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For most first-time buyers in 2026, the choice comes down to two loan types: FHA or conventional. FHA loans are backed by the Federal Housing Administration and allow lower credit scores and smaller down payments, but they charge mortgage insurance for the life of the loan in most cases. Conventional loans are not government-backed; they typically require a stronger credit profile, but PMI is cancellable once you hit 20% equity. The right choice depends almost entirely on your credit score, your down payment size, and how long you plan to stay in the home.
KEY TAKEAWAYS
- FHA wins when your credit score is under 680 or your down payment is under 5% and you have limited credit history.
- Conventional wins when your score is 680+ and you can put down at least 5-10%, because PMI is cancellable (FHA MIP often is not).
- FHA requires as little as 3.5% down (580+ score) or 10% (500-579). Conventional starts at 3% for qualifying first-timers.
- FHA’s 2026 loan limit floor is $541,287 for most areas; the ceiling is $1,249,125 in high-cost markets (HUD).
- The conforming loan limit for conventional in 2026 is $832,750 for a single-unit property (FHFA).
- FHA now uses VantageScore 4.0 alongside FICO, which can help buyers with rental and utility payment history but thin traditional credit.
Part of our Complete First-Time Buyer’s Guide for 2026.
FHA vs Conventional: Side-by-Side Comparison
| Feature | FHA loan | Conventional loan |
|---|---|---|
| Min. down payment | 3.5% (580+ score) 10% (500-579 score) | 3% (HomeReady/Home Possible) 5% (standard) |
| Min. credit score | 500 (with 10% down) 580 (with 3.5% down) | 620 minimum (best rates at 740+) |
| Mortgage insurance | Upfront MIP: 1.75% of loan Annual MIP: 0.55-1.05% Duration: life of loan (if <10% down) | PMI: 0.5-1.5%/yr Cancellable at 20% equity Auto-cancels at 22% |
| 2026 loan limit | $541,287 (floor) $1,249,125 (ceiling in high-cost areas) | $832,750 (baseline) $1,249,125 (high-cost ceiling) |
| Property standards | Stricter, home must meet FHA Minimum Property Standards (MPR) | Less strict, more flexibility on property condition |
| DTI limits | Up to 50% with strong compensating factors | Typically 43-45% max |
| Credit scoring | FICO + VantageScore 4.0 (new in 2026) | FICO 10T + VantageScore 4.0 (Fannie/Freddie) |
What Is the Difference in Mortgage Insurance Costs?
This is where the decision often gets made. FHA and conventional both charge mortgage insurance when you put down less than 20%, but the structures are very different.
FHA MIP (Mortgage Insurance Premium): Two parts. First, an upfront MIP of 1.75% of the loan amount, typically rolled into the loan. On a $315,000 loan (10% down on $350k), that is $5,513 added to your balance. Second, an annual MIP of 0.55-1.05% of the loan balance, paid monthly. At 0.55%, that is about $144/month on a $315,000 loan. And here is the critical part: if you put less than 10% down on an FHA loan, MIP stays for the life of the 30-year loan. You cannot cancel it by reaching 20% equity. The only way out is to refinance into a conventional loan later.
Conventional PMI: No upfront cost. Annual cost of roughly 0.5-1.5% of the loan amount, paid monthly. On a $315,000 loan at 0.75%, that is about $197/month. But PMI is cancellable: you can request removal when you reach 20% equity (based on the original value or a new appraisal), and it auto-cancels at 22% equity under the Homeowners Protection Act. If home values rise, you can reach that threshold faster than the amortization schedule suggests.
The long-run math example, $350,000 home, 5% down, 30-year loan at 6.5%:
| FHA | Conventional | |
|---|---|---|
| Down payment | $12,250 (3.5%) | $17,500 (5%) |
| Upfront MIP | $5,911 (added to loan) | $0 |
| Monthly MI payment | ~$158/mo (0.55% annual) | ~$206/mo (0.75% annual) |
| MI duration | 30 years (life of loan) | ~8-9 years until 20% equity |
| Total MI paid (est.) | ~$56,880 over 30 yrs | ~$21,000 over 8-9 yrs |
On this example, conventional PMI costs roughly $35,000 less in total mortgage insurance over the life of the loan, even though the monthly PMI rate is higher. The FHA upfront MIP and the permanent duration of MIP are the main reasons borrowers with 680+ scores who can put down 5% typically save money by going conventional.
The calculus flips for borrowers with 580-620 scores who can only put down 3.5%: conventional may not be available, or the rate premium for a lower score might make FHA’s overall cost competitive despite the permanent MIP. See our guide to PMI vs FHA MIP explained for the full comparison.
How Do Interest Rates Compare Between FHA and Conventional?
FHA loans often carry slightly lower interest rates than conventional loans, typically 0.1-0.3% lower for the same borrower. But the rate advantage is offset by the higher mortgage insurance costs for borrowers who could qualify for conventional. For borrowers with scores below 680 who might face a significant rate premium on conventional, FHA’s combined cost (rate + MIP) is often more competitive.
The rate also depends on which lender you use. FHA and conventional rates can vary by 0.25-0.5% between lenders for the same borrower. Always get quotes for both loan types from multiple lenders on the same day before deciding.
What Is the VantageScore 4.0 Change and Why Does It Matter?
Starting in 2025, Fannie Mae and Freddie Mac moved to FICO 10T and VantageScore 4.0 for conventional loan underwriting (replacing the older FICO Classic models). FHA made a similar shift. Both newer models incorporate “trended data”, how your balances have moved over time, and VantageScore 4.0 in particular gives credit for on-time rent and utility payments that many younger borrowers have but older models ignored.
In practice, this change helps buyers who: pay rent on time but have thin traditional credit, have been paying down balances rather than running them up, or are recent graduates with short credit histories. If your score looks weaker under older FICO models but you have a solid payment history for rent and utilities, your mortgage scores may be higher than you expect under the new models. See our guide to the new mortgage credit score models in 2026.
Which Loan Is Right for You?
Use this decision guide:
Choose FHA if:
- Your credit score is below 680 (especially below 640)
- You can only put down 3.5% and your score is 580-679
- You have high debt-to-income and need the more flexible DTI limits
- You have thin or non-traditional credit history and may benefit from VantageScore 4.0
- You plan to refinance into a conventional loan within 5-7 years once your score and equity improve
Choose conventional if:
- Your credit score is 680 or above (ideally 720+)
- You can put down at least 5% (enough to make the cancellable PMI worthwhile over the life-of-loan FHA MIP)
- The property is in less-than-perfect condition (FHA has stricter Minimum Property Requirements)
- Your loan amount exceeds the FHA floor in your area ($541,287 in most markets)
- You want PMI to go away in 8-10 years without refinancing
Can You Switch From FHA to Conventional Later?
Yes, this is a common and financially sound strategy. Many buyers start with FHA (lower barrier to entry) and refinance into a conventional loan once they have built equity and improved their credit score. The break-even on refinancing depends on your rate improvement and new closing costs, but if you can drop from an FHA MIP-burdened rate to a conventional loan with no PMI, the savings can be substantial.
The typical window: once your home has reached 20% equity (through a combination of appreciation and paydown) and your credit score is 680+, the refinance math often makes sense. See our guide on when refinancing makes sense in 2026.
What About VA and USDA Loans?
If you are eligible for a VA loan (active duty, veteran, or eligible surviving spouse), it is almost always the best option available: 0% down, no PMI, competitive rates, and flexible credit requirements. USDA loans similarly offer 0% down for eligible rural and suburban properties. Neither competes head-to-head with FHA or conventional, they are simply better if you qualify. See our full guide to VA and USDA zero-down loans in 2026.
Frequently Asked Questions
Is FHA or conventional better for a first-time buyer with a 650 credit score?
At 650, FHA is typically the better option. Conventional loans are available at 620+, but the rate premium for a 650 score on conventional often makes FHA’s overall cost competitive despite the permanent MIP. Get quotes for both and compare the total monthly cost including mortgage insurance.
Can I cancel FHA mortgage insurance?
If you put down less than 10%, FHA MIP stays for the life of the loan, you cannot cancel it by reaching 20% equity. The only exit is refinancing into a conventional loan. If you put down 10% or more, FHA MIP drops off after 11 years.
What is the FHA loan limit in 2026?
The FHA loan limit floor for most U.S. markets is $541,287 for a single-unit property in 2026, per HUD. High-cost areas (parts of California, New York, Hawaii) have a ceiling of $1,249,125. Check the HUD website for limits in your specific county.
Does FHA require 20% down?
No. FHA requires 3.5% down with a credit score of 580 or higher, or 10% down with a score of 500-579. You do not need 20%, that threshold only matters for avoiding mortgage insurance on a conventional loan.
Which loan type closes faster?
Conventional loans generally close slightly faster because they do not require the FHA-specific appraisal and Minimum Property Requirements inspection. Typical closing times: 30-45 days for both, but FHA can run 40-50 days in complex cases. The gap is narrower than it used to be.
Bottom Line
For most first-time buyers: if your credit score is under 680 or you can only put down 3.5%, FHA is usually the right starting point. If your score is 680+ and you can manage 5-10% down, conventional typically costs less over time because PMI is cancellable. Get quotes for both loan types from at least three lenders, the difference can be hundreds of dollars a month.
Last updated: July 11, 2026. FHA loan limits per HUD 2026; conforming limits per FHFA 2026. Mortgage insurance rates are estimates and vary by lender and borrower profile. This article is for educational purposes only and does not constitute financial or mortgage advice. Consult a licensed mortgage professional for guidance specific to your situation.
