FHA vs. Conventional Loan: Which Is Right for You?

Choosing between an FHA loan and a conventional mortgage usually comes down to three factors: your credit score, your down payment savings, and how long you plan to stay in the home. Both options offer low down payment paths to homeownership, but their rules for credit approval, mortgage insurance, and long-term costs work very differently.

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Key Differences at a Glance

The table below breaks down the core qualifying rules and insurance terms for each loan type:

Feature	FHA Mortgage	Conventional Loan
Minimum Credit Score	580 (3.5% down) / 500 (10% down)	620 minimum (740+ for prime rates)
Minimum Down Payment	3.5% of purchase price	3% (first-time buyers) / 5% standard
Upfront Mortgage Insurance	1.75% of base loan (UFMIP)	$0 (Zero upfront fee)
Monthly Insurance Cost	0.55% annual MIP (for <10% down)	~0.55% annual PMI (varies by credit score)
Insurance Cancellation	Life of loan (for <10% down)	Automatic at 78% LTV (or request at 80%)
Debt-to-Income (DTI) Limit	Up to 43% to 50%+ with automated underwriting	Typically capped at 43% to 45%

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1. Credit Score & Down Payment Requirements

FHA guidelines exist to help buyers who fall outside strict conventional underwriting standards:

• FHA Credit Rules: A credit score of 580 or higher unlocks the minimum 3.5% down payment. If your score sits between 500 and 579, FHA guidelines allow approval with 10% down.
• Conventional Credit Rules: Lenders require a minimum score of 620. Borrowers with scores above 740 receive the lowest interest rates and smallest Private Mortgage Insurance (PMI) rates. First-time buyers can put down as little as 3%, while repeat buyers typically need 5%.

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2. How Mortgage Insurance Works: MIP vs. PMI

Mortgage insurance is where FHA and conventional loans diverge most over the life of a loan.

FHA Mortgage Insurance (MIP)

FHA loans charge two distinct premiums:

1. Upfront MIP (UFMIP): Equal to 1.75% of your base loan amount. Most buyers roll this fee into their loan balance at closing. On a $300,000 base loan, adding 1.75% ($5,250) creates a starting loan balance of $305,250.
2. Annual MIP: On a 30-year loan with less than 10% down, the annual MIP rate is 0.55% of the loan balance, split into 12 monthly payments.

Cancellation Rules: If you put down less than 10% (LTV > 90%), federal FHA rules require annual MIP to remain for the entire 30-year term. To remove it, you must refinance into a conventional loan. If you put down 10% or more (LTV <= 90%), annual MIP automatically drops off after 11 years (132 monthly payments).

Conventional Private Mortgage Insurance (PMI)

Conventional loans charging PMI require no upfront fee. Monthly PMI rates depend on your credit score and down payment size. Under the Homeowners Protection Act (HPA), conventional PMI automatically cancels once your principal balance reaches 78% of the original home value, or you can request removal at 80% LTV.

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3. Decision Guide: Which Loan Fits Your Scenario?

Because FHA loans require a 1.75% upfront fee and permanent monthly MIP for low down payments, conventional financing is almost always cheaper over the long haul for buyers with solid credit.