The Core Difference
When FHA Wins. When Conventional Wins.
There's no universally better loan — there's the better loan for your specific numbers. FHA wins when credit is below 700, when the down payment is under 10%, or when DTI is high. Conventional wins when credit is strong and you're building equity fast enough to eliminate mortgage insurance.
The most important variable is mortgage insurance. Conventional PMI cancels automatically at 20% equity. FHA MIP stays for the life of the loan if you put less than 10% down. Over 30 years, that difference is significant — and it's the main reason buyers with strong credit choose conventional even if they could qualify for FHA. See the FHA mortgage insurance breakdown for the full picture.
FHA Wins When You Have...
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Credit score below 700FHA rates for sub-700 scores are typically lower than conventional equivalents.
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Limited savings (3.5% down)Conventional 3% down loans have stricter credit requirements.
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Higher debt-to-income ratioFHA allows up to 57% DTI; conventional typically caps at 45–50%.
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Gift funds for down paymentFHA allows 100% gift funds; conventional has restrictions.
Conventional Wins When You Have...
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Credit score 720 or higherConventional rates at 720+ are often better than FHA, and PMI cost is lower.
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20% down paymentNo PMI at all. Conventional wins clearly — no mortgage insurance of any kind.
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Planning to build equity fastPMI cancels at 20% equity; FHA MIP stays for life of loan if under 10% down.
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Buying an investment propertyFHA is primary residence only. Conventional works for rentals and second homes.
Side by Side
FHA vs. Conventional: Full Comparison
Every major factor compared. The highlighted column is FHA.
| Factor | FHA Loan | Conventional Loan |
|---|
| Minimum Credit Score | 580 (3.5% down) · 500 (10% down) | 620–640 (most lenders) |
| Minimum Down Payment | 3.5% | 3% (with restrictions) · 5% standard |
| Max Debt-to-Income | Up to 57% with comp. factors | 43–50% (45% most common) |
| Mortgage Insurance | MIP: life of loan if <10% down | PMI: cancels at 20% equity |
| Upfront Insurance Cost | 1.75% UFMIP (rolled in) | None |
| Monthly Insurance | ~0.55% annually | 0.2%–2% annually (varies) |
| Gift Funds | 100% of down payment | Allowed with restrictions by loan type |
| Seller Concessions | Up to 6% | Up to 3% (if LTV >90%) |
| Investment Properties | Not allowed | Allowed |
| Loan Limits | $498,257 floor (most counties) | $806,500 conforming limit |
| Property Condition | Must meet FHA MPS at appraisal | Standard appraisal only |
| Waiting After Bankruptcy | 2 years (Ch. 7) | 4 years (Ch. 7) |
| Waiting After Foreclosure | 3 years | 7 years (3 with extenuating) |
The Biggest Long-Term Difference
Mortgage Insurance: MIP vs. PMI
This is the single most important factor in the FHA vs conventional decision for buyers who aren't putting 20% down. Both loans require mortgage insurance below 20% — but they work very differently.
FHA MIP
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Stays for life of loan (if <10% down)The only way to remove it is to refinance out of FHA entirely.
$
1.75% upfront (UFMIP)Added to loan balance. On $300k loan = $5,250 added to what you owe.
%
0.55% annual for most 30yr loansOn $300k loan ≈ $138/month in Year 1, decreasing slightly as balance drops.
Conventional PMI
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Cancels automatically at 20% equityRequired by law (Homeowners Protection Act) at 80% LTV.
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No upfront costUnlike FHA's UFMIP, conventional PMI has no upfront premium.
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0.2%–2% annually (varies by credit)A 760 score with 5% down might pay 0.4%. A 640 score might pay 1.5%+.
30-Year Cost Comparison
$300,000 Loan · 5% Down · 680 Credit Score
At what point does conventional become cheaper? With a 680 score and 5% down, here's how total mortgage insurance costs compare over time — assuming 3% annual appreciation (reaching 20% equity in approximately year 9).
TimeframeFHA MIP PaidConventional PMI Paid
Year 1
$1,656 (annual) + $5,250 UFMIP
~$1,800 (at ~0.6% for 680 score)
Year 5
~$8,100 total MIP paid
~$8,700 total PMI paid
Year 9 (PMI cancels)
~$14,300 MIP paid, continues
~$15,300 total — then $0/month
Year 30
~$49,000 total MIP paid
~$15,300 total PMI paid
Illustrative example. Actual costs vary by rate, exact PMI rate, appreciation, and loan balance. Bayou Mortgage · NMLS #1845349.
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The FHA-to-conventional refinance strategy
Many buyers intentionally start with FHA (lower barrier to entry) and refinance to conventional once they reach 20% equity to eliminate MIP. Bayou Mortgage can map this timeline for your specific purchase price and expected appreciation. See the FHA refinance options →
Decision Matrix
Which Loan Wins by Credit Score
Your credit score is the single biggest factor in the FHA vs conventional decision. Here's how the math changes across score ranges. Note: these are generalizations — your specific rate quote matters more than the rule of thumb.
760+Excellent
Conventional wins clearly
Best conventional rates available. Low PMI cost. Reaches 20% equity and eliminates PMI well before FHA MIP cost breaks even.
Use Conventional
700–759Good
Run both — it's close
Conventional rates are competitive. PMI cost is reasonable. FHA rate may be slightly lower. The decision often comes down to down payment size and how long you plan to stay.
Run Both Scenarios
620–699Fair
FHA usually wins on rate
Conventional rates get significantly worse below 700. FHA is government-backed so the rate floor is more stable. FHA is often the better monthly payment here despite MIP.
Lean FHA
580–619Rebuilding
FHA is the primary option
Most conventional lenders require 620+. FHA is the practical choice here. Focus on getting the loan closed, then refinance to conventional as your score improves.
FHA Only
Real Scenarios
Which Loan Wins for Your Situation
Abstract comparisons only go so far. Here's how the decision plays out for specific buyer profiles.
Strong credit, 20% down, primary residence
720+ score, $60k down on a $300k home. No mortgage insurance on conventional. Excellent rate. FHA offers no advantages and adds a $5,250 UFMIP. Conventional wins by a wide margin.
Conventional
Fair credit, 3.5% down, first-time buyer
630 score, $8,750 down on a $250k home. Conventional at this score means high PMI and a higher rate. FHA offers a lower rate and is more accessible. The MIP is the cost of entry — but it's the better deal monthly.
FHA
Good credit, 5% down, buying and holding 10+ years
690 score, 5% down on $300k. Monthly payments may be similar initially, but conventional PMI cancels around year 9. FHA MIP never cancels. Over 30 years, conventional saves significantly. Plan to refi if using FHA, or put 5% down on conventional if credit allows.
Conventional
Good credit, 5% down, planning to sell in 5–7 years
690 score, shorter time horizon. Both loans have similar monthly costs for years 1–5. FHA UFMIP is a sunk cost, but the rate may be slightly lower. Over 5–7 years before PMI cancels, the difference is modest. Worth running both — could go either way.
Run Both
Buying a duplex to house-hack, 3.5% down
580 score, buying a 2-unit property, plan to live in one unit and rent the other. FHA allows this with higher loan limits for 2-unit properties. Conventional at this score is difficult. FHA is the clear path here.
See FHA multi-unit limits →
FHA
The Math
Down Payment Cost Comparison
The down payment difference between FHA (3.5%) and conventional (3% or 5%) looks small on paper. Here's what it actually looks like on real loan amounts.
Purchase PriceFHA (3.5%)Conv. (3%)Conv. (5%)
$200,000
$7,000
$6,000
$10,000
$250,000
$8,750
$7,500
$12,500
$300,000
$10,500
$9,000
$15,000
$400,000
$14,000
$12,000
$20,000
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The 3% conventional catch
Conventional 3% down programs (Fannie Mae HomeReady, Freddie Mac Home Possible) have income limits and typically require a 620+ score with solid credit history. They're not available to everyone. FHA's 3.5% has no income ceiling and goes down to 580. If you're comparing 3% conventional vs 3.5% FHA, make sure you actually qualify for the conventional program first.
Want the Side-by-Side With Your Numbers?
Bayou Mortgage will run both scenarios with your actual credit score, down payment, and loan amount so you can see the real monthly payment and total cost comparison.
Common Questions
FHA vs Conventional FAQ
Questions specific to the FHA vs conventional decision.
If I can qualify for both, which should I choose? +
Run both scenarios with real rate quotes. The right answer depends on your exact credit score, down payment, loan amount, and how long you plan to stay. As a general rule: 720+ score with 5%+ down → run conventional first. Below 680 with 3.5% down → FHA usually wins on rate and monthly payment, but MIP is the long-term cost. Bayou Mortgage will show you both.
Can I switch from FHA to conventional later? +
Yes — this is actually a common strategy. Start with FHA to get into the home, then refinance to a conventional loan once you've built enough equity (typically 20%) to eliminate mortgage insurance entirely. Bayou Mortgage can help you plan this timeline based on your purchase price and expected appreciation.
See refinance options →Is FHA harder to get approved for than conventional? +
No — FHA is generally easier to qualify for. Lower credit score minimum (580 vs 620+), higher DTI allowance, and more flexibility on credit history. The stricter part of FHA is the property appraisal, which must meet FHA Minimum Property Standards. Some sellers are less enthusiastic about FHA offers because of this — though it's rarely a deal-breaker in most markets.
Do sellers prefer conventional over FHA offers? +
In competitive markets, some sellers do prefer conventional offers because FHA appraisals have property condition requirements that can complicate the transaction. This perception is often overblown — most homes in decent condition pass an FHA appraisal without issues. If you're in a competitive market, a strong pre-approval letter and proof of funds can offset any seller hesitation about the loan type.
What's the conventional PMI rate vs FHA MIP rate? +
FHA MIP is 0.55% annually for most 30-year loans with less than 10% down — the same regardless of credit score. Conventional PMI varies by credit score and LTV: a 760 score with 5% down might pay 0.3–0.5%, while a 640 score might pay 1.3–1.8%. For borrowers below 700, FHA MIP at 0.55% is often lower than the conventional PMI rate they'd receive.
Can I use FHA to buy a duplex and rent out one side? +
Yes — FHA allows 2–4 unit properties as long as you occupy one unit as your primary residence. The rental income from the other unit(s) can be used to help qualify (with documentation). FHA also has higher loan limits for multi-unit properties.
See FHA multi-unit loan limits →
