For most first-time buyers with a credit score around 620 or higher (GMFS Mortgage), a conventional loan beats an FHA loan on long-term cost — even though both let you buy with a small down payment. Conventional lets you put as little as 3% down through programs like HomeReady, and its private mortgage insurance (PMI) disappears once you reach 20% equity. FHA gets you in with 3.5% down and easier credit rules, but its mortgage insurance premium sticks around for the life of the loan when you put less than 10% down. The winner comes down to one thing: your credit score and how fast you expect to build equity.
Conventional vs. FHA at a Glance
Buyer concern | Conventional loan | FHA loan |
|---|---|---|
Minimum down payment | 3% for qualified first-time buyers (HomeReady, Home Possible, Conventional 97); 20% drops PMI entirely | 3.5% minimum; 10% or more to unlock a path off mortgage insurance |
Minimum credit score | 620+ for most lenders; pricing improves steeply above 740 | 580 with 3.5% down; 500 with 10% down, though many lenders overlay stricter floors |
Mortgage insurance | PMI cancels at 20% equity (80% LTV), or by request at 20% — and automatically at 78% | MIP lasts the life of the loan under 10% down; 11 years at 10%+ down |
Upfront insurance cost | None built-in; PMI is monthly | 1.75% of the loan amount (upfront MIP, usually financed into the loan) |
Best for | Buyers with 620+ credit who want insurance to go away | Buyers with lower credit or thin files who need easier qualifying |
Main limitation | Stricter credit and income standards; loan-level pricing penalties for weaker credit | Life-of-loan MIP if you put less than 10% down; more seller concessions capped |
Can I really buy a home with 3% down?
Yes — three conventional programs let qualified first-time buyers finance up to 97% of the purchase price with just 3% down. The Conventional 97 program has no income limit and is open to any borrower with a solid file. Fannie Mae's HomeReady and Freddie Mac's Home Possible both require 3% down but cap your income at 80% of the area median income — making them the cheapest 3% options for buyers who qualify, since both also trim the PMI rate.
Each program carries the same core strings: you need roughly a 620 credit score, the home must be your primary residence, and HomeReady requires a short homeownership course for first-time buyers. On a $250,000 home, 3% down is $7,500 — versus $8,750 for FHA's 3.5% minimum. The real difference isn't the down payment, though. It's what happens to your insurance payment after you close.
What is private mortgage insurance?
Private mortgage insurance (PMI) is a monthly premium that protects your lender — not you — if you stop making payments. Lenders require it on any conventional loan with a down payment under 20%, because a small down payment leaves less cushion against a price drop. PMI is priced on your credit score and loan-to-value ratio, and it typically runs 0.2% to 1.5% of the loan amount per year, folded into your monthly payment.
FHA's version, the mortgage insurance premium (MIP), works differently. It has an upfront 1.75% of the loan amount — usually financed into the loan, so you pay interest on it for years — plus an annual premium of 0.55% for most 30-year loans with the minimum down payment. On a $300,000 home with 3.5% down, that adds up to more than $52,000 in mortgage insurance over 30 years if you never refinance.
When does PMI actually go away?
On a conventional loan, PMI is temporary, and that's the single biggest reason credit-worthy buyers choose it. Your PMI automatically cancels once your loan balance falls to 78% of the original home value, and you can request removal at 80% loan-to-value (20% equity) — including earlier if home appreciation has pushed your equity to that mark (Fannie Mae). Every month after cancellation is money you keep.
FHA's MIP does not work that way. If you put down less than 10%, the annual premium stays for the life of the loan — you cannot cancel it based on equity alone. Put 10% or more down and MIP drops off after 11 years (Valley West Mortgage). The only ways out are refinancing into a conventional loan once you reach 20% equity,or paying the loan off entirely. That's why two borrowers with the same home, same down payment, and same credit can end up with dramatically different 10-year costs.
Where each loan actually loses
Conventional isn't the right pick for every buyer, and pretending otherwise would be misleading. At 620–679 credit, FHA frequently produces a lower monthly payment after insurance and pricing, because conventional loan-level pricing adjustments (LLPAs) stack heavily against weaker credit and thin down payments. FHA also accepts scores down to 580 with 3.5% down — and doesn't penalize you for a lower score, since it doesn't use risk-based pricing (HSH.com).
FHA's weaknesses are the flip side. Its 6% seller concession cap for closing costs beats Conventional's 3% at high LTVs, which genuinely helps cash-strapped buyers — but that life-of-loan MIP under 10% down is a cost you carry for decades unless you refinance. The conventional tradeoff is equal and opposite: better long-term insurance math, but stricter credit and income standards that simply won't approve everyone. Choose based on what your file can actually clear, not on which headline rate looks lower.
Conventional or FHA: your decision guide
Choose conventional if your credit score is 740 or higher, you can put down at least 5–10%, and you expect your home's value to hold or rise. You'll get the cleanest rate sheet, the smallest PMI, and insurance that disappears at 20% equity — the strongest long-term financial outcome of any option here.
Choose conventional 3% (HomeReady/Home Possible) if your credit is 620–739, your income is at or below 80% of your area's median, and you want the cheapest path in with insurance you can shed. You trade a slightly higher monthly payment now for a mortgage that stops charging you for insurance after a few years.
Choose FHA if your credit is below 620 (down to 580), or if a lender overlay or your debt-to-income ratio blocks you from conventional approval. FHA won't penalize you for that lower score the way Conventional's pricing adjustments will, and you can refinance into conventional later once you've built equity. Plan for the life-of-loan MIP as a cost, you'll carry until you refi — not as a permanent one.
The short version: if you clear 620+ credit, run the conventional numbers first. If you don't, FHA gets you into homeownership now, and that's worth something a spreadsheet can't always measure.
1Can I ever get rid of FHA mortgage insurance?
FHA MIP only goes away automatically if you put 10% or more down (then it ends after 11 years). With less than 10% down it lasts the life of the loan, so most buyers exit by refinancing into a conventional loan once they reach roughly 20% equity.
2Is FHA ever cheaper than conventional?
Yes, though you'll want to compare pricing. FHA rates don't penalize weaker credit the way conventional loan-level pricing adjustments do, so at scores in the 620–679 range FHA often produces a lower total payment — but you carry that MIP for years unless you refinance.
3What's the difference between HomeReady and Conventional 97?
HomeReady caps your income at 80% of your area's median but trims the PMI rate and allows flexible income sources like boarders or rental income. Conventional 97 has no income limit but keeps standard pricing. If you qualify, HomeReady is usually the cheaper 3% option.
Monique Smith | NMLS #1112638 | 337-456-3580 | msmith@gmfslending.com
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