The choice between an FHA and conventional loan isn't just about down payments—it's about the total cost of homeownership over time. Making the wrong choice could cost you $50,000 or more over the life of your loan.
Let's cut through the marketing speak and examine real costs, with actual numbers that show which loan type saves money for different buyers.
The Fundamental Differences That Affect Your Wallet
Before diving into costs, understand the key distinctions between these loan types:
FHA Loans (Federal Housing Administration)
- Government-insured mortgages
- Minimum 3.5% down payment
- Credit scores from 580 (or 500 with 10% down)
- Mortgage insurance required for the life of the loan (in most cases)
- More flexible on employment history and debt ratios
Conventional Loans
- Private mortgages following Fannie Mae/Freddie Mac guidelines
- Minimum 3% down payment (for qualified buyers)
- Credit scores typically 620+
- PMI cancellable at 20% equity
- Stricter qualification requirements
As detailed in our First-Time Homebuyer's Guide, both options serve different buyer profiles effectively.
The True Cost Comparison: 5 Real Scenarios
Let's examine a $350,000 home purchase across different buyer profiles, assuming current market rates (FHA: 6.75%, Conventional: 7.00% for comparison).
Scenario 1: Minimum Down Payment Buyer (Credit Score: 640)
FHA Loan (3.5% down - $12,250)
- Loan amount: $337,750
- Monthly payment: $2,191
- Upfront MIP: $5,891 (financed)
- Monthly MIP: $197
- Total monthly: $2,388
- Total paid over 30 years: $859,680
Conventional Loan (3% down - $10,500)
- Loan amount: $339,500
- Monthly payment: $2,259
- Monthly PMI: $283
- Total monthly: $2,542
- PMI drops off at year 9
- Total paid over 30 years: $841,920
Winner: FHA by $154/month initially, but Conventional saves $17,760 over loan life
Scenario 2: Strong Credit Buyer (Score: 760)
FHA Loan (3.5% down)
- Same structure as above
- Rate might be 0.25% lower: 6.5%
- Total monthly: $2,331
- Total over 30 years: $839,160
Conventional Loan (5% down - $17,500)
- Loan amount: $332,500
- Rate with excellent credit: 6.75%
- Monthly payment: $2,157
- Monthly PMI: $166
- Total monthly: $2,323
- PMI drops at year 7
- Total over 30 years: $807,720
Winner: Conventional saves $31,440 over loan life
Use our Refinance Calculator to see when switching from FHA to conventional makes sense.
Scenario 3: The 10% Down Payment Buyer
FHA Loan (10% down - $35,000)
- Loan amount: $315,000
- Monthly payment: $2,044
- Monthly MIP: $184
- Total monthly: $2,228
- MIP for life of loan
- Total over 30 years: $802,080
Conventional Loan (10% down)
- Loan amount: $315,000
- Monthly payment: $2,096
- Monthly PMI: $131
- Total monthly: $2,227
- PMI drops at year 6
- Total over 30 years: $764,160
Winner: Conventional saves $37,920 due to cancellable PMI
The Hidden Costs Nobody Talks About
FHA's Lifetime Mortgage Insurance Trap
Here's what lenders won't emphasize: If you put down less than 10% on an FHA loan, you pay mortgage insurance for the entire 30 years. That's $197/month on our example—forever.
Over 30 years, that's $70,920 in mortgage insurance alone, even when you owe just $50,000 on a home worth $500,000.
The only escape? Refinancing to conventional once you have 20% equity. But as we discuss in our Complete Guide to Refinancing, this means paying closing costs again and potentially getting a higher rate.
Conventional PMI: The Disappearing Cost
Conventional loans let you cancel PMI at 20% equity (automatically cancelled at 22%). This typically happens through:
- Regular payments (years 7-11 depending on down payment)
- Home appreciation (request early removal with appraisal)
- Principal prepayments
In hot markets, appreciation alone might eliminate PMI in 3-5 years, saving $15,000-30,000.
Interest Rate Reality Check
Common myth: FHA loans always have lower rates. Reality: It depends on your credit score.
Credit Score Impact on Rates
FHA Loans:
- 580-619: Best relative rates (often 0.5-0.75% below conventional)
- 620-679: Still competitive (0.25-0.5% below conventional)
- 680-739: Similar to conventional
- 740+: Often higher than conventional for excellent credit
Conventional Loans:
- 620-659: Higher rates, expensive PMI
- 660-739: Moderate rates and PMI
- 740+: Best rates and lowest PMI
Check current rate predictions in our 2025 Mortgage Rate Analysis for market trends.
Down Payment Assistance: The Game Changer
Many buyers don't realize both loan types work with down payment assistance programs, but rules differ:
FHA + Down Payment Assistance
- Most flexible with assistance programs
- Can cover entire 3.5% down payment
- Gift funds allowed from family
- Some programs cover closing costs too
Conventional + Down Payment Assistance
- Requires some buyer contribution (varies by program)
- May have income limits
- Often requires first-time buyer status
- Can dramatically reduce PMI costs
Our upcoming guide on State-by-State First-Time Buyer Programs details available assistance.
Property Type Restrictions: What You Can't Buy
FHA Loan Property Standards
FHA requires properties meet strict standards:
- No exposed wiring or missing handrails
- Functioning heating/cooling
- No peeling paint (pre-1978 homes)
- Roof must last 2+ years
- No standing water or drainage issues
This eliminates many fixer-uppers unless using FHA 203(k) renovation loans. Learn what to watch for in our Home Inspection Red Flags guide.
Conventional Loan Flexibility
Conventional loans offer more property flexibility:
- Condition requirements less strict
- Investment properties allowed
- Second homes permitted
- No self-sufficiency test for condos
The Refinancing Factor
Your initial loan choice affects future refinancing options:
Starting with FHA
- FHA Streamline refinance available (no appraisal/income verification)
- Can refinance to conventional with 20% equity
- Must refinance to eliminate permanent MIP
Starting with Conventional
- More refinance options available
- Can refinance to FHA if credit deteriorates
- No forced refinancing to eliminate insurance
Current market conditions affect refinancing strategy—see our analysis on Rising Interest Rates.
Special Programs Within Each Loan Type
FHA Special Programs
FHA 203(k) Renovation Loans
Finance purchase plus renovations in one loan. Perfect for fixer-uppers that wouldn't qualify for standard financing.
FHA Energy Efficient Mortgage
Finance energy improvements with your mortgage, potentially qualifying for a larger loan amount.
Conventional Special Programs
HomeReady / Home Possible
3% down with reduced PMI for qualified buyers. Income from boarders/renters can count toward qualification.
Conventional 97
Standard 3% down program for first-time buyers with good credit.
Compare these to VA Loans or USDA Loans if you qualify.
Market Timing and Loan Choice
Current market conditions affect which loan type saves money:
In Rising Rate Environments
- FHA's typically lower rates become more valuable
- Lock in FHA, plan to refinance when rates drop
- Conventional PMI becomes relatively less expensive
In Falling Rate Environments
- Conventional loans position you better for refinancing
- Avoid FHA's permanent MIP trap
- Focus on eliminating PMI through appreciation
See our Best and Worst Months to Buy for timing strategies.
The Credit Score Sweet Spots
Your credit score dramatically affects which loan saves money:
580-619 Credit Score
- Clear winner: FHA
- May be only option available
- Conventional rates prohibitively high if available
620-679 Credit Score
- Usually FHA wins
- Compare total costs carefully
- Consider rapid credit improvement strategy
680-739 Credit Score
- Depends on down payment
- Under 10% down: Often FHA
- Over 10% down: Usually conventional
740+ Credit Score
- Conventional typically wins
- Best rates and lowest PMI
- More loan options available
Learn credit improvement strategies in our guide on Credit Score Myths.
Real Cost Calculator: Your Situation
To determine your best option, calculate:
- Monthly payment difference
- Total interest over expected ownership period
- Total mortgage insurance costs
- Likelihood of refinancing
- Home appreciation in your market
Use our Mortgage Calculator to run your specific numbers.
The Seller's Perspective: Which Offers Win?
In competitive markets, your loan type affects offer strength:
FHA Offers
- Seen as riskier due to property requirements
- Longer closing times typical
- May need higher offers to compete
- Some sellers won't accept FHA
Conventional Offers
- Preferred by most sellers
- Faster, smoother closings
- Fewer deal-killing inspection issues
- Stronger negotiating position
Learn negotiation tactics in our guide on Negotiating Your Best Deal.
Making Your Decision: The Action Plan
Choose FHA When:
- Credit score below 640
- Down payment under 5%
- High debt-to-income ratio
- Recent credit events (bankruptcy/foreclosure)
- Self-employed with complex income
Choose Conventional When:
- Credit score above 680
- Can put down 5% or more
- Want to avoid lifetime mortgage insurance
- Buying investment property or second home
- Property may have condition issues
The Five-Year Cost Analysis
Most buyers don't keep loans for 30 years. Here's the 5-year cost comparison for our $350,000 example:
FHA (3.5% down, 640 credit)
- Total payments: $143,280
- Principal paid: $28,450
- Equity at year 5: ~$63,450 (with appreciation)
Conventional (5% down, 640 credit)
- Total payments: $139,380
- Principal paid: $27,200
- Equity at year 5: ~$69,700 (with appreciation)
The conventional loan builds more equity despite paying less principal, thanks to the larger down payment and home appreciation.
Expert Tips for Each Loan Type
Maximizing FHA Benefits
- Time purchase when credit is rebuilding
- Use gift funds for down payment
- Plan refinance strategy from day one
- Consider FHA 203(k) for fixer opportunities
- Negotiate seller-paid closing costs
Maximizing Conventional Benefits
- Improve credit before applying (even 20 points helps)
- Pay PMI upfront if staying long-term
- Request PMI removal at 20% equity
- Shop multiple lenders for best rates
- Consider ARM options for short-term ownership
The Bottom Line: Total Cost of Ownership
For most buyers with decent credit (680+) and 5% down, conventional loans save money long-term through cancellable PMI. FHA loans serve buyers with credit challenges or minimal down payments but cost more over time.
The key is matching your loan to your situation:
- Short-term ownership (under 5 years): Monthly payment matters most
- Long-term ownership: Total interest and MI costs are crucial
- Credit improving: Start FHA, refinance to conventional
- Stable finances: Conventional usually wins
Don't let the down payment be your only consideration. As we explain in our guide on Emergency Fund vs Down Payment, maintaining reserves matters more than maximizing your down payment.
Ready to apply? Avoid common Pre-Approval Mistakes and understand The Closing Process to ensure smooth sailing to homeownership.