The Core Tradeoff
FHA loans are government-backed and easier to qualify for — lower credit scores, higher debt-to-income ratios, smaller down payments. Conventional loans are not government-backed and require better credit — but they're often cheaper long-term, especially if you can put down 20%.
| Feature | FHA Loan | Conventional Loan |
|---|---|---|
| Minimum down payment | 3.5% (580+ credit) / 10% (500-579) | 3% with some programs |
| Minimum credit score | 580 for 3.5% down (some lenders: 500) | 620 minimum; 740+ for best rates |
| Mortgage insurance | MIP for life of loan (if <10% down) | PMI removed at 20% equity |
| Loan limit (2025, most areas) | $524,225 | $766,550 (conforming) |
| Interest rate | Slightly lower typically | Varies; 740+ score gets best |
| Debt-to-income limit | Up to 57% in some cases | 43% standard; 50% with compensating factors |
The Mortgage Insurance Math — Where FHA Loses
The biggest FHA drawback: if you put less than 10% down, you pay the Mortgage Insurance Premium (MIP) for the entire life of the loan. MIP is 0.55% of the loan annually — on a $350,000 loan, that's $1,925/year, $160/month, forever. With a conventional loan, PMI disappears when you hit 20% equity — often 7-10 years into the loan.
$350,000 FHA loan at 3.5% down over 30 years: MIP for life = $57,750 total. Same loan refinanced to conventional after reaching 20% equity at year 8: MIP paid = $15,400. The savings of refinancing out of FHA early: $42,350. For people who plan to own long-term, improving credit and refinancing to conventional — or putting 10% down on FHA to eliminate lifetime MIP — dramatically reduces total cost.
When FHA Is the Right Choice
- Credit score below 660 — FHA rates are more competitive at lower scores
- High debt-to-income ratio that conventional lenders won't approve
- You plan to sell or refinance within 5-7 years (before MIP adds up)
- You need the more flexible qualification standards to get into a home now
When Conventional Is the Right Choice
- Credit score 700+ — conventional rates become very competitive
- You can put 20% down and avoid PMI entirely
- You plan to own long-term (PMI removal saves significantly vs. lifetime MIP)
- The home exceeds FHA loan limits in high-cost areas