| Feature | FHA Loan | Conventional Loan |
|---|---|---|
| Min Down Payment | 3.5% (580+ FICO) | 3% (HomeReady/Home Possible) |
| Min Credit Score | 580 (3.5% down) / 500 (10% down) | 620 |
| Mortgage Insurance | MIP: 1.75% upfront + 0.55% annual | PMI: 0.50-1.07% annual (no upfront) |
| MI Cancellation | Life of loan (if <10% down) | Cancel at 80% LTV |
| Max DTI | 43-50% | 45-50% |
| Loan Limits | $498,257 (standard areas) | $766,550 (conforming) |
| Property Types | Primary residence only | Primary, second, investment |
| Best For | Lower credit, smaller down payment, higher DTI | Strong credit, can reach 80% LTV within ~5 years |
The biggest difference between FHA and conventional is mortgage insurance. FHA charges: (1) Upfront MIP of 1.75% ($5,250 on $300,000 loan — usually rolled into the loan), PLUS (2) Annual MIP of 0.55% ($1,650/year or $137.50/month on a $300,000 loan). Crucially: FHA MIP cannot be canceled if you put less than 10% down — you pay it for the life of the loan. Conventional PMI can be canceled at 80% LTV. Over 30 years, that FHA MIP adds $49,500 on a $300,000 loan — money that conventional borrowers stop paying once they reach 80% LTV.
Many buyers use FHA to get into a home with a lower credit score, then refinance to conventional after 1-2 years when their credit improves and they've built equity. This strategy lets you benefit from FHA's easier qualification while avoiding lifetime MIP. The cost: refinance closing costs ($5,000-$10,000). But if you save $137/month by eliminating MIP, you recoup those costs in about 3-5 years. This "FHA to conventional" refinance is one of the most common mortgage strategies.