FHA vs. conventional loans: down payment, mortgage insurance, and total cost

Two ways to insure a small down payment

HUD explains that the FHA insures these loans so your lender can offer you a better deal, and the CFPB notes that FHA mortgage insurance is required on every FHA loan. You apply through an FHA-approved lender.

Either way, the insurance protects the lender, not you. The CFPB notes that private mortgage insurance rates vary by down payment and credit score and are generally cheaper than FHA rates for borrowers with good credit, while FHA mortgage insurance costs the same no matter your credit score. It says FHA loans tend to cost more with good credit and 10% to 15% down but can often be the cheapest option with lower scores or smaller down payments. There are no hard-and-fast rules, so get quotes for both.

Sources: HUD: FHA loans for homebuyers · CFPB: FHA loans · HUD: FHA Single Family Housing Policy Handbook 4000.1 (PDF) · CFPB: Conventional loans · CFPB: How mortgage insurance works

Minimum down payments and credit scores

HUD’s Single Family Housing Policy Handbook 4000.1 requires a minimum investment of at least 3.5% of the adjusted value, which on a purchase is generally the lower of the price or the appraised value. The maximum loan-to-value ratio on a purchase is 96.5%. With a credit score of 580 or higher (the handbook’s minimum decision credit score), you are eligible for maximum financing. From 500 to 579, the loan is limited to 90% of the value, so you need at least 10% down. Below 500, you are not eligible. If you have no credit score or a thin credit history, the handbook still allows maximum financing, but the lender must underwrite the loan manually.

Conventional loans can go lower. Fannie Mae’s Selling Guide allows a purchase loan above 95% of the value, up to 97%, under conditions that include a fixed-rate loan that is not a high-balance loan, a one-unit principal residence, and underwriting through its Desktop Underwriter system. Unless the loan is a HomeReady mortgage, at least one borrower must also be a first-time homebuyer, with no ownership interest in a property in the last three years. Other 3% programs set their own conditions, shown in the table. On credit, Fannie Mae’s guide sets no fixed minimum score for loans assessed by Desktop Underwriter, which analyzes your credit report itself, and a 620 minimum for manually underwritten fixed-rate loans. The CFPB notes that loan products set different debt-to-income ratio limits, so ask each lender how your debts would count and which program you would qualify for.

Sources: HUD: FHA Single Family Housing Policy Handbook 4000.1 (PDF) · Fannie Mae Selling Guide: Purchase transactions · Fannie Mae Selling Guide: HomeReady eligibility · Freddie Mac: HomeOne mortgage · Freddie Mac: Home Possible mortgage · Fannie Mae Selling Guide: Credit score requirements · CFPB: Debt-to-income ratio

Loan limits and property standards

FHFA set the 2026 conforming loan limit, the largest one-unit loan Fannie Mae and Freddie Mac will generally acquire, at $832,750 in most of the country, with a ceiling of $1,249,125 in high-cost areas. For FHA case numbers assigned on or after January 1, 2026, HUD’s Mortgagee Letter 2025-23 sets one-unit limits from a floor of $541,287 to a ceiling of $1,249,125. Both agencies set higher limits for Alaska, Hawaii, Guam, and the U.S. Virgin Islands. HUD publishes a lookup tool for your county’s FHA limit.

FHA also sets property standards. Under HUD’s Minimum Property Requirements, every home FHA insures must be safe, sound, and secure. The appraiser notes required repairs, and the lender generally approves the property only after confirming the defects are corrected. If repairs to an existing home cannot be finished before closing, the handbook lets the lender set up a repair escrow, but only if the home is habitable and safe to live in at closing.

Sources: FHFA: Conforming loan limit values for 2026 · HUD: Mortgagee Letter 2025-23, 2026 FHA loan limits (PDF) · HUD: FHA Single Family Housing Policy Handbook 4000.1 (PDF)

FHA mortgage insurance: upfront and annual

FHA charges two premiums. The upfront mortgage insurance premium is generally 1.75% of the base loan amount; the handbook lists exceptions, such as loans on Hawaiian Home Lands and some refinances of FHA loans endorsed by May 31, 2009. HUD allows it to be financed into the loan or paid in cash, and the mortgage amount is rounded down to the whole dollar. The handbook says it is not refundable, except in connection with a refinance into a new FHA-insured loan.

The annual premium is paid monthly at the Appendix 1.0 rates below; loans of 15 years or less pay less. HUD computes each year’s premium from the average balance scheduled for that year, so the monthly amount falls a little each year.

Sources: HUD: FHA Single Family Housing Policy Handbook 4000.1 (PDF) · HUD: How the monthly FHA premium is calculated

How long each kind of insurance lasts

The FHA annual premium lasts 11 years only at a loan-to-value ratio of 90% or less, which means at least 10% down. For case numbers assigned on or after June 3, 2013, HUD cancels it automatically on that schedule. With 3.5% or 5% down, you pay it for as long as you keep the loan.

PMI on a conventional loan follows federal cancellation rules instead: you can generally ask to cancel it when the balance is scheduled to reach 80% of the original value, and it must generally end at 78% if you are current on payments. For the conventional loan in the example below, those dates are month 130 and month 142.

Sources: HUD: FHA Single Family Housing Policy Handbook 4000.1 (PDF) · CFPB: When you can remove private mortgage insurance

Worked example: two loans on a $370,000 home

Take a hypothetical $370,000 home. The FHA loan uses the 3.5% minimum, a $12,950 down payment, for a base loan of $357,050. Financing the $6,248.38 upfront premium brings the loan to $363,298. With the base loan at 96.5% of the price, the annual premium rate is 0.55%: $162.86 a month in year 1 and $141.34 in year 10. The conventional loan uses 5% down, $18,500, for a $351,500 loan, with a hypothetical PMI rate of 0.50% of the loan a year, or $146.46 a month, assumed to stay a fixed percentage of the original loan; ask how yours is calculated.

Each loan type gets one hypothetical 30-year fixed rate: 6.75% for FHA and 7.00% for conventional. They are assumptions, not quotes, and the gap matters: at 7.00%, the FHA principal and interest would be $2,417.03, or $60.69 more than at 6.75%. Cost here means interest plus all mortgage insurance, including the upfront premium. Principal you repay is not counted, because it becomes equity, and closing costs are left out.

The FHA loan also needs $5,550 less down, and the comparison does not count what that cash could earn elsewhere. With 5% down, an FHA loan would pay the lower 0.50% annual premium, so compare quotes at the down payment you plan to make.

Sources: HUD: FHA Single Family Housing Policy Handbook 4000.1 (PDF) · HUD: How the monthly FHA premium is calculated

Where the answer flips

At a 0.50% PMI rate, the conventional loan costs $34.20 less a month in the first year, $6,448 less over 5 years, and $5,646 less over 10 years. Insurance drives the gap. Over 10 years, the FHA loan pays $18,367 in monthly premiums plus the upfront premium, $24,616 in all, against $17,575 of PMI. That $7,041 difference outweighs the FHA loan’s $1,395 interest advantage ($229,360 against $230,755).

The conventional loan has the lower first-year payment at PMI rates below about 0.62%. It costs less over 5 years below about 0.87%, but over 10 years only below about 0.66%. Over time, the FHA upfront premium spreads across more years, its annual premium shrinks with the balance, and its lower hypothetical rate keeps saving interest, while the assumed PMI stays fixed. After month 142, the PMI would generally end and the FHA premium would not, which favors the conventional loan over longer stays.

The rate gap drives much of this. With both loans at 7.00%, the conventional loan would cost less over 5 years at PMI rates below about 1.13%, and over 10 years below about 0.92%.

Sources: CFPB: How mortgage insurance works · HUD: How the monthly FHA premium is calculated · CFPB: When you can remove private mortgage insurance · HUD: FHA Single Family Housing Policy Handbook 4000.1 (PDF)

Refinancing out of FHA later

You may plan to refinance into a conventional loan later to drop the annual premium. A refinance is a new loan: Freddie Mac notes that it comes with upfront costs, including an appraisal and underwriting and origination fees. You would need to qualify again, at future rates no one can know today.

Equity matters too. After 10 years in the example, the FHA balance would be $309,897, which is 83.8% of the $370,000 price if the home’s value had not changed. Fannie Mae’s Selling Guide generally requires mortgage insurance on conventional loans it buys, including refinances, when the loan-to-value ratio is above 80%, so a refinance then could trade one premium for another. Before counting on a refinance, run a refinance break-even estimate with realistic costs.

Sources: Freddie Mac: A closer look at refinancing · Fannie Mae Selling Guide: When mortgage insurance is required · HUD: FHA Single Family Housing Policy Handbook 4000.1 (PDF)

Your next-step checklist

• Get FHA and conventional quotes on the same day.
• Get the actual PMI rate for your credit score and down payment.
• Check whether you qualify for a 3% down conventional program.
• Look up your county’s 2026 FHA loan limit.
• Ask how your debts would count under each program.
• Ask how the home’s condition could affect an FHA appraisal.