FHA vs Conventional Loans: Which Is Cheaper Overall?
FHA loans are advertised as the "easy" mortgage — lower score minimums, smaller down payments. Conventional loans are advertised as the "smart" one. Both pitches hide the same fact: which loan is cheaper depends almost entirely on your credit score and your down payment, and the answer flips at a predictable threshold. Here's the math.
The structural difference that decides everything
Both loans price insurance differently, and mortgage insurance is where these loans actually compete:
- FHA charges an upfront premium (1.75% of the loan, usually financed) plus an annual premium (MIP). On most loans with under 10% down, that annual MIP lasts the entire life of the loan — it cannot be canceled, only refinanced away.
- Conventional charges PMI only below 20% down — and PMI is cancelable: it legally ends at 78% LTV, and you can request removal at 80% or earlier with appreciation.
So FHA trades easier qualification for an insurance cost that may never end; conventional trades stricter qualification for insurance that's temporary. Everything else follows from this.
The numbers: $300,000 home, 5% down
Illustrative pricing — run your own scenario in the mortgage calculator:
| Borrower | Conventional | FHA | Cheaper |
|---|---|---|---|
| Credit 740, 5% down | Rate ~6.5%, PMI ~$95/mo (cancelable) | Rate ~6.25%, MIP ~$355/mo (lifetime) + $4,900 upfront | Conventional, decisively |
| Credit 660, 5% down | Rate ~6.85%, PMI ~$235/mo | Rate ~6.35%, MIP ~$340/mo + upfront | Close — FHA often wins early years, loses later |
| Credit 620, 3.5% down | Rate ~7.35%, PMI ~$310/mo (if approved) | Rate ~6.45%, MIP ~$345/mo + upfront | FHA — often the only realistic door |
The flip threshold
As a planning rule of thumb:
- Score 680+ (many say 700 to be safe): conventional almost always wins — your PMI prices cheap enough to beat FHA's lifetime MIP, and it disappears.
- Score 640–680: genuinely close; the winner depends on down payment, how long you'll keep the loan, and whether you'll refinance. Price both.
- Below ~640 or down payment under 5%: FHA is usually cheaper and often the only approval you'll get.
Four questions that settle it
- How long will you keep this loan? If you expect to refinance or move within ~5 years, FHA's lifetime MIP matters less — its upfront cost amortizes over a short period. If it's a 15-year home, conventional's cancelable insurance compounds its advantage enormously.
- Can you get to 20% equity and stay? Conventional lets you shed PMI; FHA never does (below 10% down). If your plan is to pay extra principal — see how fast that moves the date — conventional rewards it.
- Is your score about to improve? If you're 6–12 months from a higher band (see the repair plan), waiting may flip you into conventional territory worth far more than the delay costs.
- What's your DTI? FHA tolerates higher ratios — a borderline DTI can make FHA the only door regardless of price.
The trap to avoid
Comparing these loans by monthly payment alone systematically favors FHA (lower rate, and its MIP is spread invisibly). Compare five-year and thirty-year totals instead: payment + insurance + upfront costs. The loan calculator handles the interest side; add each loan's insurance quote to see the full picture. And get both quotes from multiple lenders — pricing overlaps between programs.
FHA is a bridge, not a bargain: it gets you in the door sooner, and the toll booth on that bridge never closes.
Bottom line
Above ~680 credit, conventional usually wins on total cost — sometimes by tens of thousands over the loan's life, thanks to cancelable PMI. Below ~640, FHA is frequently the only realistic path and still a good one. In between, the answer is arithmetic, not opinion: price both, project your hold period, and let the totals decide.
Informational only — not financial or lending advice. Program rules and pricing change; confirm with lenders.