On this page
- FHA vs conventional loan: how do they differ?
- FHA vs conventional loan: which payment is lower at a 730 score?
- Who qualifies for a Conventional 97 loan?
- When is an FHA loan the better choice?
- Which homes can you buy with each loan?
- What are the closing-cost rules on an FHA vs conventional loan?
- Can you switch from an FHA to a conventional loan later?
- FAQ
- What should you do with two pre-approvals?
The question: A reader with a credit score of about 730 qualifies for both an FHA loan and a Conventional 97 loan with 3% down, and plans to keep the home six years or more. In an FHA vs conventional loan comparison, which has the lower payment, what is the difference, and what are the closing-cost rules?
The short answer: With a 730 score, the conventional loan usually costs less over time. The monthly payments start out close, but the conventional loan has no upfront mortgage insurance fee, its private mortgage insurance (PMI) can be canceled, and FHA’s annual premium lasts the life of the loan when you put down less than 10%. FHA tends to win for buyers with lower scores, higher debt or a recent bankruptcy or foreclosure.
FHA vs conventional loan: how do they differ?
The biggest difference in any FHA vs conventional loan comparison is who protects the lender. The Federal Housing Administration (FHA) insures FHA loans, so the lender is repaid if the borrower defaults. A conventional loan has no government insurance. Most conventional loans follow Fannie Mae or Freddie Mac rules, and a borrower who puts down less than 20% pays for PMI from a private company instead.
That difference drives everything else. FHA charges the same premium to nearly every borrower, while PMI is priced by credit score and down payment. As a result, strong credit favors the conventional loan, and weaker credit favors FHA.
FHA and conventional loan rules side by side
| Feature | FHA loan | Conventional loan |
|---|---|---|
| Who backs it | FHA insurance (HUD) | No government backing; private mortgage insurance below 20% down |
| Minimum down payment | 3.5% with a 580+ score; 10% with a 500–579 score | 3% on a Conventional 97 loan for eligible buyers; 5% otherwise |
| Credit score | 580 for 3.5% down, 500 with 10% down | No Fannie Mae minimum in Desktop Underwriter since November 16, 2025; lenders may set their own |
| Upfront mortgage insurance | 1.75% of the base loan, usually financed | None with monthly PMI |
| Annual mortgage insurance | 0.55% of the balance for most loans with under 5% down | Priced by score and down payment |
| When mortgage insurance ends | Life of the loan with under 10% down; 11 years with 10% or more | On request at 80% of the original value; automatically at 78% |
| Debt-to-income (DTI) limit | 43% when manually underwritten, up to 50% with compensating factors; automated approvals can go higher | 50% in Desktop Underwriter; 36% to 45% when manually underwritten |
| Loan limit, one unit | $541,287 in most counties, higher in costly areas | $832,750 in most counties; Conventional 97 is not available on high-balance loans |
| Property condition | Must meet HUD minimum property requirements | Must be safe, sound and structurally intact |
| Occupancy | Primary residence only | Primary residence, second home or investment property |
| Wait after Chapter 7 bankruptcy | 2 years from discharge | 4 years |
| Wait after foreclosure | 3 years | 7 years |
| Seller help with closing costs | Up to 6% of the sales price | 3% to 9% by down payment |
Sources: HUD Handbook 4000.1 and Fannie Mae’s Eligibility Matrix and Selling Guide. Both agencies allow shorter waits after a bankruptcy or foreclosure caused by extenuating circumstances. See our pages on FHA loan limits and conventional loan limits for your county.
FHA vs conventional loan: which payment is lower at a 730 score?
Say a buyer purchases a $420,000 home, close to the $417,500 national median existing-home price that the National Association of Realtors reported for September 2026. Both loans use a 30-year fixed rate of 7.18%, the average 30-year fixed rate in Freddie Mac’s survey on November 5, 2026. Actual FHA and conventional rates differ by lender and borrower, so treat the rate as a placeholder.
For PMI, this example uses 0.70% a year. That is the rate for a 720–739 score in the Urban Institute’s September 2026 Housing Finance at a Glance chartbook, which used Enact Mortgage Insurance pricing at 96.5% loan-to-value (LTV). Because a 3% down loan is at 97% LTV, your own quote may differ slightly.
| Item | Conventional 97 | FHA |
|---|---|---|
| Down payment | 3%: $12,600 | 3.5%: $14,700 |
| Upfront mortgage insurance | None | 1.75%: $7,093, added to the loan |
| Loan amount | $407,400 | $412,393 |
| Monthly principal and interest | $2,760 | $2,794 |
| Monthly mortgage insurance, first year | $238 (0.70% a year) | $189 (0.55% a year) |
| Principal, interest and mortgage insurance | $2,998 | $2,983 |
| When mortgage insurance ends | About year 12 on the original schedule, sooner with extra payments or a higher home value | Never, unless you refinance |
These figures leave out property taxes and homeowners insurance, which are the same for both loans. FHA’s annual premium is charged on the average balance each year, so it slowly falls as you pay down the loan.
FHA vs conventional loan costs over six years
At the start, the FHA payment is about $15 a month lower in this example. However, the conventional borrower comes out ahead over time. After 72 payments:
- The FHA borrower has paid about $1,500 less in monthly payments.
- However, the FHA borrower still owes about $4,640 more, mostly because the upfront premium was added to the loan.
- The FHA borrower also put $2,100 more down.
Together, the conventional loan costs about $5,200 less after six years at the same rate. After that, the gap widens. On the original schedule, the conventional borrower can ask to cancel PMI in about year 12, and it ends automatically about 11 months later under the Homeowners Protection Act, as the CFPB explains. Meanwhile, the FHA premium continues for all 30 years.
How PMI can end sooner
Extra principal payments move the cancellation date up. In addition, a rising home value can help.
For a loan Fannie Mae owns, a borrower can ask to drop PMI based on the home’s current value once the loan reaches 80% of that value after five years, or 75% between two and five years. In this example, the home would need to be worth about $473,000 at the six-year mark, roughly 13% above the price. The servicer sets the steps, which usually include a new valuation.
What changes the answer
- A lower FHA rate. FHA rates often come in below conventional rates on paper, and that alone can flip the FHA vs conventional loan result. If the FHA quote is about a quarter point lower, the interest saved over six years roughly erases the $5,200 gap. So compare actual Loan Estimates from both lenders.
- A lower credit score. PMI climbs fast as scores drop. In the Urban Institute table, PMI runs 0.98% a year at 680–699 and 1.50% at 620–639. Fannie Mae’s loan-level price adjustments also rise, from 0.75% of the loan at 720–739 to 1.50% at 640–659 for loans above 95% LTV. FHA’s premium stays at 0.55% regardless of score.
- A 5% or larger down payment. PMI drops with more equity, and it ends sooner. FHA’s annual premium only falls to 0.50% at 95% LTV, and it still lasts the full term until you put down 10%.
- Income-based breaks. Fannie Mae waives its price adjustments for first-time buyers earning up to 100% of the area median income (120% in high-cost areas), which makes the conventional loan cheaper still.
Who qualifies for a Conventional 97 loan?
A Conventional 97 loan is a conventional mortgage with 3% down. Under Fannie Mae’s Eligibility Matrix, a loan above 95% LTV must be a fixed-rate loan on a one-unit primary residence. For a purchase, at least one borrower must be a first-time home buyer, unless the loan is a HomeReady loan or uses a Community Seconds loan for down payment help.
There are also limits. High-balance loans in costly counties are not eligible, and a non-occupant co-borrower caps the loan at 95% LTV in Desktop Underwriter. HomeReady has an income limit tied to the area median income. For the full rules, see our Conventional 97 guide.
When is an FHA loan the better choice?
The FHA vs conventional loan math flips in several common cases:
- Credit scores below about 680. PMI and price adjustments rise sharply, while FHA pricing does not change with your score.
- Higher debt. FHA’s automated approvals can accept more debt than Fannie Mae’s 50% cap, and its manual rules allow up to 50% with compensating factors.
- A recent bankruptcy or foreclosure. FHA’s waits are 2 and 3 years, against 4 and 7 for Fannie Mae. Our guide to buying a house after foreclosure covers the timelines.
- A family co-signer who won’t live there. FHA allows a family member as a non-occupant co-borrower at its full 96.5% LTV.
- Gifts and assistance from more sources. FHA accepts gifts from a close friend with a documented interest, an employer, a union, a charity or a government program. Fannie Mae limits gifts to relatives and people with a familial relationship.
FHA loans also carry a benefit when you sell: they are assumable. A qualified buyer can take over your loan and its rate, which helps if rates have risen since you bought. By contrast, most conventional fixed-rate loans have a due-on-sale clause, so the buyer cannot take them over. Our assumable mortgage guide explains the process. For FHA’s other tradeoffs, see the pros and cons of FHA loans.
Which homes can you buy with each loan?
An FHA loan must be for a home you will live in as your primary residence. In addition, the appraiser checks the home against HUD’s minimum property requirements, so peeling paint, a failing roof or missing handrails can require repairs before closing. Our answer on FHA minimum property standards covers what fails and who pays.
A conventional loan can also finance a second home or an investment property, though with larger down payments. For a condo, FHA requires an approved project or a single-unit approval. Fannie Mae and Freddie Mac require their own project review instead, so a condo that works for one loan may not work for the other.
What are the closing-cost rules on an FHA vs conventional loan?
Both loans let the seller pay part of your closing costs. However, the limits differ:
| Loan | Down payment | Maximum seller contribution |
|---|---|---|
| FHA | Any | 6% of the sales price |
| Conventional, primary residence | Less than 10% | 3% |
| Conventional, primary residence | 10% to 25% | 6% |
| Conventional, primary residence | More than 25% | 9% |
| Conventional, investment property | Any | 2% |
On the $420,000 example, an FHA seller could pay up to $25,200 toward closing costs, prepaid items and points. In contrast, the Conventional 97 seller could pay up to $12,600. Neither loan lets seller money count toward your down payment. For more detail, see our seller-paid closing cost limits.
Both loans also accept gift funds. On a one-unit primary residence, Fannie Mae requires no minimum contribution from your own money, and FHA lets a gift cover the full 3.5% down payment. Either way, the lender will ask for a gift letter and a record of the transfer.
Can you switch from an FHA to a conventional loan later?
Yes. Many FHA borrowers refinance into a conventional loan once they have enough equity, which ends the FHA premium. With at least 20% equity, the new loan needs no PMI at all.
The catch is the rate. If market rates are higher than your FHA rate when you have the equity, the refinance can cost more than the premium it removes. Therefore, it is safer to choose the loan that fits now than to count on a future refinance. Our guide on removing FHA mortgage insurance walks through the options.
FAQ
Is an FHA or conventional loan better for first-time buyers?
It depends mostly on credit. A first-time buyer with a score above about 700 and steady income often pays less with a Conventional 97 loan, especially if Fannie Mae’s income-based fee waiver applies. Below that, or with a recent credit problem, FHA is often cheaper or the only approval available.
Is a Conventional 97 loan better than FHA?
For a borrower with good credit who will stay several years, often yes, because PMI can end and there is no 1.75% upfront fee. However, an FHA rate quote that is noticeably lower can close the gap. Ask both lenders for a Loan Estimate on the same day and compare the total payment.
Do FHA loans have higher interest rates than conventional loans?
Usually not. FHA rates are often lower on paper. Still, FHA’s upfront and annual premiums add to the cost, so the loan with the lower rate is not always the cheaper loan.
Which loan is easier to qualify for?
FHA is generally easier. It accepts scores down to 500 with 10% down, allows shorter waits after a bankruptcy or foreclosure, and can approve higher debt. A conventional loan has no Fannie Mae score minimum in Desktop Underwriter, but many lenders still set one.
Do sellers prefer conventional offers?
Some sellers do, because the FHA appraisal must confirm the home meets HUD’s minimum property requirements, which can lead to repair requests. A conventional appraisal also flags safety and soundness problems, so a well-kept home usually passes either one. A strong FHA offer with a solid pre-approval can still win.
What should you do with two pre-approvals?
Ask each lender for an official Loan Estimate for the same home price, on the same day. That turns the FHA vs conventional loan question into a side-by-side of real numbers. Then compare the monthly payment with mortgage insurance, the cash needed to close and how long the mortgage insurance lasts. Also ask the conventional lender for its exact PMI quote and whether you qualify for a HomeReady or first-time buyer fee waiver.
If you plan to stay six years or more and your score is above about 700, the conventional loan will likely cost less. If your score is lower or your debt is high, the FHA loan may be the better fit. For more on scores, see our guide to the credit score you need to buy a house.
