When you’re buying your first home, two loan types dominate the conversation: FHA and conventional. Most buyers pick one based on what their lender recommends or what they’ve heard from friends. But there’s one detail that almost nobody mentions upfront — and it can cost you tens of thousands of dollars over the life of your loan.
What’s the Difference?
Conventional loans are the standard mortgage product, backed by Fannie Mae or Freddie Mac. They require good credit (typically 620+, with better pricing at 740+) and a minimum 3% down payment. Private mortgage insurance (PMI) is required when you put down less than 20% — but here’s the key: it cancels automatically once you reach 20% equity.
FHA loans are government-backed loans designed for buyers with thinner credit files or smaller savings. They allow a 3.5% down payment with a credit score as low as 580, and underwriting is more flexible. They sound like the obvious choice for first-time buyers — but the fine print changes everything.
The Detail Nobody Tells You
FHA loans come with two kinds of mortgage insurance:
Upfront MIP (1.75%) — charged at closing and usually financed into the loan. On a $350,000 loan, that’s $6,125 added to your balance before you make a single payment.
Annual MIP (0.55% for most loans) — charged monthly for the life of the loan if you put down less than 10%.
That last part is the one that stings. With a conventional loan, PMI disappears once you hit 20% equity — usually within 7–10 years on a standard loan, or faster if you make extra payments. With FHA and less than 10% down, the mortgage insurance never goes away. The only exit is refinancing into a conventional loan later.
What That Looks Like in Real Numbers
On a $350,000 home with 3.5% down at 6.75%:
| FHA | Conventional | |
|---|---|---|
| Down payment | $12,250 (3.5%) | $10,500 (3%) |
| Mortgage insurance | $161/mo (forever*) | ~$140/mo (cancels at 20% equity) |
| Upfront fee | $5,906 financed | $0 |
| 10-year MI cost | ~$19,320 | ~$16,800 (then $0) |
| 30-year MI cost | ~$57,960 | ~$16,800 |
*With less than 10% down
The difference over 30 years: over $41,000 in mortgage insurance alone.
So When Does FHA Actually Win?
FHA makes sense when:
- Your credit score is below 620 (conventional won’t approve you)
- Your score is 620–679 (conventional PMI pricing gets expensive; FHA may actually be cheaper)
- You need the more flexible debt-to-income ratios FHA allows
- You plan to refinance within 5–7 years anyway (before the long-term MIP pain kicks in)
Conventional wins when:
- Your credit is 680+ (especially 740+)
- You can qualify for both — run the side-by-side numbers first
- You plan to stay in the home long-term
The Move Most Smart Buyers Make
Use FHA to get in the door, then refinance to conventional once you’ve built equity and improved your credit. FHA is a doorway, not a destination. The mistake is treating it like a permanent solution when it’s really a bridge.
Before you commit to either loan type, run both scenarios side by side with real numbers. Our free calculator at piti.com lets you switch between FHA and conventional instantly — showing the complete payment, mortgage insurance, and cash to close for each.
Know before you owe.