Conventional vs. FHA Loans: Which One Actually Saves You Money?

When you’re deciding between a conventional loan and an FHA loan, most people focus on the down payment requirement.

Conventional: 3-5% down
FHA: 3.5% down

They look pretty similar, right? So why not just go with FHA since it’s “easier to qualify”?

Not so fast. The down payment is just one piece of the puzzle. When you factor in mortgage insurance, credit score impacts, and long-term costs, conventional loans often come out ahead—even for borrowers with less-than-perfect credit.

Let me show you the real math.

The Mortgage Insurance Trap

Both loan types require mortgage insurance if you put down less than 20%. But how that insurance works is dramatically different.

Conventional PMI:

• Costs 0.3% to 1.5% of loan amount annually
• Can be removed once you reach 20% equity
• Automatically terminates at 78% LTV
• Cost varies based on credit score and down payment

FHA MIP (Mortgage Insurance Premium):

• Costs 0.55% of loan amount annually (for most loans)
• Includes a 1.75% upfront premium rolled into the loan
• Can NEVER be removed if you put down less than 10%
• Can be removed after 11 years if you put down 10%+

That last point is huge. If you put down 3.5% on an FHA loan, you’re paying mortgage insurance for the entire 30-year term unless you refinance.

Let’s run a real scenario:

$350,000 home purchase, 5% down, 30-year loan at 6.5% interest

Conventional Loan:

• Loan amount: $332,500
• PMI: ~$180/month
• PMI duration: Approximately 9 years (until 20% equity through paydown + appreciation)
• Total PMI paid: ~$19,440

FHA Loan:

• Loan amount: $343,688 (includes 1.75% upfront MIP)
• Monthly MIP: ~$157
• MIP duration: 30 years (entire loan term)
• Total MIP paid: ~$56,520

The FHA loan looks cheaper monthly ($180 vs. $157), but you’ll pay $37,000 more over the life of the loan because you can’t remove it.

Credit Score Impact

FHA loans are marketed as “easy to qualify” because they accept credit scores as low as 580 (or even 500 with 10% down).

But here’s what nobody tells you: if your credit score is 640 or higher, conventional loans almost always cost less—even with PMI.

Why? Because conventional PMI pricing is tied to your credit score. Higher scores get much lower PMI costs.

Example: $400,000 loan, 5% down, 740 credit score

• Conventional PMI: ~0.4% annually = $133/month
• FHA MIP: 0.55% annually = $183/month

The conventional loan is $50/month cheaper with better terms and removable insurance.

If your score is below 640, FHA starts looking more attractive because conventional PMI costs spike dramatically at lower score tiers. But even then, improving your credit to 680+ and waiting a few months to apply for conventional could save you tens of thousands long-term.

Want to understand exactly how your credit score impacts loan pricing? Check out MiddleCreditScore.com to see how lenders evaluate your middle score and what improvements would save you the most money.

Down Payment Flexibility

Conventional loans offer more down payment options:

• 3% down for first-time buyers (HomeReady/Home Possible programs)
• 5% down for repeat buyers
• Any amount up to 20% with PMI
• 20%+ with no PMI

FHA is more rigid:

• 3.5% minimum with 580+ credit score
• 10% minimum with 500-579 credit score
• No benefit to putting down more unless you reach 10% (for MIP removal after 11 years)

If you have 10-15% to put down, conventional loans reward you with lower PMI costs. FHA doesn’t offer the same incentive structure.

Loan Limits and Property Types

Conventional loans have higher conforming limits in most areas:

• Baseline: $806,500 (2025)
• High-cost areas: Up to $1,209,750

FHA limits are lower:

• Baseline: $498,257 (2025)
• High-cost areas: Up to $1,149,825

If you’re buying in a moderately priced market, this might not matter. But in expensive metros like San Francisco, Seattle, or Boston, FHA limits can disqualify homes that conventional loans would cover.

FHA also has stricter property condition requirements. The home must meet HUD minimum property standards, which can disqualify fixer-uppers or homes needing repairs. Conventional loans are more flexible—if the appraiser notes issues, you can often negotiate repairs or credits without killing the deal.

Seller Perception and Negotiating Power

This one’s anecdotal, but real: in competitive markets, sellers prefer conventional loan buyers.

Why? FHA loans have a reputation for falling through due to appraisal issues, property condition requirements, and longer processing times. Sellers worried about deal certainty will choose a conventional buyer over an FHA buyer—even if the FHA offer is slightly higher.

I’ve seen sellers accept offers $5,000-10,000 lower from conventional buyers because they’re confident the deal will close. If you’re competing in a hot market, qualifying for conventional gives you a negotiating advantage.

The Refinance Consideration

Here’s a strategy a lot of buyers use: start with FHA, then refinance to conventional once you have 20% equity.

This works, but it’s not free. You’ll pay closing costs twice—once on the original FHA loan and again on the conventional refinance. Depending on market conditions, that could be $5,000-10,000 in additional costs.

If you’re confident your credit score will improve or you expect rapid home appreciation, this strategy can make sense. But if you can qualify for conventional upfront, you’re avoiding the refinance cost and headache entirely.

For more on refinance timing and strategies, including options for accessing equity, explore resources at Cash-OutRefinance.com to understand when refinancing makes financial sense.

Multi-Unit Properties

Buying a duplex, triplex, or fourplex? Conventional loans allow up to 4 units with owner-occupancy. FHA does too, but the underwriting is more conservative.

Conventional lenders will count 75% of expected rental income toward your qualifying income. FHA requires more documentation and is stricter about rental history and market rents.

If you’re house hacking (living in one unit, renting the others), conventional loans give you more flexibility and faster approvals.

When FHA Actually Makes Sense

I don’t want to make it sound like FHA is always the wrong choice. There are legitimate scenarios where FHA wins:

Your credit score is below 640. Conventional PMI costs spike dramatically at lower score tiers. FHA’s flat 0.55% MIP might actually be cheaper.

You have limited cash for down payment and closing costs. FHA allows sellers to contribute up to 6% toward your closing costs (conventional allows 3-6% depending on down payment). If you’re cash-strapped, this can make the difference between closing and not closing.

Your debt-to-income ratio is high. FHA allows DTI ratios up to 56.9% with compensating factors. Conventional typically caps at 45-50%. If your income is tight relative to your debts, FHA might be your only option.

You’re buying a foreclosure or fixer-upper. FHA 203(k) loans allow you to finance purchase + repairs in one loan. This is perfect for buyers willing to take on a project.

Your credit history is thin. FHA is more forgiving with limited credit history. Conventional underwriting prefers established credit profiles with multiple tradelines.

The 5-Year Break-Even Analysis

Here’s how I recommend deciding:

Calculate your total cost of ownership over 5 years for both loan types.

Include:

• Down payment
• Upfront MIP (FHA only)
• Monthly payment (P&I + insurance + taxes)
• Mortgage insurance costs
• Estimated equity from appreciation and paydown

Whichever loan results in higher net worth after 5 years is probably the better choice—assuming you plan to stay in the home that long.

Most of the time, conventional wins this analysis for borrowers with 660+ credit scores and 5%+ down payment. But run your specific numbers to be sure.

Your Next Move

Don’t just pick FHA because you think it’s “easier.” Talk to a licensed loan officer, pull your credit, and compare both options side by side.

Ask them to show you:

• Monthly payment difference
• Total mortgage insurance costs over 10 years
• Break-even point if you plan to refinance
• Impact of improving your credit score before applying

Sometimes FHA is the right call. But more often than people realize, conventional loans save you money—even if you’re not putting down 20%.

Ready to compare conventional and FHA options with verified loan officers who’ll show you the real numbers? Visit Browse Lenders to connect with professionals who prioritize education over sales pressure and help you make the smartest decision for your situation.