Should I do an FHA loan or a conventional loan?

FHA allows lower down payments and more flexible credit but requires MIP that can last the life of the loan if under 10% down. Conventional PMI cancels automatically around 78-80% loan-to-value.

FHA vs Conventional Loan

It mostly comes down to your down payment and credit. But the mortgage insurance rules are different enough between the two that they're worth understanding before you choose.

What FHA stands for, and what it means

FHA stands for the Federal Housing Administration. An FHA loan isn't issued by the government. It's issued by a regular private lender and insured by the federal government, so the lender takes on less risk. That's why FHA loans can offer more flexible qualifying, lower credit score minimums (often 580 for 3.5% down), and a lower down payment than most conventional options.

The real cost: mortgage insurance, and it works differently than you'd think

Because the government backs the loan, every FHA loan requires mortgage insurance, called MIP (Mortgage Insurance Premium), no matter how much you put down. This is where FHA and conventional really split, so it's worth getting the details right.

FHA MIP has two parts: an upfront premium (currently 1.75% of the loan amount, usually rolled into the loan) and an annual premium (around 0.50-0.55%, built into your monthly payment). If your original down payment was less than 10%, MIP stays for the life of the loan. It doesn't go away on its own no matter how much equity you build, and the only way to remove it is to refinance into a different loan. If you put down 10% or more, MIP cancels automatically after 11 years of on-time payments.

Conventional PMI works differently. Conventional loans only require Private Mortgage Insurance if you put down less than 20%. By federal law, PMI cancels automatically once you reach 78% loan-to-value, and you can usually ask to remove it earlier, around 80%, once you've built enough equity through payments or appreciation and have a good payment history. FHA MIP on most current loans doesn't follow that equity-based rule. It's based on your original down payment, and in the under-10%-down case, it's permanent.

So which one should you choose?

FHA tends to make sense if your credit is still building, you have a smaller down payment saved, and you'd rather get into a home sooner with more forgiving qualifying standards than wait.

Conventional tends to make sense if you can put down 20% and skip mortgage insurance entirely. It also works if you're putting down less than 20% but expect to build equity fairly quickly and want a clear path to dropping mortgage insurance.

The refinance path out of FHA

If you start with FHA and later build 20% equity, refinancing into a conventional loan is the most common way to get rid of FHA's mortgage insurance for good, especially if you put down less than 10%. That refinance comes with its own closing costs and a new interest rate, though. I'd run the math at the time instead of assuming it's automatically worth it.

An honest note

I'm not a lender, and the exact numbers (rates, premium percentages, credit thresholds) change over time. I'd connect you with a lender I trust to run your numbers on both loan types side by side. That way you're deciding based on your situation, not a generic comparison.

Get a real comparison for your situation