FHA or conventional: which is better when I have a small down payment?
The short answer
It mostly comes down to your credit score. FHA needs just 3.5% down and is forgiving on credit, but its mortgage insurance usually lasts for the life of the loan. Conventional needs as little as 3% down for first-time buyers, and its PMI gets cheaper with a higher score and can be removed later. The Mortgage Advisory prices both side by side so you can see the real monthly and long-term cost.
What's the quick rule of thumb?
- Credit score under about 680, or higher debt: FHA often comes out ahead.
- Credit score around 720 or higher: conventional usually wins, because PMI is cheaper and can come off later.
- In between: it's close, and the only way to know is to price both.
How do the two compare?
| FHA | Conventional | |
|---|---|---|
| Minimum down payment | 3.5% (with a 580+ score) | 3% for first-time buyers, otherwise 5% |
| Credit flexibility | More forgiving | Rewards higher scores |
| Upfront mortgage insurance | 1.75% of the loan (usually added to the loan) | None |
| Monthly mortgage insurance | About 0.55% a year for most loans, same for every credit score | Based on your credit score and down payment |
| Does it go away? | Usually lasts the life of the loan with less than 10% down | Can be removed at 20% equity; ends automatically at 22% |
| 2026 loan limit (1 unit) | $541,287 to $1,249,125, depending on county | $832,750 in most areas, higher in high-cost areas |
| Property standards | Stricter (FHA minimum property requirements) | Standard appraisal |
Why does credit score matter so much?
FHA charges roughly the same mortgage insurance no matter your score. Conventional PMI is priced by your score, so a 760 borrower might pay a fraction of what a 640 borrower pays. That's why stronger credit usually tips the scale toward conventional.
What about the long run?
If you pick FHA, you're not stuck. Many buyers start with FHA and later refinance into a conventional loan once their credit improves and they reach about 20% equity, which drops the mortgage insurance. See how to get rid of FHA mortgage insurance.
Example scenario (illustrative)
Two first-time buyers in Sacramento are each buying a $450,000 home with 3.5% down. The one with a 640 score pays noticeably less each month with FHA, because conventional PMI at 640 is expensive. The one with a 760 score pays less with conventional, and can ask to drop the PMI once they reach 20% equity.
Our take
Don't let anyone pick for you based on habit. We're the direct lender on conventional loans in California, Texas, and Colorado, and we arrange FHA loans through approved partner lenders, so I'll lay out both with the same home, the same down payment, and your real credit, then show you the monthly cost and what it looks like five years out.
Sources
Ace Ausar, Mortgage Banker · NMLS #1143018
The Mortgage Advisory, Inc. · NMLS #1549739
Reviewed by Ace Ausar, NMLS #1143018 · Updated
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