FHA vs Conventional for First-Time Buyers

TL;DR: FHA loans allow 3.5% down with 580 credit score. Conventional loans typically need 5%+ down and 620+ credit. FHA usually costs more long-term thanks to permanent mortgage insurance.

_Last reviewed: July 2026 · 4 min read_

If you're a first-time buyer choosing between FHA and conventional financing, the honest answer is: FHA loans are easier to qualify for (3.5% down, 580 credit minimum) but cost more long-term due to permanent mortgage insurance. Conventional loans need better credit and more down but let you drop PMI once you hit 20% equity — usually cheaper over a 5+ year hold.

Okoniq Property Hub stores loan documents so you can compare actual costs year over year.

What's an FHA loan?

Insured by the Federal Housing Administration (part of HUD), these loans are for buyers who don't qualify for conventional financing:

• Minimum down payment: 3.5% with 580+ credit; 10% with 500-579 credit
• Minimum credit score: 500 (technically) / 580 practically
• Debt-to-income ratio: up to 43-50%
• Loan limits: vary by county — $524,225 in most areas, up to $1,209,750 in high-cost areas (2025)
• Property must be primary residence
• Property must pass FHA appraisal (stricter than conventional)

What's a conventional loan?

Conventional = any mortgage not backed by a federal agency (FHA, VA, USDA). Includes conforming loans (following Fannie Mae/Freddie Mac guidelines) and jumbo loans.

• Minimum down payment: 3% for some programs, 5% typical, 20% to avoid PMI
• Minimum credit score: 620 typical (some programs allow 580)
• Debt-to-income ratio: up to 45-50% typical
• Loan limits: conforming cap $806,500 in most areas (2025)
• Property can be primary, second, or investment
• Standard appraisal

Comparison table

| Factor | FHA | Conventional | |---|---|---| | Minimum down | 3.5% | 3-5% | | Minimum credit | 580 | 620 | | Mortgage insurance | UFMIP + monthly MIP for life of loan (usually) | PMI, cancellable at 20% equity | | Property type | Primary residence only | Any | | Appraisal | Stricter (FHA standards) | Standard | | Loan limit (typical) | $524,225 | $806,500 | | Best for | Lower credit, lower down | Higher credit, longer hold |

The mortgage insurance angle

FHA:

• Upfront MIP: 1.75% of loan amount, financed into balance
• Monthly MIP: 0.15%-0.75% annually depending on down payment and term
• Duration: LIFE OF LOAN if you put less than 10% down; 11 years if 10%+ down

Conventional PMI:

• Monthly premium: varies by credit/down payment, typically 0.3%-1.5% annually
• Duration: cancellable at 20% equity (loan-to-value = 78% by amortization, or 80% by appraisal request)

Over a 30-year loan, FHA's permanent MIP can cost $30,000-$60,000 more than conventional's cancellable PMI.

When FHA wins

• Credit under 620
• Down payment under 5%
• Higher debt-to-income
• Plan to sell within 5-7 years (permanent MIP burden smaller)
• Property in FHA-eligible area at lower price point

When conventional wins

• Credit 620+ (especially 700+)
• Down payment 5%+ (especially 20%+)
• Plan to hold long term
• Property outside FHA loan limits
• Investment property (FHA is primary only)

The refinance path

Many buyers start FHA to enter the market, then refinance to conventional once they build equity + credit. Break-even math on refinance closing costs vs. avoided permanent MIP — see how to calculate refinance break-even in 60 seconds.

Track loan documents

Okoniq Property Hub stores your loan documents, PMI/MIP records, and equity growth over time — critical for planning refinance vs. hold decisions. Related: VA loan basics for veterans, USDA rural loans explained, how PMI works and when it drops, and the Mortgage & Money hub. Comprehensive comparison at Consumer Financial Protection Bureau.

Frequently asked questions

Can I use gift money for FHA down payment?

Yes — from family members with a gift letter. Conventional also allows gifts with documentation.

Are FHA rates higher than conventional?

Base rates are typically similar or slightly lower for FHA. But once you factor in permanent MIP, effective borrowing cost is often higher.

Does FHA require me to be a first-time buyer?

No — FHA is available for any buyer of a primary residence. "First-time buyer programs" are separate; some FHA programs favor first-timers with additional benefits.

Not financial advice. Loan choice depends on your specific credit, down payment, timeline, and property — consult a licensed mortgage broker. Okoniq Property Hub keeps documents organized. Get started free.

FAQ

What credit score do I need for an FHA loan versus a conventional loan?

FHA loans require a minimum credit score of 580 for the 3.5% down payment option, or 500-579 with 10% down. Conventional loans typically require 620, though some lenders accept 580 for specific programs.

Can I remove mortgage insurance from an FHA loan after reaching 20% equity?

No — if you put down less than 10%, FHA mortgage insurance (MIP) stays for the life of the loan. The only way to remove it is to refinance into a conventional loan once you have sufficient equity and credit.

How much does FHA mortgage insurance cost compared to conventional PMI?

FHA charges 1.75% of the loan amount upfront plus 0.15%-0.75% annually in monthly premiums for the loan's life. Conventional PMI typically costs 0.3%-1.5% annually but cancels at 20% equity, making FHA $30,000-$60,000 more expensive over 30 years in many cases.

Can I buy a rental property with an FHA loan?

No — FHA loans are for primary residences only. You must live in the property as your primary home. Conventional loans allow financing for second homes and investment properties.