FHA or conventional? The right choice saves you thousands.
Quick comparison
| Factor | FHA | Conventional |
|---|---|---|
| Down payment | 3.5% | 3-20% |
| Credit score | 580+ | 620+ |
| PMI | MIP for life (unless 10%+ down) | Removable at 78-80% LTV |
| Loan limits | $644K-$1.09M (CA) | $806,500 |
| Property standards | Stricter | More flexible |
| DTI | Up to 50%+ | Up to 43-45% |
Down payment
FHA: 3.5% minimum
Conventional: 3% minimum (first-time buyers), 5-20% otherwise
Both are low. Edge: Conventional (3% option).
PMI / MIP
FHA mortgage insurance
Upfront: 1.75% of loan (financed)
Monthly: 0.55-0.85% annually
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Example $500K loan:
- Upfront: $8,750
- Monthly: ~$260
MIP stays for life unless you put 10%+ down (then it drops after 11 years).
Conventional PMI
Monthly: 0.3-1.5% annually (varies by down payment and credit)
Example $500K loan, 5% down:
- Monthly PMI: ~$200
PMI drops automatically at 78% LTV or you can request removal at 80% LTV.
Winner long-term: Conventional (you can remove PMI).
Credit requirements
FHA: 580+ (3.5% down), 500-579 (10% down)
Conventional: 620+ minimum, 740+ for best rates
Winner for lower credit: FHA.
Interest rates
Rates are similar. FHA may be slightly lower for borrowers with 620-680 credit. Conventional usually better for 720+ credit.
Total cost over time
5-year scenario ($500K purchase, 5% down):
FHA:
- Upfront MIP: $8,750
- Monthly MIP: $260/month x 60 = $15,600
- Total MIP: $24,350
Conventional:
- Monthly PMI: $200/month x 60 = $12,000
- Total PMI: $12,000
Winner: Conventional saves $12,350 over 5 years.
10-year scenario:
FHA: MIP for all 10 years = $8,750 + $31,200 = $39,950
Conventional: PMI drops after ~5 years when you hit 78% LTV = $12,000
Winner: Conventional saves $27,950 over 10 years.
Property standards
FHA: Strict appraisal requirements. Peeling paint, minor repairs, safety issues must be fixed.
Conventional: More flexible. Cosmetic issues usually okay.
Some sellers refuse FHA because of stricter standards.
DTI limits
FHA: Can go to 50%+ DTI with compensating factors
Conventional: Usually max 43-45% DTI
Winner for tight ratios: FHA.
When to choose FHA
Use FHA if:
- Credit score under 680
- DTI above 43%
- You need more flexible qualification
- You're okay with MIP for life (or until you refi)
When to choose conventional
Use conventional if:
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- Credit score 680+
- You have 5-10%+ down
- You want to remove PMI later
- Property may not meet FHA standards
- Seller prefers conventional
Can you switch later?
Yes! Many buyers use FHA to get in, then refinance to conventional after 1-2 years to:
- Remove MIP
- Get better rate (if credit improved)
- Eliminate FHA restrictions
Real California example
$600K home in Riverside:
FHA (3.5% down):
- Down: $21K
- Upfront MIP: $10,150
- Monthly MIP: $310
- P&I: $3,698
- Total payment: ~$4,600
Conventional (5% down):
- Down: $30K
- Upfront: $0
- Monthly PMI: $240
- P&I: $3,616
- Total payment: ~$4,450
Conventional costs $9K more upfront but saves $150/month and PMI drops later.
Bottom line
FHA: Best for lower credit, tight DTI, or minimal down payment. Plan to refinance later to remove MIP.
Conventional: Best for 680+ credit, 5%+ down, and long-term holding. PMI removal saves thousands.
Run both scenarios with your lender. Small differences upfront can mean huge savings long-term.
Want to compare FHA vs conventional for your situation? Get A Quote.
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Bill McCoy | 888-421-1117 | mccoy@betteroffers.com