Choosing a loan · Phase 3
FHA vs Conventional: Which Is Better for First-Time Buyers?
It's the most common loan decision a first-time buyer faces, and the popular advice — "FHA is for first-timers" — is often wrong. The right answer turns on your credit score, your down payment, and one detail most people miss: how long you'll pay mortgage insurance. Here's how to decide.
The decision rule. Choose FHA if your credit is in the 580–619 range or your budget is tight — it's easier to qualify for. Choose a conventional loan if your score is roughly 700+, because it can cost less over time: conventional PMI is cancellable at 20% equity, while FHA's mortgage insurance usually lasts the life of the loan when you put less than 10% down. Conventional even wins on minimum down payment (3% vs 3.5%). The mortgage insurance — not the down payment — is what usually decides it.
FHA vs conventional, side by side (2026)
| Feature | FHA | Conventional |
|---|---|---|
| Minimum credit score | 580 (500–579 with 10% down) | 620 (typical) |
| Minimum down payment | 3.5% | 3% (Conv 97 / HomeReady / Home Possible) |
| Mortgage insurance | MIP: 1.75% upfront + ~0.55%/yr | PMI: ~0.5–1.5%/yr, no upfront |
| Does insurance cancel? | No if <10% down (life of loan); 11 yrs if ≥10% down | Yes — at 20% equity (auto at 22%) |
| Insurance priced by credit score? | No | Yes (better score = lower PMI) |
| 2026 loan limit (1-unit, baseline) | Floor $541,287 (higher in costly areas) | $832,750 (higher in costly areas) |
Sources: HUD/FHA (FHA terms & MIP), Fannie Mae/Freddie Mac (conventional & 3%-down programs), CFPB (PMI cancellation), FHFA (2026 limits).
When FHA is the better choice
- Your score is 580–619. You clear FHA's threshold but not the usual 620 conventional floor, so FHA may be your only low-down-payment path.
- Your debt-to-income is tight. FHA underwriting is generally more flexible on DTI and past credit blemishes than conventional.
- Your score is under 700. Conventional PMI is priced by credit score, so a middling score makes conventional PMI expensive — sometimes more than FHA's flat MIP.
- You had a recent hiccup. FHA's waiting periods after events like a past foreclosure or bankruptcy are typically shorter.
When conventional is the better value
- Your score is ~700+. You get lower PMI (it's score-based) and better rate pricing.
- You want the insurance to end. Conventional PMI cancels at 20% equity on request and terminates automatically at 22% — FHA MIP usually doesn't.
- You want the smallest down payment. Conventional 97, HomeReady, and Home Possible go to 3% down, below FHA's 3.5%.
- You're income-eligible for HomeReady/Home Possible. Within the 80%-of-area-median-income limit, these add reduced PMI and other first-time-buyer benefits.
The mortgage-insurance difference that usually decides it
Both loans charge mortgage insurance when you put down less than 20% — but they behave very differently, and that difference is where the real money is.
FHA charges an upfront premium of 1.75% of the loan (usually financed into the balance) plus an annual MIP most borrowers pay at about 0.55% a year. The catch: if you put down less than 10%, that annual MIP stays for the life of the loan. Put down 10% or more and it drops off after 11 years.
Conventional charges no upfront premium, and its PMI — typically 0.5% to 1.5% a year depending on your credit and down payment — is cancellable. Under the federal Homeowners Protection Act you can request cancellation at 80% loan-to-value (20% equity), and it must terminate automatically at 78%.
Why this flips the popular advice
Because FHA insurance can be permanent, an FHA buyer who bought with 3.5% down and never refinances can pay mortgage insurance for decades. A conventional buyer sheds it at 20% equity. That's why many FHA buyers later refinance into a conventional loan once they have the equity — and why a strong-credit first-time buyer is often better off starting conventional.
How to actually decide
Don't choose on the headline down payment. Get a real quote for both from the same lender on the same day, and compare three things: the all-in monthly payment (including insurance), how long you'll pay that insurance, and the total cost over the years you actually expect to keep the loan. Then let your credit score break the tie — lower score leans FHA, strong score leans conventional.
Run both side by side
Compare FHA vs conventional with your numbers
See the monthly payment and mortgage-insurance cost for each with your price, score, and down payment — no signup.
Related in the First-Time Home Buyer Guide: check what credit score you need, look at down payment assistance, and if you served, compare a 0%-down VA loan.
Keep reading
- First-Time Buyer Questions, AnsweredThe 30 questions buyers actually ask — down payments, pre-approval, closing costs, PMI, and the first year of ownership.
- The First-Time Home Buyer GuideThe whole journey, phase by phase, with a calculator at each step.
- What Credit Score Do You Need?Minimum scores by loan type, and how your score changes your rate and PMI.
Frequently asked questions
Is an FHA or conventional loan better for a first-time buyer?+
Neither is universally better — it depends on your credit and down payment. FHA is usually the stronger option if your score is in the 580–619 range or your debt-to-income is tight, because it's more forgiving to qualify. A conventional loan (including 3%-down programs like Conventional 97, HomeReady, and Home Possible) is often the better long-term value once your score is around 700+, because its mortgage insurance can be cancelled at 20% equity while FHA's usually cannot.
What's the difference in down payment between FHA and conventional?+
FHA requires a minimum of 3.5% down with a 580 score (or 10% with a 500–579 score). Conventional loans go slightly lower for eligible first-time buyers — as little as 3% down through Conventional 97, HomeReady, or Home Possible. So conventional can actually have the smaller minimum down payment, which surprises many buyers who assume FHA is always the low-down-payment option.
Does FHA mortgage insurance ever go away?+
Usually not on its own. If you put down less than 10% on an FHA loan, the annual mortgage insurance premium (MIP) lasts the entire life of the loan. If you put down 10% or more, MIP drops off after 11 years. Because of that, many FHA buyers who bought with a low down payment refinance into a conventional loan once they have enough equity, specifically to eliminate the mortgage insurance.
Can I refinance from FHA to conventional to drop mortgage insurance?+
Yes, and it's a common strategy. Once you have about 20% equity and a qualifying credit score, you can refinance an FHA loan into a conventional loan with no PMI, which removes the FHA mortgage insurance premium. The trade-off is that refinancing has its own closing costs and resets your loan, and it only makes sense if the monthly insurance savings outweigh those costs at a rate you can still get.
What credit score do I need for FHA versus conventional?+
FHA allows a 580 score for 3.5% down (or 500–579 with 10% down). Conventional loans typically require 620, including the 3%-down first-time-buyer programs. That gap is the main reason FHA exists as an option for buyers in the 580–619 range. Lenders can set higher minimums than these program floors.
Which loan has the lower monthly payment?+
It depends on your score and down payment. With a lower credit score, FHA often wins on the monthly payment because its mortgage insurance isn't priced by score the way conventional PMI is. With a strong score (roughly 700+) and especially as you approach 20% equity, conventional usually wins because its PMI is lower and can be cancelled. The honest answer is to price both with your actual numbers, because the crossover point moves with your credit.
What is a Conventional 97 loan?+
Conventional 97 is Fannie Mae's 97% loan-to-value program — a conventional loan that lets you put just 3% down on a one-unit primary residence. For the standard version, at least one borrower generally must be a first-time buyer (defined as no ownership interest in a principal residence in the prior three years). It carries private mortgage insurance until you reach 20% equity, at which point the PMI can be cancelled.
Methodology
FHA figures (580/500 score thresholds, 3.5%/10% down, 1.75% upfront MIP, ~0.55% annual MIP, and the 11-year vs life-of-loan duration rule) reflect HUD/FHA program rules. Conventional figures (620 typical minimum, 3% down via Conventional 97 / HomeReady / Home Possible, and PMI cancellation at 80% LTV on request / 78% automatic) reflect Fannie Mae, Freddie Mac, and the federal Homeowners Protection Act. PMI ranges are typical industry figures and vary by credit and down payment; 2026 loan limits are from FHFA. This guide is educational, not lending advice — quote both loans with a licensed lender using your actual profile.
Sources
- HUD — FHA Single Family Housing Policy Handbook (4000.1): MIP & down payment — accessed 2026-07-27
- FHA.com — FHA loan requirements (credit, down payment, MIP) — accessed 2026-07-27
- Fannie Mae — HomeReady & 97% LTV (Conventional 97) fact sheets — accessed 2026-07-27
- Freddie Mac — Home Possible mortgage — accessed 2026-07-27
- CFPB — Private mortgage insurance (PMI) and cancellation rights — accessed 2026-07-27
- FHFA — 2026 conforming loan limit ($832,750 baseline) — accessed 2026-07-27