Most first-time buyers assume FHA is the budget-friendly choice because you can put down just 3.5%. But when you factor in mortgage insurance, that assumption doesn't always hold up. The loan that gets you in the door cheapest isn't necessarily the one that costs less month-to-month or over the life of the loan.
We walk buyers through this comparison every week. The right answer depends on your down payment, credit profile, and how long you plan to stay in the home. Here's how to think it through.
Down Payment: FHA's Biggest Advantage
FHA allows 3.5% down with a credit score as low as 580. Conventional loans require at least 3% down, but many lenders set credit score floors closer to 620—and the best pricing typically kicks in around 680.
If you're buying a $400,000 home in Gilbert or Chandler, that's $14,000 down with FHA versus $12,000 with conventional at 3% down. The difference is real but manageable for many buyers. The bigger question is what happens to your monthly payment.
Mortgage Insurance: Where the Math Flips
Both loan types require mortgage insurance when you put down less than 20%, but they handle it very differently.
FHA charges an upfront mortgage insurance premium of 1.75% of the loan amount (usually rolled into the loan), plus an annual premium. On a typical 30-year FHA loan that's 0.50% to 0.75% a year, depending on your loan size and down payment (0.55% for most buyers putting 3.5% down). That annual premium stays for the life of the loan if you put down less than 10%.
Conventional loans charge private mortgage insurance (PMI) that varies by credit score and down payment but typically runs 0.30% to 1.00% annually. The key difference: PMI goes away. You can ask to remove it once you've paid down to 80% of the original value, it drops off automatically at 78%, and if your home gains value, many lenders will remove it sooner with a new appraisal.
For buyers with decent credit, conventional PMI is often lower than FHA's annual premium—and it goes away.
Worked Example: $400,000 Purchase in Mesa
Let's compare two scenarios for a $400,000 home, both 30-year fixed loans. The rates below are hypothetical, chosen to illustrate the math. They're not a quote or an offer, and your actual rate and APR will depend on your credit, the market, and the loan.
FHA loan with 3.5% down ($14,000):
- Loan amount: $386,000, plus $6,755 upfront MI = $392,755
- At 6.50% interest: $2,482/month principal and interest
- Annual MI: 0.55% = $177/month
- Total payment (P&I + MI): $2,659/month
Conventional loan with 5% down ($20,000):
- Loan amount: $380,000
- At 6.75% interest: $2,465/month principal and interest
- PMI (assume 0.50% for good credit): $158/month
- Total payment (P&I + MI): $2,623/month
On day one the two payments are close: the conventional loan comes out about $36/month lower, even with the slightly higher rate, and it took $6,000 more down. The real difference is what happens later. The conventional PMI ($158/month) comes off once you reach 80% of the original value, or sooner if your home appreciates and the lender agrees to remove it. The FHA premium stays for the life of the loan unless you refinance out of it. Over 10 to 15 years, that's often thousands of dollars in the conventional loan's favor.
The numbers shift if your credit score is below 660 or if you truly can't gather more than 3.5% down. In those cases, FHA can be the right move to get you into a home now.
Which One Makes Sense for You?
FHA is a strong option if you're working with limited cash, building credit, or buying in a seller's market where the lower down payment gives you more flexibility. It's a workhorse program that helps people buy who otherwise couldn't.
Conventional often makes more sense if you can stretch to 5% down, your credit is in the mid-600s or higher, and you plan to stay a while. The day-one savings are modest, but you're not locked into mortgage insurance forever.
We don't push one loan type over another—we run your specific numbers and show you what each path actually costs. Text us or schedule a strategy call, and we'll map it out with your real income, savings, and timeline.