FHA vs conventional: which loan costs less?

If your credit score is somewhere between 620 and 720 and you plan to put down less than 10%, you will probably qualify for both an FHA loan and a conventional loan. The question is which one leaves more money in your pocket. The answer depends on three variables: your credit score, your down payment and how long you plan to keep the loan.

The key differences at a glance

Minimum down payment: 3.5% for FHA, 3% to 5% for conventional.
Minimum credit score: 580 for FHA, 620 for conventional.
Mortgage insurance: FHA charges 1.75% upfront plus an annual premium. Conventional charges monthly PMI that varies with credit and can be cancelled.
Rates: FHA rates are often lower than conventional rates for borrowers with mid-range credit.
Loan limits: FHA limits in Salt Lake County are lower than conventional limits.

Where FHA wins

FHA pricing does not change much with credit score. A borrower with a 640 score often gets a rate close to a borrower with a 740 score. Conventional pricing, on the other hand, adds cost at each lower credit tier, and PMI rises steeply below 700.

That means for a borrower with a 650 score and 3.5% down, FHA frequently produces the lower monthly payment, even after mortgage insurance. FHA is also more forgiving on debt-to-income ratios, which matters if you carry student loans.

Where conventional wins

Once your score reaches about 720 to 740, conventional PMI becomes inexpensive and the rate gap narrows or reverses. Conventional also has a big long-term advantage: PMI cancels automatically at 78% loan-to-value, and you can request removal at 80%. FHA mortgage insurance stays for the life of the loan if you put down less than 10%.

Conventional loans also allow second homes and investment properties, and appraisals are generally less strict about repairs.

A side-by-side sample

Here is a sample comparison on a $450,000 home in West Jordan with a 680 credit score. Rates are illustrative.

FHA with 3.5% down

Base loan: $434,250, plus 1.75% upfront premium financed
Sample rate: 5.75%
Principal and interest: about $2,578
Monthly mortgage insurance: about $199
Total before taxes and insurance: about $2,777

Conventional with 5% down

Loan: $427,500
Sample rate: 6.375%
Principal and interest: about $2,667
Monthly PMI: about $178
Total before taxes and insurance: about $2,845

In year one, FHA wins by about $68 per month. But assume the home appreciates 3% a year and you pay down principal. Conventional PMI could cancel in roughly six to seven years. FHA insurance keeps going unless you refinance.

The refinance factor

Many borrowers choose FHA to get into a home sooner, then refinance to conventional once their score improves and they reach 20% equity. That is a sound strategy, but it assumes rates will be reasonable when you are ready and that you are comfortable paying refinance closing costs. We model both paths so you can decide with real numbers.

Questions to ask your loan officer

What is my payment on each program at my exact credit score?
How many months until conventional PMI would cancel under a modest appreciation estimate?
What is my five-year total cost for each, including mortgage insurance and interest?
Would a 20 point credit score increase change the recommendation?

The honest answer is rarely one program for everyone. It is the program that matches your credit, cash and timeline. Start with a pre-qualification and we will show both options in one side-by-side estimate.

All figures are samples for illustration and are not loan offers. Mortgage insurance premiums, rates and eligibility vary.