FHA or Conventional: Which One Actually Costs Less

The difference that decides most files

Conventional mortgage insurance ends. FHA's, on most loans, does not.

On a conventional loan you have the right to ask your servicer to cancel private mortgage insurance when the balance is scheduled to reach 80 percent of the original value, and the servicer must terminate it automatically at 78 percent provided you are current.¹ On an FHA loan above 90 percent loan-to-value the annual premium runs for the term of the loan — equity does not end it.²

Over a thirty-year hold that gap is usually larger than any difference in the note rate, and it is the part of the comparison most likely to be missing when somebody shows you two payments side by side.

Where FHA wins anyway

The score. FHA publishes its floor: 580 for 3.5 percent down, 500 for 10 percent.³ Conventional pricing does not stop at a cliff, it just gets steadily more expensive as the score falls, and at the bottom of the range it is often no longer a real option.
The pricing of the insurance. FHA charges the same annual premium at a 580 score as at a 780 score.² Private mortgage insurance is priced on credit, so a weaker file pays materially more for it.
Debt ratios. FHA's 31 and 43 percent figures are guidelines written to be exceeded with documented compensating factors.³

The strategy this points at

For a borrower with a thin or damaged file and little down, the two are often not rivals but a sequence: FHA to buy, conventional to refinance into once the score has recovered and the equity is there — which is the move that ends the premium.

It only works if the numbers work on the day, so it should be priced, not assumed. But it is the reason “FHA costs more over thirty years” is an incomplete argument: most FHA loans are not held for thirty years.

Where conventional wins

A strong score with 10 to 20 percent down is usually a conventional loan, and it is not close. Above 20 percent down there is no mortgage insurance at all, which removes the whole question. Conventional also avoids the upfront premium — 1.75 percent, added on top of the loan and paid interest on for as long as you keep it.^3,4

How to actually compare them

Ask for both, priced the same day, on the same Loan Estimate form. Then compare the total of rate, mortgage insurance and lender fees over the period you actually expect to hold the loan — not the payment, and not the rate. The fee page covers what else to look at on those two documents.

Any broker can run both. If you are talking to somebody who can only offer one of them, that is worth knowing before you take their comparison as the market's answer.

Sources

These references support the factual explanations above. Where this page states a preference rather than a fact, it says so — those are our editorial judgement, not a claim that any one channel always costs less.

1CFPB · When can I remove private mortgage insurance from my loan?Conventional mortgage insurance cancellation on request at 80 percent of original value, automatic termination at 78 percent, and the amortization midpoint rule.

2HUD · Mortgagee Letter 2023-05 — Annual mortgage insurance premium reductionAnnual MIP by base loan amount, loan-to-value and term, and how long each rate runs for. Effective for case numbers endorsed on or after March 20, 2023. The base loan amount threshold is the national conforming loan limit.

3FDIC · Affordable Mortgage Lending Guide — FHA 203(b) mortgage insurance programThe credit score bands and the maximum loan-to-value each allows, the 31 and 43 percent debt ratio guidelines, and the 1.75 percent upfront premium.

4HUD · Handbook 4000.1 — Glossary and AcronymsThe definitions the arithmetic turns on: Base Loan Amount as the mortgage amount prior to the addition of any financed upfront premium, and loan-to-value as the Base Loan Amount divided by the Adjusted Value.

FHA mortgage insuranceTwo premiums, not one — and whether the second one ever ends is settled on the day you close.Conventional mortgage insurance, and how it endsUnlike FHA's, it is built to come off. There are three ways, and one kind that never does.

Priced against your actual file

Your county limit, your score, your numbers

FHA limits are set county by county, and what the mortgage insurance costs depends on where your loan-to-value lands. Send us the basics and we’ll price it properly — no credit pull, and it commits you to nothing.

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FHA or conventional?