FHA vs. Conventional Loans: Which Mortgage Option Will Save You Thousands?

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First-time buyers often believe FHA loans are for bad credit and no money down. They’re wrong. And that mistake could be costing you thousands.

In this post, we’ll compare FHA and conventional loans in-depth—covering down payments, credit score requirements, mortgage insurance, debt-to-income ratios, loan limits, and more. If you’re buying a home with 3%, 5%, or 10% down, understanding the pros and cons of each loan type could dramatically impact your monthly payment.

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What’s the Difference Between FHA and Conventional Loans?

Let’s clear up a myth: FHA loans are not just for first-time buyers or those with poor credit. Any buyer can use FHA or conventional financing depending on eligibility. The real difference lies in the credit score requirements, down payment flexibility, and how mortgage insurance is handled.

Criteria	FHA	Conventional
Minimum Credit Score	580 (3.5% down), 500 (10% down)	620
Minimum Down Payment	3.5%	3%
Mortgage Insurance	Required for life (unless 10% down)	Drops at 20-22% equity
Upfront Mortgage Insurance	1.75% of loan amount	None
Interest Rates	Typically lower	Higher with lower credit
DTI Ratios	Up to 57%	Typically capped at 49.99%

FHA Loan Breakdown

Credit Scores and Down Payment
FHA loans allow down payments as low as 3.5% with a 580+ credit score. If your score is between 500-579, you’ll need at least 10% down.

Recommendation: If your score is near the minimum, take time to improve your credit. Even 20-40 points can save you thousands.

Mortgage Insurance
- Upfront: 1.75% of loan amount (can be financed).
- Monthly: 0.55% of loan amount.
- Duration: Life of the loan unless you put down 10% (then drops after 11 years).

Example:
Home Price: $500,000 | Down Payment: 3.5% | Rate: 6.25%
Loan: $482,500
Upfront MI: $8,443 (financed)
Final Loan: $490,943
Total Monthly: ~$3,856

Conventional Loan Breakdown

Credit Scores and Down Payment
Conventional loans allow 3% down with a 620+ score. Best rates start at 740+.

Mortgage Insurance
- No upfront mortgage insurance
- Monthly MI varies (based on credit & down payment)
- Drops at 20-22% equity

Example:
Home Price: $500,000 | Down Payment: 3% | Rate: 6.875%
Loan: $485,000
Monthly MI: ~$121 (for 780+ score)
Total Monthly: ~$3,911

Debt-to-Income (DTI) Ratio Comparisons

FHA DTI Limits:
- Front-End: 47%
- Back-End: 57%

Conventional DTI Limits:
- Max: 49.99% with strong credit/reserves

Mortgage Insurance Showdown: FHA vs. Conventional

Feature	FHA	Conventional
Upfront MI	Yes (1.75%)	No
Monthly MI	0.55% fixed	Varies
Cancellation	After 11 yrs (10%+ down) or never	At 20-22% equity

FHA vs. Conventional: Payment Comparison

Assumptions:
$500,000 Home | 1.1% Property Tax | $145/month Insurance

• 3.5% Down: FHA ~$3,856 | Conv ~$3,911
• 5% Down: FHA ~$3,868 | Conv ~$3,799
• 10% Down: FHA ~$3,633 | Conv ~$3,616

Property Requirements and Loan Limits

FHA:
- Stricter property safety rules
- Condos must be FHA-approved
- County-based loan limits

Conventional:
- Appraisals focus on value
- Condos don’t need FHA approval
- Generally higher loan limits

Final Thoughts: Which Loan Should You Choose?

If your credit is under 680 or you need flexible qualifications, FHA may be better.
But if you’ve got 700+ credit and can do 5% down, conventional will likely save you more long-term.

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