For most first-time buyers with a credit score above roughly 700, a conventional loan ends up cheaper because its private mortgage insurance is priced lower and cancels once you reach 20% equity. Below that credit range, an FHA loan is usually the better deal, because its mortgage insurance rate is fixed by the government no matter your credit score, while conventional PMI gets noticeably more expensive as your score drops. There's no single right answer here. It comes down to your actual credit score, how much you can put down, and how long you plan to keep the loan.
What's the Real Difference Between an FHA Loan and a Conventional Loan?
An FHA loan is backed by the Federal Housing Administration and built for buyers with lower credit scores or smaller down payments, while a conventional loan is backed by Fannie Mae or Freddie Mac and generally rewards stronger credit with a lower cost. FHA will approve a loan with a credit score as low as 580 at 3.5% down, or down to 500 if you can put 10% down. Conventional loans require a minimum credit score of 620, but qualified first-time buyers (defined as anyone who hasn't owned a home in the past three years) can get in with as little as 3% down through Fannie Mae's HomeReady or Freddie Mac's Home Possible programs. On paper, conventional looks like it needs less cash down. In practice, the credit score bar is what actually decides who qualifies for which loan, and what either one costs you every month.
How Does FHA Mortgage Insurance Actually Work?
FHA charges two separate insurance costs: an upfront premium of 1.75% of your loan amount, paid at closing or rolled into the loan, plus an annual premium that for most 30-year loans with less than 5% down runs 0.55% of the loan balance, billed monthly. The part that catches people off guard is how long it sticks around: if you put down less than 10%, that annual MIP stays on the loan for its entire term, even after you've built up real equity. Put down 10% or more and you can get it removed after 11 years. There's no waiting for your home value to rise and no requesting early removal based on equity. The number is fixed at closing and barely moves.
How Does Conventional PMI Actually Work?
Conventional private mortgage insurance kicks in whenever you put down less than 20%, and unlike FHA's flat rate, it's priced individually by private mortgage insurers based on your credit score and loan-to-value ratio, typically landing anywhere from about 0.2% to over 2% of the loan annually. A borrower with a 760+ credit score and 5% down might pay close to the bottom of that range. A borrower with a 620 score and the same 5% down can land well above 1%, because the insurer is pricing in real default risk. The upside that FHA doesn't offer: conventional PMI cancels automatically once your loan balance hits 78% of the home's original value, by federal law, and you can request removal yourself at 80%. Build equity, refinance, or just pay the loan down, and the insurance cost goes away for good.
What Does This Actually Cost on a $400,000 Home?
Run the real numbers on a $400,000 purchase and the credit score gap becomes obvious fast. FHA at 3.5% down means a $386,000 loan: a $6,755 upfront premium (usually financed into the loan) plus annual MIP of 0.55%, which works out to about $177 a month, for as long as you hold the loan if your down payment stayed under 10%. A conventional loan at 5% down on the same home means a $380,000 loan. At a strong credit score (roughly 760+), published mortgage insurer rate cards put PMI around 0.2% to 0.3% annually, or roughly $65 to $95 a month, and it disappears once you hit 20% equity. At the minimum 620 score conventional allows, rate cards for that same 5% down scenario commonly run 1.3% to 1.9% annually, or roughly $410 to $600 a month, well above what FHA would charge the exact same buyer. The insurance cost isn't a fixed property of the loan type. It's a direct function of your credit score, and that's the number that actually decides which loan is cheaper.
So Which One Should You Actually Pick?
As a real-world rule of thumb: if your credit score is in the 500s or low 600s, FHA is almost always cheaper because conventional PMI at that score is priced steeply. Once you're solidly above 700, conventional usually wins, both on the monthly PMI cost and on the fact that it eventually disappears entirely. In the 620 to 700 range, it genuinely depends on your exact score, your down payment size, and how long you expect to stay in the home, since FHA's fixed cost becomes relatively more attractive the longer that insurance would otherwise run on a conventional loan. Before committing to either, get a loan estimate for both from the same lender on the same day. The APR and monthly payment lines will show you the real comparison far better than any rule of thumb, including this one.
What Are the Real Risks and Trade-Offs?
- FHA loan limits are lower than conventional conforming limits. The 2026 FHA floor is $541,287 in most of the country, with a high-cost ceiling of $1,249,125, versus conventional's $832,750 conforming baseline (higher in expensive metro areas). If you need to borrow more than the FHA limit allows, conventional may be your only option.
- FHA mortgage insurance can outlast the loan's benefit to you. If you put down less than 10% and stay in the home more than a decade, you could pay FHA's fixed MIP for years after a conventional borrower in the same house would have already had PMI cancelled.
- Conventional PMI pricing isn't guaranteed to stay where it starts. Some conventional PMI is structured to step down as you build equity even before 20%, but the exact terms vary by lender and insurer, so read your specific loan estimate rather than assuming a best-case scenario.
- A lower rate doesn't always mean a lower total cost. FHA loans sometimes carry a slightly lower nominal interest rate than conventional loans for the same borrower, but the mortgage insurance cost can easily erase that advantage once you add it to the monthly payment.
- Your credit score isn't fixed at today's number. If you're close to a credit tier that would meaningfully lower your PMI, it can be worth spending a few months paying down revolving balances before you apply, rather than locking in a higher rate today.
Figuring out which loan is cheaper only matters once you know how much home you can actually afford to begin with. Our breakdown of how much house you can actually afford using the 28/36 rule is the right starting point before you compare loan types, and if you're still weighing whether to buy at all right now, our look at renting vs. buying in 2026 covers that real math too.
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