FHA vs Conventional: The Real Cost Comparison

For most first-time buyers, the choice comes down to FHA or conventional. The "right" answer depends on three things: your credit score, your down payment, and your timeline.

The credit score angle

• 580-619: FHA is your only realistic option with low down payment. Conventional requires 620 minimum.
• 620-679: FHA usually has a lower rate, but conventional might work if you can put 5-10% down.
• 680-739: It's close. Run the numbers both ways.
• 740+: Conventional almost always wins. The rate advantage and no upfront MIP make it cheaper.

The down payment factor

• 3-5% down: FHA (3.5%) and conventional (3-5%) are both available. FHA tends to have lower rates but higher ongoing costs.
• 5-10% down: Getting closer. Conventional PMI becomes cheaper than FHA MIP.
• 10-20% down: Conventional is almost certainly cheaper, especially if you can avoid PMI entirely at 20%.

The "lifetime cost" trap

Here's the hidden gotcha: FHA mortgage insurance (MIP) lasts for the life of the loan if you put less than 10% down. Conventional PMI drops off automatically when you reach 78% LTV.

Scenario: You put 3.5% down on a $300k house with FHA. MIP costs about $150/month. You have the loan for 7 years. Total MIP paid: $12,600 and it keeps going.

Same scenario with conventional 5% down? PMI drops off after about 5-6 years as you build equity. Total PMI paid: about $6,000-8,000, then it's gone.

When FHA is clearly better

• Your credit is under 640.
• You need the lowest possible down payment.
• You plan to refinance within 2-3 years (MIP doesn't matter as much).
• Your DTI is high — FHA allows up to 50%+ in some cases.

When conventional is clearly better

• Your credit is over 700.
• You can put at least 5% down.
• You plan to stay 5+ years (PMI drops off, MIP doesn't).

The takeaway: Don't assume FHA is the default for first-time buyers. Run the numbers including MIP/PMI over your expected ownership period. Conventional often wins for borrowers with decent credit.