FHA vs conventional loans: which costs less?

The rules side by side

An FHA loan is made by a private lender and insured by the Federal Housing Administration, part of HUD. A conventional loan has no government insurance; most follow the rules of Fannie Mae and Freddie Mac, which buy them from lenders. Here is how the main requirements compare in 2026:

Conventional figures are Fannie Mae's; Freddie Mac's are similar. Lenders can set stricter rules of their own. Debt-to-income (DTI) is shown as housing payment / all monthly debts, as a share of gross income.

The loan limits rarely bite at the median price, but they matter in expensive areas: FHA's limit is lower than the conforming limit in most counties. Above the conforming limit you need a jumbo loan, which has its own, usually stricter, rules.

The monthly payment

We priced the same $360,000 home, close to the U.S. median value, with a 30-year fixed loan at 7.24%, today's average conventional rate. Our market data has no separate FHA rate, so both use the same rate here. In practice FHA rates are often a little lower for borrowers with modest credit, because Fannie Mae and Freddie Mac add loan-level price adjustments to conventional rates for lower scores and smaller down payments, which narrows conventional's edge.

First-month payment: principal, interest, mortgage insurance, property tax (0.89% of value) and homeowners insurance ($4.29 per $1,000). FHA includes the 1.75% upfront premium added to the loan. Conventional PMI uses the published rate for each score and loan-to-value band, so it falls with a bigger down payment. These rates assume 25% mortgage insurance coverage, the level Fannie Mae requires on HomeReady loans and the one Urban Institute publishes. A standard conventional loan with less than 10% down needs 30% to 35% coverage, which typically costs up to about a third of a percentage point more a year.

FHA's monthly premium is 0.55% of the loan a year with 3.5% down, about $159 a month, whatever your score. Conventional PMI runs from about $133 a month with a 760 or higher score to $434 at 620 to 639. That is why the cheaper option changes as you move across the table.

Mortgage insurance: how much and for how long

The bigger difference is time. Conventional PMI ends automatically when the balance is scheduled to reach 78% of the original value. FHA's annual premium lasts the life of the loan with less than 10% down, and 11 years with 10% or more. FHA also charges the upfront premium, usually financed, so you pay interest on it too.

Conventional at the published PMI rate for a 700 to 719 score: 0.79% with 3.5% down, 0.68% with 5% down, 0.55% with 10% down. FHA's annual premium is recalculated each year on the falling balance, as HUD requires, so it shrinks slowly. Totals include the upfront premium.

With 3.5% down, FHA insurance adds up to about $44,436 over 30 years against $34,535 of PMI for a 700 to 719 borrower, whose PMI stops after 12 years 7 months. Our guide to when PMI goes away covers asking to cancel at 80%, extra payments and new appraisals, all of which can end PMI sooner. None of them work for FHA.

Which costs less in total

Adding interest and every dollar of mortgage insurance over the first 10 years:

Interest plus mortgage insurance (upfront and monthly) paid in the first 10 years. Break-even: conventional costs less over 10 years if your PMI quote, as an annual percent of the loan, is below this rate.

The break-even column is the most useful number here: get a PMI quote from your lender, and if it is under about 0.81% a year with 3.5% down, conventional comes out ahead over 10 years. Over the full 30 years the bar is higher, about 1.22%, because FHA insurance never stops. With 10% down, PMI is cheaper still (0.55% a year for a 700 to 719 score, against 0.79% with 3.5% down), so FHA comes out ahead only for scores of 660 to 679 and below.

• FHA tends to win with a score of 680 to 699 or lower, a score between 500 and 619 that many conventional lenders will not take, a debt-to-income ratio above conventional limits, or a recent bankruptcy or foreclosure: FHA's standard wait is 2 years after a Chapter 7 discharge and 3 after a foreclosure, against 4 and 7 years for Fannie Mae.
• Conventional tends to win with a score of 700 or higher, 10% or more down, a plan to stay long enough that PMI's end date matters, or a home that may not pass FHA's property standards.

Refinancing out of FHA later

Many buyers start with FHA and refinance into a conventional loan once their credit has improved and they owe 80% or less of the home's value, which removes mortgage insurance entirely. In our 3.5%-down example the balance reaches 80% of the purchase price after about 12 years 4 months if the home's value stays flat. If it rose 3% a year (an illustration, not a forecast) you would get there after about 5 years.

Refinancing costs money and only makes sense if the new rate is not much higher than your current one; the refinancing guide and refinance calculator show the break-even. Refinancing into another FHA loan within three years refunds part of the upfront premium as a credit toward the new one: 58% after 12 months, about $3,526 of the $6,080 in our example, falling to 10% at 36 months.

VA and USDA loans

Two other government programs need no down payment at all. VA loans, for eligible veterans, service members and some surviving spouses, have no monthly mortgage insurance; instead most borrowers pay a one-time funding fee of 2.15% on first use with no down payment ($7,740 on a $360,000 home), lower with 5% or more down, and waived for veterans receiving VA disability compensation. USDA loans, for moderate-income buyers in eligible rural and suburban areas, charge 1% upfront ($3,600) and 0.35% a year. If you qualify for either, compare it too: the home affordability calculator runs FHA, VA, USDA and conventional side by side for your income and debts, and the affordability guide explains the limits lenders use.