FHA vs. Conventional Loan: Costs, Insurance and Down Payment

FHA and conventional financing can produce different costs for the same home and down payment. Compare cash needed, monthly insurance, loan balance and financing costs over the time you expect to hold the loan. A lower initial payment alone does not identify the less expensive loan.

Eligibility and insurance rules

Selected FHA forward purchase and conventional differences
Question	Conventional	FHA forward purchase
Down payment	As little as 3% with eligible program	Generally 3.5% for FHA minimum decision score at least 580; 500–579 limited to 90% LTV. Lender can be stricter
Mortgage insurance	Borrower-paid PMI commonly applies above 80% LTV; policy premium varies	Usually 1.75% upfront MIP and annual MIP paid monthly; annual rate varies with term, base amount and LTV
When insurance ends	Covered principal-home PMI: conditional 80% request and scheduled 78% termination if current	Original LTV at or below 90%: annual MIP generally 11 years; above 90%: mortgage term. Current equity alone does not end it

Sources: Fannie Mae 97% options, HUD Handbook 4000.1 (August 12, 2026), II.A.2 and Appendix 1.0, CFPB PMI cancellation.

Worked example: same home and 5% down

Hypothetical mathematics, not available rates, an APR or an offer. Assume $320,000 purchase and original value, $16,000 down, a 30-year fixed amortizing loan with an invented 6.00% note rate for both. No extra payments, appreciation, refinancing, points or lender credits. Taxes, homeowners insurance, HOA and ordinary closing costs are excluded: the payments are not the full housing payment and financing costs are not total ownership costs.

Conventional: $304,000 note; invented borrower-paid PMI of 0.60% of original loan annually ($152 monthly), assumed cancelled after payment 118 when scheduled balance first drops below $256,000, with every condition satisfied and no delay. FHA: $304,000 base loan; $5,320 upfront MIP financed for a $309,320 note; 0.50% annual MIP at this base amount, term and 95% initial LTV. HUD's average-balance method yields approximately $125.96 monthly MIP in year one. A different policy or actual terms change the comparison.

Hypothetical financing-cost comparison
Illustration	Conventional	FHA
Monthly principal and interest	$1,822.63	$1,854.53
First-year monthly P&I and MI	$1,974.63	$1,980.49
Financing cost through 3 years	$59,182	$64,446
Financing cost through 5 years	$97,363	$102,461
Financing cost through 10 years	$187,057	$191,494
Balance after 10 years	$254,405	$258,857

Financing cost means interest plus insurance premiums, including the full FHA upfront premium. It excludes principal repayment and down payment, which build equity. Financing FHA's premium increases debt and interest. The HUD premium calculation method explains average-balance MIP; its older example rates are not used here. These selected inputs favor conventional financing, but actual terms may reverse the result. Compare Loan Estimates for the same home, down payment, term and lock period. Future refinancing, approval and pricing are uncertain. See the PMI guide and down-payment options.

Who this may fit

Buyers with modest down payment who could plausibly go either direction and want a total-cost view.

Key decision factors

Credit tier and how each program prices at that tier
Down payment and cash reserves
How long you plan to keep the loan
Mortgage insurance structure and when it may end
Property type and occupancy

Illustrative example

Common mistakes

Comparing only note rate instead of total cost
Ignoring FHA's ongoing mortgage insurance rules
Assuming one program is always more affordable

Questions to ask a licensed loan officer

Can you produce a total-cost comparison of both programs for my file?
How would each program's mortgage insurance behave over five years?
How do closing costs compare after seller and lender credits?

Common questions

Is a conventional loan better than FHA?

Neither is better for everyone. Compare actual Loan Estimates for the same home, down payment, term and holding period, including mortgage insurance and remaining balances.

How is PMI different from FHA mortgage insurance?

Conventional borrower-paid PMI on covered homes has conditional cancellation rules. FHA forward loans generally carry upfront and annual MIP; duration depends on original LTV and term, not just current equity.

Can I switch from FHA to conventional later?

Refinancing may be an option, but it requires a new application and depends on future eligibility, terms, costs, remaining balance and holding period.

Which is better for a first-time buyer?

It depends on the specific borrower and terms; compare both programs for the same home, down payment and holding period.

Choose your next step

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Share a mortgage-planning request for review by Bolt Home Loans, or keep exploring your options here.

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Sources

Primary sources relied on for this page. Check scope varies by entry; a source check is not a licensed or human compliance review.

CFPB — When Can I Remove PMI?
Consumer Financial Protection Bureau · Status: Verified (see check notes) · Published/effective: unverified · Last checked: 2026-09-25
What was checked
Checked borrower-requested cancellation at 80% of original value for covered borrower-paid PMI on single-family principal residences, scheduled 78% termination when current, midpoint termination, original-value definitions, and exceptions. Editorial source check only; not a licensed human or compliance review.
Fannie Mae 97% LTV Options
Fannie Mae · Status: Verified (see check notes) · Published/effective: unverified · Last checked: 2026-09-25
What was checked
Checked Standard 97's first-time-buyer condition and lack of an income cap, 97% LTV eligibility, and the high-balance exclusion for Standard 97 and HomeReady. The historical 620-score FAQ is superseded by the current credit-score section. Editorial source check only; not a licensed human or compliance review.
HUD Handbook 4000.1, August 12, 2026 edition
U.S. Department of Housing and Urban Development · Status: Verified (see check notes) · Published/effective: 2026-08-12 handbook edition · Last checked: 2026-09-25
What was checked
Checked section II.A.2 credit and LTV rules and Appendix 1.0: 1.75% upfront MIP; for the 95% LTV, 30-year, $304,000 base-loan example, 0.50% annual MIP for the mortgage term. PDF pages 203–207 and 1774 were inspected. Editorial source check only; not a licensed human or compliance review.
HUD Mortgage Insurance Premium Calculation
U.S. Department of Housing and Urban Development · Status: Verified (see check notes) · Published/effective: unverified · Last checked: 2026-09-25
What was checked
Checked the annual average-balance calculation method only. Historical example rates on this page are not the current rates used in the comparison. Editorial source check only; not a licensed human or compliance review.

FHA vs. conventional loans