FHA vs Conventional Loans: Down Payment, Insurance, Limits

The short comparison

Mortgage insurance is the main difference

FHA. Every FHA loan carries mortgage insurance premiums paid to the FHA. The CFPB notes that FHA insurance costs the same regardless of your credit score, with only a slight increase for down payments under 5%. Under HUD Mortgagee Letter 2023-05, for loans over 15 years with a base amount up to $726,200:

Larger loans pay 0.70% to 0.75%, and loans of 15 years or less pay 0.15% to 0.65%. The upfront premium is 1.75% of the base loan for all of them.

Conventional. PMI is priced by private insurers. The CFPB says PMI rates vary by down payment and credit score and are generally cheaper than FHA for borrowers with good credit. The Homeowners Protection Act lets you cancel PMI at 80% of original value and ends it automatically at 78%, as our PMI guide explains.

For a conventional quote on the same home, enter the PMI from your Loan Estimate in our payment calculator and switch the loan type to compare.

When each tends to cost less

The CFPB's rate explorer sums it up: FHA loans can be less expensive than conventional loans for borrowers with lower credit scores and a down payment of less than 10% to 15%. With strong credit, conventional PMI is often cheaper, and it doesn't last for the life of the loan.

Things that tip the balance:

• Credit score. Lower scores raise PMI more than they raise FHA premiums.
• How long you will keep the loan. Lifetime FHA MIP matters more over 10 or 20 years than over 3.
• Down payment. At 10% down, FHA annual MIP ends after 11 years; under 10%, it doesn't.
• Loan size. Both programs have county limits, and FHA limits are usually lower than conforming limits. Above the conforming limit, a conventional loan becomes a jumbo loan.

Other differences

• Property types. HUD says FHA purchase loans are available on 1 to 4 unit properties, and FHA also has programs for manufactured homes.
• Help with the down payment. HUD points buyers to state and local down payment assistance programs, which can be paired with either loan type depending on the program.
• Debt-to-income. Each program sets its own limits. See our DTI guide.

The best way to choose is to get a Loan Estimate for each and compare the total of payments and mortgage insurance over the years you expect to keep the loan. This guide is educational, not advice.

Common questions

Can I switch from FHA to conventional later?

Yes, by refinancing into a conventional loan, often to drop lifetime FHA mortgage insurance once you have enough equity. A refinance has closing costs, so check the break-even.

Is FHA only for first-time buyers?

No. HUD pitches FHA loans to first-time buyers, but the program is not limited to them. Ask an FHA lender about occupancy and other eligibility rules.

Which has the lower interest rate?

It depends on your credit and the lender. Compare Loan Estimates for both, including mortgage insurance, rather than the rate alone.