FHA vs. Conventional: Which Loan Is Right for You?
Picking a loan type feels like a pop quiz nobody prepared you for. But it really comes down to two things: your credit score and how much you have saved. Let's walk through a real example to make the difference click.
Meet Alex and Jordan
Alex has a 620 credit score and saved $10,500. Jordan has a 740 credit score and saved $60,000. Both want to buy a $300,000 home. They'll end up with very different loans, and that's completely fine because these loan types are built for different situations.
Alex Goes FHA
FHA loans are designed for people exactly like Alex. The minimum down payment is 3.5%, so Alex only needs $10,500 down on a $300,000 home. Credit requirements are more relaxed, so getting approved is easier when your score isn't perfect.
FHA adds mortgage insurance. First, there's an upfront premium of 1.75% of the loan at closing ($5,074 on a $290,000 loan). Then there's a monthly insurance premium of about $137 for as long as the loan is active. That $137 a month adds up to over $49,000 over 30 years. But it got Alex into a home when nothing else would.
Jordan Goes Conventional
Jordan puts 20% down ($60,000) and has strong credit. No monthly mortgage insurance at all. The interest rate is lower because lenders love low-risk borrowers. Over 30 years, Jordan pays significantly less than if the same home had been bought with an FHA loan.
Conventional loans allow as little as 3% down, so Jordan could put down $9,000. With less than 20% equity, PMI kicks in at about $150 a month. Here's the key difference from FHA: once Jordan reaches 20% equity in the home, PMI gets removed. With FHA, that monthly insurance usually sticks around for the entire life of the loan unless you refinance out of it.
Quick Cheat Sheet: How to Decide
- Credit below 620: FHA is likely your best shot. Conventional lenders get very picky below this threshold.
- Credit 620 to 719, limited savings: FHA is probably easier and cheaper to start. Low down, more lenient approval.
- Credit 720+, 20% down: Go conventional. No PMI, lower rate, lower total cost over time.
- Credit 720+, less than 20% down: Compare both. PMI on conventional can be removed, FHA's usually cannot.
- Military veteran? Skip both and check VA loans first. Zero down, no PMI, and usually the best rates available.
Use the Loan Type dropdown to switch between FHA and Conventional and see exactly how the payment, PMI, and total cost change with your real numbers.