Jonathan Machado
The two most common mortgage types for US homebuyers are conventional loans and FHA loans. They differ in down payment requirements, credit standards, and the structure of mortgage insurance, which is the cost both add to cover lender risk on low-down-payment loans. The choice between them matters because the wrong loan can quietly cost tens of thousands of dollars over the life of the mortgage. This guide compares them on the factors that actually drive the decision and explains when each option makes the most financial sense for typical borrowers. Pay attention to the mortgage insurance details, because that is where the long-term cost gap usually shows up.
Down Payment and Credit Requirements
Conventional loans now allow down payments as low as 3 percent for first-time buyers and 5 percent for repeat buyers, primarily through programs like Fannie Mae HomeReady and Freddie Mac Home Possible. Credit score requirements are typically 620 minimum at most lenders, with the best pricing tiers kicking in at 740 and above. Some lenders go below 620 with overlays, but rates climb steeply.
FHA loans require 3.5 percent down with a credit score of 580 or higher. Borrowers with scores between 500 and 579 can sometimes qualify with 10 percent down, though many lenders impose their own overlays and will not go that low. This combination makes FHA the most accessible mainstream mortgage product for borrowers with weaker credit profiles.
Underwriting standards differ beyond just the credit score number on the application. FHA is more flexible on debt-to-income ratios, often allowing DTIs up to 50 percent versus conventional's typical 43 to 45 percent cap on most loans. FHA also has more lenient policies on collections, prior judgments, and recent credit events like bankruptcy or foreclosure with shorter waiting periods. This documented flexibility is the main reason FHA exists as a government-backed product and why it remains popular for first-time buyers.
Mortgage Insurance Structure
This is where the two products differ most. Conventional loans with less than 20 percent down require Private Mortgage Insurance, or PMI. PMI rates vary by credit and loan-to-value ratio, typically 0.3 to 1.5 percent of the loan amount annually. PMI automatically terminates when your loan balance reaches 78 percent of the home's original value, and you can request removal at 80 percent.
FHA loans require Mortgage Insurance Premium, or MIP. This has two parts: an upfront MIP of 1.75 percent of the loan amount paid at closing or rolled into the loan, plus an annual MIP of 0.55 percent (current rate) of the loan amount paid monthly. The annual MIP lasts the full life of the loan for most modern FHA loans with less than 10 percent down. For loans with 10 percent or more down, annual MIP can drop off after 11 years.
This permanence is the main FHA disadvantage. A conventional borrower escapes PMI within a few years by building equity. An FHA borrower with 3.5 percent down keeps paying MIP for the entire loan term, which can mean tens of thousands of dollars over 30 years. The only escape is refinancing into a conventional loan once equity reaches 20 percent.
Total Cost Over Time
On the surface, FHA looks cheaper because of the lower credit requirements and slightly easier qualification. Run the full numbers over 7 to 10 years (the typical holding period) and the picture often flips. A borrower with credit in the 660 to 720 range frequently saves money with a conventional loan plus PMI even though monthly payments might be slightly higher early on.
The reason is that PMI eventually drops, while MIP often does not. Add the upfront 1.75 percent MIP fee and the conventional loan looks even better. For a 740+ credit borrower, conventional almost always wins because PMI rates at that credit tier are very low.
FHA wins on total cost in two main cases. First, borrowers with credit below 620 who do not qualify for conventional at all. FHA is then the only mainstream option. Second, borrowers who plan to refinance into conventional within a few years once their credit or equity improves. FHA buys them entry into homeownership now, and the refinance later removes the permanent MIP burden.
Which One to Choose
If your credit is 720 or above, you can save for at least 5 percent down, and you are not in a hurry, conventional is almost always cheaper. PMI rates are favorable at high credit, the upfront FHA fee disappears, and PMI termination eventually kicks in.
If your credit is 580 to 660 and you have at least 3.5 percent down, FHA is often the right path. Conventional underwriting may approve you but at PMI rates that exceed FHA MIP, making FHA the better deal at lower credit tiers.
If your credit is below 580, conventional is generally unavailable and FHA with 10 percent down is one of the few mainstream options. Specialty programs, including VA loans for veterans and USDA loans for qualifying rural properties, may also fit your situation and should be checked. The conventional-versus-FHA framing is not the only choice; broader shopping pays off.
