Most first-time buyers assume FHA is the only way in with minimal down payment, then discover years later they're paying mortgage insurance that will never go away. The truth is more nuanced: FHA and conventional loans solve different problems, and the best choice depends on how much cash you have today, your credit profile, and how long you plan to keep the loan.
Down payment and cash to close
FHA permits 3.5% down if your FICO is 580 or higher; below that you need 10%. Conventional loans require at least 3% down through programs like HomeReady or Home Possible, but underwriting tightens considerably under 5% equity. If you're putting down less than 10%, FHA often approves borrowers conventional lenders decline—not because of the down payment, but because FHA tolerates higher debt-to-income ratios (up to 56.9% back-end in many cases) and scores as low as 580. Conventional typically wants 620 minimum and prefers DTI under 50%.
Mortgage insurance: the hidden long game
FHA charges an upfront mortgage-insurance premium of 1.75% of the loan amount, financed into the balance, plus annual MIP that ranges from 0.45% to 1.05% depending on loan term, LTV, and base amount. For most borrowers putting down less than 10%, that annual MIP stays for the life of the loan—it does not cancel at 78% LTV the way conventional PMI does. On a 30-year term with under 10% down, you will pay MIP until you refinance or sell. These figures are illustrative; rates and products are subject to change and this is not a commitment to lend.
Conventional PMI, by contrast, automatically terminates at 78% LTV by statute, and you can request removal at 80%. Monthly premiums vary by credit score and down payment but are often lower than FHA annual MIP for borrowers with good credit. There is no upfront fee rolled into the loan.
When each program wins
FHA makes sense when you have minimal savings, credit in the 580–680 range, or debt ratios that conventional underwriting won't stomach. You accept higher lifetime mortgage-insurance costs in exchange for approval today. Conventional wins when you can scrape together 5% or more, your FICO is above 700, and you value the eventual disappearance of PMI. The break-even point often arrives within five to seven years if home values appreciate and you pay down principal.
The Alliance take
Many borrowers start with FHA, build equity, then refinance to conventional once their LTV drops below 80% and their credit improves. That's a legitimate two-step strategy—just factor closing costs into the math and confirm the rate environment supports a refi when the time comes. Neither product is universally better; the right answer depends on your balance sheet and timeline. If you want to model both scenarios with your actual numbers, run the calculations or start an application to see which structure costs less over your expected holding period.