Most first-time homebuyers hear about FHA loans as the "easier" option and conventional loans as the "harder" option. That framing is not wrong exactly, but it skips the most important part of the comparison: FHA loans carry mortgage insurance that never goes away on loans with less than 10% down. Conventional loans carry PMI that cancels automatically when you build 20% equity. Over a 30-year loan, that difference compounds into a meaningful amount of money — and whether FHA or conventional actually costs less depends almost entirely on your credit score and how long you plan to stay in the home.
Here is the full comparison run at $285,000 purchase price with 5% down across three credit score scenarios, plus the refinance strategy that sophisticated buyers use to get FHA's easy qualifying and then escape the permanent MIP later.
The Core Difference: FHA MIP vs Conventional PMI
Why These Two Numbers Are Not the Same Product
Both FHA and conventional loans require some form of mortgage insurance when you put less than 20% down. The mechanics are different in ways that matter significantly.
FHA Mortgage Insurance Premium (MIP):
FHA charges two layers of mortgage insurance. First, an upfront MIP of 1.75% of the loan amount — on a $270,750 loan (5% down on $285,000), that is $4,738. The upfront MIP is typically rolled into the loan rather than paid at closing, so your actual loan amount becomes approximately $275,488. Second, an annual MIP of 0.85% of the loan balance — which works out to roughly $192-195/month in year one. For borrowers who put less than 10% down (the vast majority of FHA buyers), this annual MIP is permanent. It does not cancel when you hit 20% equity. It does not cancel when you hit 50% equity. It runs for the life of the loan or until you refinance out of FHA entirely. This rule has been in place for FHA loans originated after June 2013 and applies to every FHA loan made in the market today.
Conventional PMI:
Conventional PMI is typically 0.5-1.2% annually depending on your credit score and loan-to-value ratio. At 5% down with a 700 credit score, expect roughly 0.85-1.0% annually — approximately $192-226/month on a $270,750 loan. Higher credit score means lower PMI rate. The crucial difference: conventional PMI cancels by law (Homeowners Protection Act) when you reach 80% LTV — meaning when your loan balance drops below 80% of the original purchase price. On a $285,000 purchase with 5% down and a 30-year fixed mortgage, you typically hit 80% LTV (loan balance of $228,000 or below) around year 9 to 10. After that, you owe nothing for mortgage insurance. Zero. On a conventional loan, PMI is a temporary cost. On an FHA loan with less than 10% down, MIP is a permanent cost.
The 30-Year Math by Credit Score Scenario
Scenario 1: 620 Credit Score
A 620 credit score is the functional floor for conventional loan qualification. You can technically get approved, but you will pay for it in rate. At a 620 score in the current market:
FHA loan parameters:
Purchase price: $285,000
Down payment: $14,250 (5%)
Base loan amount: $270,750
Upfront MIP (1.75%, rolled in): $4,738 → actual loan: $275,488
Interest rate: approximately 6.75%
Monthly P&I: approximately $1,787
Monthly MIP (0.85%): approximately $195
Total monthly: $1,982
Permanent MIP over 30 years: $195 × 360 = $70,200 in insurance alone
Total 30-year payment cost (P&I + MIP): approximately $714,000
Conventional loan parameters at 620:
Loan amount: $270,750
Interest rate: approximately 7.25% (credit score penalty applies)
Monthly P&I: approximately $1,848
Monthly PMI (1.2% rate for low credit score): approximately $271
Total monthly years 1-9.5: approximately $2,119
After PMI cancels (~month 115): $1,848/month
Months 1-114 × $2,119 = $241,566
Months 115-360 × $1,848 = $454,608
Total 30-year payment cost: approximately $696,000
At a 620 credit score, the conventional loan is actually cheaper over 30 years despite the higher rate — the PMI cancellation saves roughly $18,000 in the back half of the loan. However, the monthly payment is $137/month higher in the early years ($2,119 vs $1,982). If cash flow in years 1-9 is the binding constraint, FHA is the easier payment. If you plan to stay 20+ years, conventional saves more over the full term.
Scenario 2: 700 Credit Score
FHA loan parameters remain largely unchanged:
Interest rate: approximately 6.75% (FHA rates are less sensitive to credit score than conventional)
Total monthly: approximately $1,982
Total 30-year cost: approximately $714,000
Conventional loan parameters at 700:
Interest rate: approximately 6.875% (better rate than 620, but not yet prime pricing)
Monthly P&I: approximately $1,779
Monthly PMI (0.90% rate): approximately $203
Total monthly years 1-9.5: approximately $1,982
After PMI cancels: $1,779/month
Months 1-114 × $1,982 = $225,948
Months 115-360 × $1,779 = $437,418
Total 30-year cost: approximately $663,000
At 700, the gap widens significantly. The conventional loan saves approximately $51,000 over 30 years compared to FHA — and the monthly payment is nearly identical for years 1-9 before PMI cancels and drops the conventional payment by $200/month. At this credit score, the case for conventional is clear. The only reason to choose FHA at 700 is if you need the lower down payment minimum (3.5% vs 3-5% conventional) or have a specific qualifying issue that FHA's underwriting handles more favorably (higher debt-to-income ratio, recent credit events).
Scenario 3: 740+ Credit Score
FHA is almost never the right choice at 740+:
Interest rate: approximately 6.75% (FHA)
Total monthly: approximately $1,982
Total 30-year cost: approximately $714,000
Conventional loan parameters at 740+:
Interest rate: approximately 6.5% (prime pricing)
Monthly P&I: approximately $1,713
Monthly PMI (0.55% rate — credit score reduces PMI significantly): approximately $124
Total monthly years 1-9.5: approximately $1,837
After PMI cancels: $1,713/month
Months 1-114 × $1,837 = $209,418
Months 115-360 × $1,713 = $421,398
Total 30-year cost: approximately $631,000
At 740+, the conventional loan saves approximately $83,000 over 30 years versus FHA — a meaningful amount. The monthly payment is also $145/month lower immediately. At this credit tier, choosing FHA is essentially paying a substantial long-term premium for no benefit. If you have a 740 credit score, get conventional.
The Refinance Strategy: Using FHA to Get In, Then Escaping the MIP
There is a legitimate strategy for buyers who cannot qualify for competitive conventional rates but want to avoid decades of permanent MIP: use FHA to purchase, then refinance to conventional once your credit score improves and you have sufficient equity.
Here is how this pencils out: Buy with FHA at 3.5% down ($9,975 on a $285,000 home). Build credit diligently. In 2-3 years, if your credit score has improved to 700+ and home values have appreciated modestly, you may be able to refinance to conventional with enough equity to avoid PMI entirely, or at least access a lower PMI tier. Refinancing costs $3,000-6,000 in closing costs typically — but eliminating $195/month in MIP pays back that refinancing cost in 15-30 months. The math works as long as you are not refinancing from a lower rate to a significantly higher one.
The current rate environment complicates this strategy. Buyers who purchased with FHA in 2020-2021 at 2.75-3.5% rates have almost no incentive to refinance to a 2025-2026 conventional rate of 6.5-7.0%, even to eliminate MIP. For buyers purchasing today at current rates, the refinance-out-of-FHA calculation is more straightforward: you are not giving up a low rate because the rate you are refinancing from (6.5-7.0% FHA) is similar to the rate you are refinancing to (6.5% conventional at 700+ credit). What you are buying with the refinance is the elimination of permanent MIP. That is worth doing if closing costs are reasonable and your credit score has improved enough to access prime conventional pricing.
FHA's Advantages Are Real — Just Narrowly Applicable
FHA loans are not bad products. They serve a genuine purpose for buyers who need them:
Lower credit score threshold: FHA accepts 580 credit score with 3.5% down. Conventional requires 620 minimum and higher scores for best pricing. If your score is 580-619, FHA may be your only conventional purchase option (non-QM lenders exist but have other trade-offs).
Higher debt-to-income tolerance: FHA allows DTI up to 57% in many cases. Conventional typically caps at 45-50%. For buyers with significant student loan debt or other obligations, FHA may qualify you when conventional does not.
Consistent rate pricing regardless of credit score: FHA mortgage insurance rates do not scale up sharply with lower credit scores the way conventional PMI does. This partly offsets the permanent MIP disadvantage for buyers in the 580-660 credit score range.
Lower minimum down payment: 3.5% vs conventional's typical 5% (though Fannie Mae HomeReady and Freddie Mac Home Possible offer 3% down to income-qualifying buyers).
The honest summary: FHA is the right loan when you need it to qualify. It is a reasonable trade-off for buyers who cannot access competitive conventional financing today but plan to refinance once their credit improves. It is a poor choice for buyers who can already qualify for conventional financing at 680+ credit scores, because the permanent MIP represents a multi-thousand dollar long-term cost premium with no corresponding benefit. Our detailed breakdown of when PMI cancels on a $350,000 home with 5% down covers the conventional PMI timeline in more detail — including the exact loan balance and month at which you can request PMI cancellation before it removes automatically at 78% LTV. And if credit score is the reason you are considering FHA over conventional, our analysis of what a 620 vs 760 credit score costs on a 30-year mortgage shows the rate and PMI differences in concrete dollar terms — because sometimes the right answer is to spend 6 months improving your score before applying rather than locking in a permanent mortgage insurance premium at a lower rate tier. The mortgage decision also interacts with the 15-year vs 30-year choice once you are in conventional territory; our breakdown of whether a 15-year or 30-year mortgage is the smarter choice covers the payment-to-payoff-speed trade-off that buyers face after they have already navigated the FHA vs conventional decision.
Two books worth reading before you make the mortgage decision: Nolo's Essential Guide to Buying Your First Home is the most practical consumer guide to the mortgage process available — it covers FHA vs conventional in full, explains how lenders evaluate your application, and walks through every closing cost line item without the sales pitch you get from a lender's pre-approval packet. And if your credit score is the reason you are looking at FHA rather than conventional, Credit Secrets by Scott and Allison Hilton covers the dispute process and credit rehabilitation steps that have helped a significant number of buyers move from FHA-qualifying credit into conventional-qualifying credit within 6-12 months — sometimes eliminating the FHA vs conventional question entirely by the time they actually close.
One action to take right now: if you are within 12-24 months of a home purchase, pull your credit reports at AnnualCreditReport.com (free, official, not the subscription service) and check for errors. A single erroneous collection account can hold a score below the conventional prime pricing threshold. Disputing errors before you apply costs nothing and can shift you from FHA territory to conventional territory before you ever talk to a lender.