No—an FHA mortgage can cost less for buyers with weaker credit or a smaller down payment, while a conventional mortgage can cost less once credit and cash are stronger.
“Better” depends on the math, not the label. Two people can buy the same house on the same day and get opposite answers.
Your job is to compare total cost and approval fit: how much cash you need at closing, what your monthly payment looks like, and what it takes to drop mortgage insurance later.
How FHA And Conventional Loans Work
An FHA loan is a mortgage insured by the Federal Housing Administration. Lenders follow FHA rules, and the loan includes FHA mortgage insurance (MIP). The Consumer Financial Protection Bureau gives a clear overview of FHA basics, including down payment options and county loan limits. CFPB FHA loans
A conventional loan is not part of a government mortgage program like FHA, VA, or USDA. Rules still vary by lender and investor, yet the loan is not insured by a federal housing program. CFPB’s page on conventional loans explains the definition and broad cost patterns. CFPB conventional loans
Both can be fixed-rate or adjustable-rate. Both can be used for a primary home. The trade-offs show up in credit flexibility, down payment rules, and mortgage insurance.
What Makes FHA Easier To Qualify For
FHA underwriting can leave more room when credit history is messy. If your score is coming back after late payments, collections, or a thin credit file, FHA may be the path that gets you to closing.
FHA also lets many borrowers buy with a low down payment. That helps when you want cash left over for moving costs, repairs, and a buffer after you move in.
Where FHA Can Help Most
- Lower credit scores: FHA can accept ranges that many conventional programs price harshly or decline.
- Smaller down payment: The entry cash can be lower than many buyers expect.
- Higher debt-to-income ratios: Some FHA files can pass with strong compensating factors, based on lender rules.
Where Conventional Can Cost Less
Conventional loans reward strong credit. When your score is high and your down payment is larger, the interest rate can be sharper and private mortgage insurance (PMI) can be cheaper than FHA MIP.
Conventional PMI also has a path to removal. Under federal rules described by the CFPB, borrowers can request PMI cancellation when the balance is scheduled to hit 80% of the home’s original value, and automatic termination can occur later if conditions are met. CFPB on removing PMI
If you plan to keep the home for a long time, that exit path can change the long-run total cost.
What Drives Your Monthly Payment
Interest rate matters, but it is not the full story. Mortgage insurance and down payment sizing can move the payment by a lot.
Think in four lines:
- Principal and interest
- Property taxes
- Homeowners insurance
- Mortgage insurance (MIP on FHA, PMI on conventional when required)
Taxes and homeowners insurance depend on the property and your location. Loan choice mainly changes the interest rate and the mortgage insurance line.
One more piece that trips buyers up: the headline rate you see online is rarely the rate you get. Lenders price mortgages off your score, down payment, debt ratio, and the property type. That means an FHA quote and a conventional quote can move in different directions as your profile changes.
Also watch the property itself. FHA appraisals are not only about value; the home must meet FHA minimum property standards. A chipped handrail, missing smoke detectors, or peeling paint on an older home can turn into a repair list that must be finished before closing. Conventional appraisals can still flag safety issues, but the repair bar is often lower.
Loan limits also shape your options. FHA limits are set by county and can cap the loan size you can insure through the program, while conventional conforming limits depend on the national baseline plus high-cost area rules. If the home price pushes you into jumbo territory, the comparison changes again.
FHA Loans Vs Conventional Loans With Real Trade-Offs
Use this table as a map. Then get quotes on the same day, for the same home price, with the same down payment, so you can compare cleanly.
| Factor | FHA Loan | Conventional Loan |
|---|---|---|
| Down payment | Low down payment options for borrowers who meet FHA score rules | As low as 3% down in some programs for qualified buyers |
| Credit tolerance | Often more flexible, subject to lender overlays | Often tighter, with pricing that rises fast as scores drop |
| Mortgage insurance | Upfront MIP charge plus an annual MIP rate | PMI when putting under 20% down |
| Insurance end date | MIP can last the full term at higher loan-to-value levels | PMI can end after equity grows, based on cancellation rules |
| Appraisal rules | Must meet FHA minimum property standards | Standard appraisal rules set by lender and investor |
| Loan limits | County FHA limits apply | Conforming limits apply unless you go jumbo |
| Upfront cost structure | Lower down payment option, plus upfront MIP financed or paid at closing | Lower down can trigger PMI; larger down can reduce PMI cost |
| Refinance strategy | Many borrowers refinance to conventional later to drop FHA MIP | Some borrowers stay put and cancel PMI without refinancing |
| Best fit pattern | Credit rebuilding, smaller down payment, first-time buyers | Strong credit, larger down payment, plan to end PMI |
Mortgage Insurance: The Deal Breaker For Many Buyers
FHA MIP has two layers: an upfront charge and an annual charge paid monthly. HUD’s Mortgagee Letter 2023-05 lists the up-front MIP as 1.75% of the base loan amount for many forward mortgages, along with the annual MIP rate schedule tied to loan term and loan-to-value. HUD Mortgagee Letter 2023-05
Conventional PMI is priced by risk. Your credit score and down payment drive a lot of it. Some lenders also offer lender-paid PMI structures, where the cost is baked into the rate.
Why FHA Insurance Can Cost More Over Time
Many FHA borrowers pay the annual MIP for the life of the loan when the initial down payment is under 10%. That means the monthly payment can stay higher for years unless you refinance or sell.
Refinancing can work, but it depends on market rates and closing costs at that time. Treat it as an option, not a guarantee.
Credit Score And Down Payment: Where The Answer Flips
Most “FHA vs conventional” debates are mostly “insurance pricing vs credit score.”
- If your credit score is low, conventional pricing can get steep, and FHA can land with a lower total payment.
- If your credit score is high and you can put more down, conventional can pull ahead as PMI drops and can be removed.
CFPB sums up the same pattern: FHA can cost more for borrowers with good credit and a medium down payment, while FHA can cost less for borrowers with lower credit scores or a smaller down payment. CFPB FHA cost pattern
Four Questions To Ask Before You Pick A Loan
Question 1: How close are you to 20% down?
If you are near 20% down, conventional becomes more attractive because PMI can drop off sooner. If you are far from 20%, FHA can still make sense if the payment and approval fit are right.
Question 2: Is your score rising or flat?
A score that is rising can change your best option in the next year or two. If your score is already strong and steady, conventional pricing can be hard to beat.
Question 3: How long do you plan to keep the home?
Short stays put more weight on cash to close and up-front fees. Longer stays put more weight on how long you pay mortgage insurance.
Question 4: Can the home meet FHA property standards at closing?
FHA appraisals can require repairs tied to safety and habitability. If the home needs work that can’t be finished before closing, conventional may be the workable lane unless you use an FHA rehab program.
Common Buyer Scenarios And What Usually Fits
These are patterns, not promises. Lender overlays, local housing stock, and your full file can change the result.
| Situation | Often fits | Main watch-out |
|---|---|---|
| Lower score, limited cash | FHA | MIP cost and how long it lasts |
| High score, 10%–19% down | Conventional | PMI quote and rules to remove it |
| High score, near 20% down | Conventional | Fees, points, and lender credits |
| First-time buyer with thin credit history | FHA or a low-down conventional program | Documentation and lender overlays |
| House needs repairs before closing | Conventional or FHA rehab | Repair conditions and timeline |
| Plan to refinance after credit improves | FHA then refinance | Rate climate and refi closing costs |
| Large down payment, keep payment lean | Conventional | Rate lock choices and closing cost totals |
How To Compare Loan Offers Like A Pro
Ask two lenders for two Loan Estimates: one FHA and one conventional, same purchase price, same down payment, same day. Then line these up:
- Rate and APR: APR helps when one offer uses discount points or lender credits.
- Monthly mortgage insurance: Get the exact dollar amount for MIP or PMI.
- Upfront FHA MIP handling: Ask if it is financed into the loan or paid at closing, then check the loan amount line.
- Cash to close: Compare the full total, not just down payment.
If a rate looks much lower, ask what it costs in points. A low rate can hide a big up-front fee.
Are FHA Loans Better Than Conventional?
FHA is often the better tool when you need more breathing room on credit or cash to close. Conventional is often the better tool when your credit is strong, your down payment is larger, and you want a clear path to end PMI.
Get side-by-side Loan Estimates and pick the option with the lowest total cost that still fits your home, your timing, and your risk level.
References & Sources
- Consumer Financial Protection Bureau (CFPB).“FHA loans.”Defines FHA loans, notes low down payment options, and describes cost patterns across credit scores and down payments.
- Consumer Financial Protection Bureau (CFPB).“Conventional loans.”Defines conventional mortgages and outlines broad cost and approval differences.
- Consumer Financial Protection Bureau (CFPB).“When can I remove private mortgage insurance (PMI) from my loan?”Explains PMI cancellation rights and timing under federal rules.
- U.S. Department of Housing and Urban Development (HUD).“Mortgagee Letter 2023-05.”Lists FHA MIP charges, including the up-front rate and annual rate schedule for many forward mortgages.