minimum	3%–20% (20% avoids PMI)
Credit score	500–580 with 10% down	620 or higher
Mortgage insurance	MIP — usually for the loan's life	PMI — drops at 20% equity
Loan limits	Up to $766,550 (2026)	Up to $766,550 (2026)
Interest rates	Often slightly lower base rate	Lower overall for strong credit

Which Loan Is Right for You?

FHA loans shine for borrowers with lower credit or a small down payment. Conventional loans usually cost less over time if you qualify. Compare rates, insurance and monthly payments with a mortgage calculator before choosing.

How the FHA vs. Conventional Comparison Works

This calculator compares the true cost of an FHA loan and a conventional loan on the same home, term and down payment. Both payments start from the standard amortization formula for a fixed-rate mortgage, where each monthly payment is split between principal and interest. The real difference comes from how each program handles mortgage insurance, which is added on top of the base payment in a different way.

With an FHA loan, the comparison includes the upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount — which most borrowers finance into the balance — plus the annual MIP of 0.15% to 0.75% that is added to your payment every month for most of the loan's life. With a conventional loan, it adds private mortgage insurance (PMI) only when you put down less than 20%, and removes it automatically once you reach 20% equity. Looking at the all-in monthly payment and the total cost over the full term, not just the advertised rate, is what makes one path cheaper than the other.

Worked Example: a $300,000 Home

Let us compare a $300,000 purchase on a 30-year fixed mortgage, with a typical FHA base rate of 6.0% and a conventional rate of 6.5%.

With an FHA loan and 3.5% down, your down payment is $10,500 and the base loan is $289,500. Financing the 1.75% upfront MIP (about $5,066) raises the balance to roughly $294,566. At 6.0%, the principal-and-interest payment is about $1,766, and the annual MIP of 0.55% adds roughly $133 per month — for a total of about $1,899 monthly. Because this MIP lasts for the life of the loan, you pay it for all 30 years.

With a conventional loan and 10% down, the down payment is $30,000 and the loan is $270,000. At 6.5%, the principal-and-interest payment is about $1,707. Adding PMI at 0.7% (about $158 per month) brings the first years to roughly $1,865 — slightly lower than the FHA payment. The key difference is that PMI stops once you reach 20% equity, usually around year 6 or 7. From that point, your payment drops to $1,707 for the remaining term.

Over 30 years, the FHA path pays about $683,000 including MIP, while the conventional path pays roughly $627,000 including the years of PMI — a saving of more than $56,000 before accounting for the larger conventional down payment. The lower advertised FHA rate does not win because its mortgage insurance never goes away. Your exact numbers depend on credit, rates and lender pricing, but this is why the total cost matters more than the base rate.

Frequently Asked Questions

Can I buy a house with 3.5% down?

Yes, with an FHA loan you can put down as little as 3.5%. Some conventional programs also allow 3% down, but you will likely pay PMI until you build 20% equity.

Is FHA mortgage insurance permanent?

For most FHA loans taken out after June 2013, MIP lasts for the life of the loan if you put down less than 10%. The only way to remove it is to refinance into a conventional loan.

Which loan has lower rates: FHA or conventional?

FHA loans often have slightly lower base rates, but mortgage insurance makes the total cost higher. Conventional loans usually have lower overall costs for borrowers with good credit and a down payment of 20%.

Do FHA loans have lower rates than conventional loans?

FHA base rates are often 0.25% to 0.75% lower than conventional rates for the same borrower, because the FHA guarantee reduces lender risk. But the advertised rate is not the full picture: the annual MIP adds 0.15% to 0.75% (plus the 1.75% upfront premium), so the all-in cost is frequently higher than a conventional loan once insurance is included. Compare the total monthly payment, not just the rate.

How can I compare an FHA loan and a conventional loan?

Compare them on the same home price, loan term and down payment, and include mortgage insurance on both sides. Add the FHA upfront MIP and annual MIP, and for the conventional loan add PMI only if you put down less than 20%. Also check two numbers: the first-year monthly payment and the total cost over the length of time you plan to keep the loan, because FHA MIP usually lasts for the entire term while conventional PMI is removed once you reach 20% equity. This calculator does exactly that comparison for you.

Does a conventional loan have mortgage insurance too?

Yes, when you put down less than 20%, conventional lenders require private mortgage insurance (PMI), usually 0.5% to 1.5% of the loan amount per year. Unlike FHA MIP, conventional PMI drops off once your loan balance falls to 80% of the home value — automatically if your loan is handled through the lender, or by request with a new appraisal. That difference is one of the main reasons conventional loans can be cheaper over a long period.