Key takeaways
- FHA loans allow 3.5% down with a 580 credit score (10% down at 500–579). Conventional loans start at 3% down for many first-time buyers.
- FHA charges a 1.75% upfront mortgage insurance premium plus 0.50%–0.55% a year, usually for the life of the loan if you put less than 10% down. Conventional PMI can be canceled once you reach 20% equity.
- Average 30-year rates in late October 2026: about 7.12% FHA vs. 7.37% conventional (MBA).
- 2026 loan limits: FHA $541,287–$1,249,125 depending on county; conventional conforming $832,750 in most areas.
FHA vs. conventional loan: which is right for a first-time buyer? In short, an FHA loan is usually the better fit if your credit score is below about 680, your debt-to-income ratio is high or you have a recent credit setback. A conventional loan usually costs less over time if your score is 700 or higher, because its mortgage insurance is cheaper for strong borrowers and goes away once you build equity.
Both can work with a small down payment. The real difference is how each one prices risk — and that shows up in your monthly payment and in what you’ll pay over the years you keep the loan. Here’s how the two compare in 2026, with a worked example on a $350,000 home.
FHA vs. conventional loans at a glance
An FHA loan is insured by the Federal Housing Administration, part of HUD, which lets lenders approve borrowers with lower scores or less savings. A conventional loan isn’t government-backed; most follow rules set by Fannie Mae and Freddie Mac.
| Feature (2026) | FHA loan | Conventional loan |
|---|---|---|
| Minimum down payment | 3.5% with a 580+ score; 10% with 500–579 | 3% for eligible first-time buyers and some programs; 5% is common otherwise |
| Credit score | As low as 500 under FHA rules (many lenders set 580–620) | Fannie Mae dropped its fixed 620 floor for loans run through its automated system in Nov. 2025, but most lenders still look for about 620+ |
| Mortgage insurance | 1.75% upfront + 0.50%–0.55% a year on most loans | PMI only if you put down less than 20% |
| Removing mortgage insurance | Lasts the life of the loan with under 10% down; 11 years with 10%+ down | Request removal at 80% loan-to-value; ends automatically at 78% |
| Loan limit (one unit) | $541,287 to $1,249,125 by county | $832,750 in most of the U.S.; higher in high-cost areas |
| Average 30-year rate* | 7.12% | 7.37% |
| Property rules | Primary residence only; must pass FHA appraisal standards | Primary homes, second homes and investment properties |
| Waiting period after bankruptcy (Ch. 7) | Generally 2 years | Generally 4 years |
*Mortgage Bankers Association weekly survey released Oct. 28, 2026. Your rate depends on your credit, down payment, points and lender.
How mortgage insurance changes the math
Mortgage insurance is where the two loans really separate, so it’s worth understanding before you compare rate quotes.
FHA mortgage insurance premium (MIP)
Every FHA borrower pays two premiums, no matter the credit score:
- Upfront MIP: 1.75% of the base loan amount. Most people roll it into the loan rather than paying cash at closing.
- Annual MIP: for 30-year loans up to $726,200, it’s 0.55% of the loan per year if you put down less than 5%, and 0.50% with 5% or more down. Larger loans pay 0.70%–0.75%. It’s split into your monthly payment.
The catch is how long it lasts. Put down less than 10%, and annual MIP stays for the life of the loan. Put down 10% or more, and it drops off after 11 years. The only way to get rid of lifetime MIP early is to refinance into a conventional loan once you have enough equity.
Conventional private mortgage insurance (PMI)
Conventional loans require PMI only when you put down less than 20%. Freddie Mac estimates it at roughly $30 to $70 a month for every $100,000 you borrow, and the price depends heavily on your credit score and down payment. A 760 score with 10% down pays far less than a 640 score with 3% down.
PMI is also temporary. Under federal law, you can ask your lender to cancel it once your balance reaches 80% of the home’s original value, and it ends automatically at 78% if you’re current on payments. Paying extra principal gets you there faster. For more detail, see our guide to first-time homebuyer programs, which covers low-down-payment conventional options like HomeReady and Home Possible.
Rule of thumb: The lower your credit score, the more expensive conventional PMI gets, while FHA’s premium stays the same for everyone. That’s why FHA often wins below roughly 680 and conventional often wins above roughly 720.
Worked example: a $350,000 home
Let’s compare a first-time buyer purchasing a $350,000 home with a 30-year fixed loan, using the late-October MBA averages: 7.12% for FHA and 7.37% for conventional. We’ll leave out property taxes and homeowners insurance, since those are the same either way.
- FHA with 3.5% down ($12,250): base loan $337,750, plus $5,911 of upfront MIP rolled in, for a total loan of $343,661. Principal and interest are about $2,314 a month, and annual MIP adds about $155. Total: about $2,469 a month.
- Conventional with 5% down ($17,500): loan $332,500. Principal and interest are about $2,295 a month. With strong credit, PMI at $45 per $100,000 adds about $150 (total about $2,445). With weaker credit, PMI at $70 per $100,000 adds about $233 (total about $2,528).
| Scenario | Monthly payment (P&I + mortgage insurance) | Paid over 7 years | Paid over 10 years |
|---|---|---|---|
| FHA, 3.5% down | $2,469 | $207,392 | $296,274 |
| Conventional, 5% down, strong credit | $2,445 | $205,379 | $293,398 |
| Conventional, 5% down, weaker credit | $2,528 | $212,361 | $303,373 |
What this shows:
- With strong credit, conventional is a bit cheaper — about $2,900 less over 10 years in this example — and the gap widens later because PMI ends while FHA’s MIP doesn’t. Without home-price growth or extra payments, this loan would hit 78% of the original value in about 12 years, at which point PMI disappears.
- With weaker credit, FHA is cheaper — about $7,100 less over 10 years — even though FHA’s MIP never ends on its own.
- FHA needs less cash up front: $12,250 vs. $17,500 for the down payment in this example.
These figures use illustrative PMI pricing; your actual quote can be higher or lower. Run your own numbers with our mortgage calculator, which handles FHA upfront and annual MIP and conventional PMI side by side.
When an FHA loan makes more sense
- Your credit score is under about 680. FHA’s insurance cost doesn’t rise with a lower score, and FHA rates are often lower than conventional rates for these borrowers.
- You’ve had a recent bankruptcy or foreclosure. FHA’s waiting periods are generally shorter (about two years after a Chapter 7 discharge and three years after a foreclosure, versus four and seven years for conventional).
- Your debt-to-income ratio is high. FHA’s automated underwriting can approve higher DTIs when the rest of your file is solid. Check yours with our debt-to-income ratio calculator.
- You’re getting help with the down payment. FHA allows gifts from relatives and many down payment assistance programs.
- You’d like an assumable loan. FHA loans can be assumed by a qualified buyer, which may help if you sell when rates are higher than yours.
If credit is your main hurdle, our guide to FHA loans for bad credit covers the 500 and 580 score rules in more detail.
When a conventional loan makes more sense
- Your credit score is 700 or higher. PMI is cheap for strong borrowers, and you’ll likely qualify for better pricing.
- You can put down 10% to 20% or more. At 20% down, there’s no mortgage insurance at all.
- You plan to stay put for a long time. PMI ends; FHA MIP with under 10% down doesn’t, so conventional usually pulls ahead the longer you keep the loan.
- You’re buying an expensive home. The $832,750 conforming limit is higher than FHA’s limit in most counties.
- You want a second home or rental. FHA loans are for primary residences only.
Common mistakes to avoid
- Comparing interest rates alone. FHA often has the lower rate, but its upfront and lifetime premiums can make it the pricier loan. Compare the APR and the total monthly payment on each Loan Estimate.
- Getting only one quote. Pricing varies by lender. Ask at least three lenders for both FHA and conventional quotes on the same day.
- Forgetting the exit plan on FHA. If you go FHA with less than 10% down, plan to refinance into a conventional loan once you reach about 20% equity and your credit improves — but only if rates and closing costs make it worth it. Our refinance calculator shows the break-even.
- Ignoring the property. FHA appraisals check health and safety standards. A home needing major repairs may not qualify without fixes.
- Draining your savings for the down payment. Keep cash for closing costs (often 2% to 5% of the price), moving and a starter emergency fund.
How to choose: a 4-step plan
- Check your credit score and DTI. Pull your free credit reports and fix errors. If your score is close to a pricing threshold, a few months of paying down card balances can help; see how to improve your credit score.
- Decide how much cash you can put down without wiping out your reserves. Our home affordability calculator helps you set a realistic price range.
- Get preapproved and ask for both loan types. Have each lender show you an FHA and a conventional quote with the same down payment.
- Compare five-year and ten-year costs, not just the first payment, and factor in when conventional PMI would drop off.
For a broader look at loan types, including VA and USDA, read our guide to the best mortgage types for 2026.
Frequently asked questions
Is FHA or conventional better for a first-time buyer?
It depends mainly on your credit score and how long you’ll keep the loan. FHA is often better with a score under about 680 or a recent credit problem. Conventional is often cheaper with a score of 700 or more, especially if you stay in the home long enough for PMI to drop off.
What credit score do you need for an FHA loan in 2026?
FHA rules allow a score as low as 580 with 3.5% down, or 500 to 579 with 10% down. Many lenders add their own minimums, often 580 to 620, so shop around if you’re near the low end.
Can you remove mortgage insurance on an FHA loan?
If you put down 10% or more, annual MIP ends after 11 years. With less than 10% down, it lasts for the life of the loan, and the usual way out is refinancing into a conventional loan once you have enough equity.
Why are FHA rates lower than conventional rates?
The government insurance protects lenders if you default, so lenders can price FHA loans more aggressively. But FHA borrowers pay for that protection through upfront and annual premiums, so a lower rate doesn’t always mean a lower total cost.
Can I switch from an FHA loan to a conventional loan later?
Yes. You can refinance from FHA to conventional when you qualify, typically once you have around 20% equity so you can avoid PMI. Weigh the closing costs and your new rate against the MIP you’d save.
Sources: HUD (2026 FHA loan limits; Mortgagee Letter 2023-05 annual MIP rates), FHFA 2026 conforming loan limit, Mortgage Bankers Association weekly survey (Oct. 28, 2026), Freddie Mac PMI guidance and Fannie Mae Selling Guide update (Nov. 2025), checked November 3, 2026. PMI amounts in the example are estimates. This article is for educational purposes and isn’t financial advice.
Written by Chanchala
Founder & Lead Writer · B.Sc. Mathematics (Honors) · 9 years in banking & lending
Chanchala is the founder and lead writer of FinInfoBlog. She holds a B.Sc. in Mathematics (Honors) and has 9 years of experience in banking and lending. She writes plain-English guides on savings, CDs, loans, credit and personal finance for U.S. readers, and makes sure every example shows the math behind the money decision. How we research and fact-check.