I spent years working on cars other mechanics had already “fixed,” and half the job was figuring out what the last guy actually did versus what the customer thought he did. Mortgages have the same problem. Ask around about FHA versus conventional loans and most people hand you a one-line rule: FHA if your credit’s rough, conventional if it’s clean. That’s not wrong exactly, it’s just missing the part that actually decides what the loan costs you.
Short version: FHA loans let you buy with a lower credit score and a smaller down payment, but the mortgage insurance can stick around for the life of the loan if you put down less than 10%. Conventional loans ask a little more upfront, but the insurance goes away once you build equity. Which one actually costs less depends less on your credit score today and more on how long you plan to keep the loan.
If you’re earlier in the process and still working through how to buy your first house generally, this loan decision is usually the first real fork in the road, so it’s worth understanding before you start shopping.
The down payment and credit comparison everyone leads with
FHA is the easier door to walk through. In 2026 you can qualify with a credit score as low as 580 and put down just 3.5%. Drop to a 500-579 score and you can still get in, you just need 10% down instead. Conventional loans typically want a 620 or better, though lenders have gotten more flexible on that floor recently, some first-time buyer programs (HomeReady, Home Possible) will take 3% down at 620, and repeat buyers usually land around 5%.
So on paper, FHA looks like the friendlier loan for anyone rebuilding credit or still saving. For a lot of guys I know from the trades, credit scores took a hit somewhere along the way, a slow season, a medical bill, a stretch on 1099 income before they figured out how to document it properly. FHA exists for exactly that situation.
If you’re not sure what price range either down payment actually puts you in, it’s worth running your numbers through the house affordability calculator before you get attached to a loan type.
But down payment and credit score are the two numbers everyone compares. They’re not where the real cost difference lives.
Where the real cost actually lives: mortgage insurance
Both loan types charge you for the privilege of putting down less than 20%. FHA calls it MIP (mortgage insurance premium). Conventional calls it PMI (private mortgage insurance). They are not the same animal.
FHA MIP has two parts: an upfront charge of 1.75% of your loan amount (usually rolled into the loan itself, so you’re not paying it out of pocket at closing), and an annual premium of about 0.55% for most 30-year loans, split into your monthly payment. Here’s the part that catches people off guard: if you put down less than 10%, that annual MIP does not go away. Not at 20% equity, not at 30%. It rides with the loan until you refinance out of it or pay it off entirely. Put down 10% or more and it finally drops off, but only after 11 years.
Conventional PMI works differently. It’s priced based on your credit and loan-to-value ratio, roughly 0.46% to 1.5% annually, and it’s designed to disappear. Once your loan balance hits 78% of the original purchase price, your lender is legally required to cancel it automatically. You can also request removal yourself at 80% equity, sometimes with a new appraisal to prove the home’s value.
That difference is the whole ballgame for anyone planning to stay in a house more than a few years. A lower FHA rate with permanent insurance can quietly cost more over a decade than a conventional loan with a slightly higher rate and insurance that ends. If you’re also weighing fixed vs. adjustable rate on top of this decision, that’s a separate question worth its own read before you lock anything in.
Loan limits: how much house either loan will actually let you buy
For 2026, FHA loan limits run from a floor of $541,287 in most counties up to $1,249,125 in high-cost areas. Conventional conforming loans go higher, a baseline of $832,750, up to the same $1,249,125 ceiling in expensive markets. If you’re buying in a market where prices push past FHA’s limit, conventional (or a jumbo loan) is your only path regardless of what your credit score prefers.
The part a lot of first-time buyers get blindsided by: the appraisal
This is the one nobody mentions until it’s already a problem, and it’s the one I’d flag hardest for anyone who’s handy. FHA appraisals aren’t just about the home’s value, they check the property against HUD’s minimum standards: working systems, no exposed wiring, sound roof, no safety hazards. If the home fails, those repairs typically have to happen before closing, not after.
Conventional appraisals are almost entirely about value. If you or a buddy can fix a handrail or patch a roof section yourself after closing, a conventional loan lets you buy the house as-is and handle it on your own time and your own dime. FHA can force those same repairs into the deal before you ever get the keys, sometimes killing a sale on a place that would’ve been a great buy for someone willing to do the work.
If you’re eyeing a place that needs some obvious attention, that’s worth running past your lender before you fall in love with the price. Worth keeping in mind: this appraisal isn’t the same thing as a home inspection. The appraisal protects the lender and checks value (plus, for FHA, those minimum property standards), while an inspection is something you hire separately to protect yourself and dig into the property’s actual condition.
Debt-to-income: the number that matters more with irregular income
FHA is meaningfully more forgiving here. Standard guidance caps debt-to-income at 43%, but FHA will go up to 50% or higher with compensating factors, strong reserves, a clean payment history, stable work even if the paycheck varies week to week. Conventional lenders typically hold closer to 45%, tightening up as your score drops.
If your income isn’t a flat W-2 number, seasonal trade work, overtime that isn’t guaranteed, a side hustle that fills the gaps, this is often the number that actually decides which loan you qualify for, not your credit score.
So which one actually costs less?
Here’s where the “FHA if bad credit, conventional if good” rule falls apart: it treats this as a qualification question when it’s really a cost-over-time question. Two people with identical 640 credit scores could reasonably end up on different loans depending on one thing, how long they’re staying.
Buying a starter place you’ll be out of in three to five years? FHA’s lower barrier to entry might genuinely cost you less in that window, even with the MIP, because you won’t be around long enough for the “insurance that never ends” problem to matter. Buying the house you plan to raise a family in for the next fifteen years? That permanent MIP adds up to real money, and conventional is very likely cheaper even if the rate is a touch higher today.
If you want to see how either loan type changes your actual monthly number, running both loan amounts through the mortgage calculator side by side, and comparing that against how mortgages actually work under the hood, is the fastest way to see it for yourself instead of taking my word for it.
The FHA escape hatch nobody explains clearly
If you go FHA now because it’s the loan you can get, you’re not locked into paying MIP forever. Once you’ve built enough equity, usually 20%, you can refinance into a conventional loan and the MIP problem disappears entirely. A lot of buyers use FHA to get in the door, then refinance a few years later once their credit and equity catch up.
Whether that refinance is actually worth it depends on the math: your current MIP cost, the new rate you’d get, and what closing costs eat into the savings. The refinance break-even calculator walks through that exact math using your own numbers, worth running before you assume refinancing automatically pays off.
Frequently Asked Questions
Yes. FHA loans aren’t limited to first-time buyers, though you generally need to sell or pay off your current FHA loan before getting another one, since FHA loans are meant for primary residences, not second homes or investment properties.
Only if you cross the 10% down payment threshold. Putting down 10% or more means your annual MIP drops off after 11 years instead of lasting the life of the loan. Putting down 5% or 7% instead of 3.5% lowers your loan balance but doesn’t change how long you’re stuck paying MIP.
Most lenders still underwrite around a 620 floor in practice, even though Fannie Mae removed its official hard minimum in late 2025 in favor of a broader risk review. Scores of 700 or higher typically unlock meaningfully better rates and lower PMI costs.
Yes, through a refinance. Once you’ve built enough equity, typically 20%, you can refinance your FHA loan into a conventional one, which ends the MIP requirement entirely. Whether it’s worth doing depends on your new rate, remaining loan balance, and closing costs.
FHA appraisals check the property against HUD’s minimum property standards, things like safe electrical, a sound roof, and working systems, not just market value. A conventional appraisal is focused almost entirely on value, so a home needing cosmetic or minor repair work can pass conventional financing while failing FHA until those repairs are made.
Not always. It depends heavily on how long you plan to keep the loan. Short holding periods can favor FHA’s lower entry cost even with MIP included, while longer holding periods usually favor conventional once PMI cancels and FHA’s permanent MIP keeps adding up.
Sources:
https://www.hud.gov/news/hud-no-25-145
https://www.fhfa.gov/news/news-release/fhfa-announces-conforming-loan-limit-values-for-2026
https://entp.hud.gov/idapp/html/hicostlook.cfm