The down payment question is basically a tie
The old framing — FHA for small down payments, conventional for big ones — is out of date. FHA requires 3.5% down (with a credit score of 580+). Conventional loans through first-time buyer programs like HomeReady and Home Possible go as low as 3% down, and standard conventional is 5%. On a $350,000 house, the difference between 3% and 3.5% down is $1,750. Down payment alone should almost never drive this decision. What should: what each loan charges you for putting so little down, and for how long.
MIP vs PMI: where the real money is
Both loans charge you for low-down-payment risk, but the structures are fundamentally different.
FHA charges MIP two ways: an upfront premium of 1.75% of the loan (usually financed into the balance) plus an annual premium, currently 0.55% for most borrowers, paid monthly. The trap: with less than 10% down, FHA MIP lasts for the life of the loan. It never cancels, no matter how much equity you build. The only exit is refinancing out of FHA entirely.
Conventional charges PMI — a monthly premium priced on your credit score and LTV, with no upfront component. And PMI dies: you can request cancellation at 20% equity, and it terminates automatically at 22% equity (78% of original value). Strong-credit borrowers can also pay via a slightly higher rate (lender-paid PMI) or a single upfront premium.
Worked example: the lifetime cost gap
Take a $350,000 purchase. FHA at 3.5% down: base loan $337,750, plus $5,911 upfront MIP financed in, and monthly MIP of $337,750 × 0.55% ÷ 12 ≈ $155/month, forever. Conventional at 5% down: loan of $332,500 with PMI at an illustrative 0.6% ≈ $166/month — but cancellable. With normal price appreciation and amortization, that borrower plausibly hits 20% equity around year 6–7.
| Cost item | FHA 3.5% down | Conventional 5% down |
|---|---|---|
| Upfront premium | $5,911 (1.75%) | $0 |
| Monthly premium | ~$155 | ~$166 |
| When it ends | Never (refi only) | ~Year 6–7 at 20% equity |
| 10-year total | ~$24,500 | ~$13,000 |
| 15-year total | ~$33,800 | ~$13,000 |
Hold the loan 15 years and FHA's insurance costs roughly $20,000 more — and the gap keeps widening every year after. That is the single most important number in this comparison.
So why does FHA still win for millions of buyers? Credit.
Conventional pricing is brutally score-sensitive. Loan-level price adjustments stack up fast below 680, and below 640 conventional pricing plus high-LTV PMI can get ugly — PMI itself is score-priced, so a 640 borrower might pay double the PMI rate of a 760 borrower. FHA pricing, by contrast, barely moves with score: a 600 and a 740 borrower get nearly the same FHA rate, and MIP is flat regardless of credit.
The practical crossover: above roughly 680–700 with 3–5% down, conventional usually wins. Below about 660, FHA usually wins on monthly payment — sometimes by a lot — despite the lifetime MIP. In the 660–700 band, run both. Your DTI matters too: FHA tolerates higher debt-to-income ratios, which can be the difference between approved and declined for stretched buyers.
Loan limits, appraisals, and seller perception
- Loan limits: FHA limits in most counties sit well below conforming limits (the FHA floor is set at 65% of the conforming limit). Pricier markets get higher FHA ceilings, but if your price point exceeds the local FHA limit, conventional decides itself.
- Property condition: FHA appraisals enforce minimum property standards — peeling paint, missing handrails, roof issues, and safety hazards can trigger repair conditions before closing. Fixers and as-is sales fit conventional more smoothly.
- Seller perception: in competitive multiple-offer situations, listing agents sometimes steer toward conventional offers, fearing FHA appraisal repairs and stricter appraised-value pushback. Fair or not, an FHA offer can need a stronger price or terms to compete. A rock-solid preapproval helps offset this.
The FHA superpower: house hacking 2–4 units
FHA allows 3.5% down on 2-, 3-, and 4-unit properties as long as you live in one unit — the classic house hack. Conventional owner-occupied multi-unit historically demanded 15–25% down (though 5%-down conventional options on 2–4 units now exist), and pure investment property down payments start at 15–20%. For a first property that pays its own mortgage, FHA on a duplex or fourplex is one of the lowest-cash entries into real estate investing that exists. FHA even lets you count a portion of the other units' rent toward qualifying.
The exit plan: refinancing out of MIP
FHA's life-of-loan MIP is not a life sentence — it is a loan you graduate from. The standard play: buy with FHA while your credit or DTI demands it, then refinance into conventional once you have 20% equity and a stronger score, dropping mortgage insurance entirely. Buyers who did this after a few years of appreciation got FHA's easy entry and escaped most of its lifetime cost. Just underwrite the plan honestly: a refinance depends on future rates, values, and your finances, none of which are guaranteed. Choose FHA because it wins today, with the refi as upside — not because the exit is promised.
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