FHA vs Conventional: Which Is Better for First-Time Buyers?

FHA vs conventional, side by side (2026)

Sources: HUD/FHA (FHA terms & MIP), Fannie Mae/Freddie Mac (conventional & 3%-down programs), CFPB (PMI cancellation), FHFA (2026 limits).

When FHA is the better choice

• Your score is 580–619. You clear FHA's threshold but not the usual 620 conventional floor, so FHA may be your only low-down-payment path.
• Your debt-to-income (DTI — your monthly debt payments divided by your gross monthly income) is tight. HUD's standard FHA benchmark is 31% of income for the housing payment and 43% for housing plus all other debt, but manual underwriting (a human review of your file rather than an automated approval) can stretch that to roughly 40%/50% with documented compensating factors like cash reserves — well above what most conventional lenders will allow without those same factors.
• Your score is under 700. Conventional PMI is priced by credit score, so a middling score makes conventional PMI expensive — sometimes more than FHA's flat MIP.
• You had a recent hiccup. FHA's waiting periods after events like a past foreclosure or bankruptcy are typically shorter.

When conventional is the better value

• Your score is ~700+. You get lower PMI (it's score-based) and better rate pricing.
• You want the insurance to end. Conventional PMI cancels at 20% equity on request and terminates automatically at 22% — FHA MIP usually doesn't.
• You want the smallest down payment. Conventional 97, HomeReady, and Home Possible go to 3% down, below FHA's 3.5%.
• You're income-eligible for HomeReady/Home Possible. Within the 80%-of-area-median-income limit, these add reduced PMI and other first-time-buyer benefits.

The mortgage-insurance difference that usually decides it

Both loans charge mortgage insurance when you put down less than 20% — but they behave very differently, and that difference is where the real money is.

FHA charges an upfront premium of 1.75% of the loan (usually financed into the balance) plus an annual MIP (mortgage insurance premium — FHA's version of mortgage insurance) most borrowers pay at about 0.55% a year. The catch: if you put down less than 10%, that annual MIP stays for the life of the loan. Put down 10% or more and it drops off after 11 years.

Conventional charges no upfront premium, and its PMI — typically 0.5% to 1.5% a year depending on your credit and down payment — is cancellable. Under the federal Homeowners Protection Act you can request cancellation at 80% loan-to-value (20% equity), and it must terminate automatically at 78%.

What FHA mortgage insurance adds per month: a $300,000 example

The percentages are easy to skim past, so here's what they mean in dollars on a $300,000 FHA loan with 3.5% down (a base loan amount of roughly $289,500):

Figures are illustrative, using the upfront and annual MIP rates cited above from HUD/FHA program rules. Your actual annual MIP rate depends on your loan amount, term, and loan-to-value — run your own numbers with the PMI Calculator.

Why some sellers hesitate on FHA offers

This is the part most down-payment comparisons skip, and it matters before you write an offer, not after. A seller can't discriminate against you personally, but they can and do prefer one financed offer over another — and in a competitive market, some sellers or their listing agents steer away from FHA offers. The reason isn't the buyer; it's the appraisal (an independent estimate of a home's market value and condition that a lender orders before approving the loan). An FHA appraisal checks the property's condition against HUD's standards, not just its value the way a conventional appraisal does. If the appraiser flags a health-or-safety issue, the loan can't close until the seller fixes it and a follow-up inspection confirms the repair — a delay a conventional or cash offer typically doesn't carry.

In practice, this mostly matters on older homes, fixer-uppers, or homes with deferred maintenance. A clean, recently updated house almost never triggers it. If you're competing for a move-in-ready home in a hot market, know that your FHA offer may get a second look — and that a strong pre-approval letter and a clean, few-contingency offer can offset the perception.

Will the house pass an FHA appraisal? Minimum property requirements

FHA appraisers apply HUD's minimum property requirements (MPRs) — a checklist meant to confirm the home is safe, sound, and sanitary, on top of estimating its value. Common issues that can hold up an FHA closing, per HUD's Single Family Housing Policy Handbook 4000.1:

• Peeling, chipping, or flaking paint on any home built before 1978 — a possible lead-based-paint hazard that must be scraped and repainted before closing.
• Missing handrails on any interior or exterior staircase with four or more steps.
• Roof problems — an active leak, or a roof with less than two years of remaining useful life.
• Non-functioning core systems — heating, plumbing, and electrical all need to work and be safe.
• General safety hazards — exposed wiring, broken windows, and similar issues an appraiser is trained to flag.

A conventional appraisal is mainly a value check and doesn't require these fixes as a condition of closing — which is a second reason (beyond timeline risk) some sellers of older homes prefer a conventional buyer. If you're eyeing a fixer-upper, ask your agent about the property's age and visible condition before you commit to FHA financing, and budget time for repairs and a re-inspection if issues turn up.

Can you use gift funds for the down payment?

Yes on both loan types, and both are more generous than most first-time buyers expect. FHA allows 100% of your down payment and closing costs to come from approved gift funds (money from a relative or other eligible donor, documented with a signed gift letter confirming it doesn't need to be repaid), with no required minimum contribution from your own funds, per HUD guidance.

Fannie Mae conventional loans allow the same 100%-gift treatment on a one-unit primary residence — the popular belief that conventional loans require you to contribute your own cash doesn't hold for the typical first-time-buyer purchase. Where it changes is on certain other property types: Fannie Mae's Selling Guide requires a minimum borrower contribution from the buyer's own funds on some multi-unit purchases and second homes when the down payment is under 20%. If your purchase is a standard single-unit primary residence, gift funds can realistically cover the entire down payment under either loan type.

Can you buy a condo with an FHA loan?

Only if the project qualifies. Unlike a single-family house, an FHA condo purchase requires the entire condominium project to be on HUD's FHA-approved condo list, or the specific unit to qualify through HUD's Single-Unit Approval (sometimes called spot approval) process for a project that isn't otherwise approved. HUD's project-level standards include limits on commercial space, a cap on the share of units more than 60 days delinquent on HOA dues, and a requirement that the association fund reserves adequately — per HUD's condominium program rules.

Conventional loans through Fannie Mae and Freddie Mac review condo projects too, but their approval standards are generally less restrictive, so more condo buildings qualify for conventional financing than for FHA. If you're condo shopping, check the building's FHA status (or ask your lender to) before you write an offer — finding out mid-contract that a condo isn't FHA-approved is a common and avoidable deal-killer.

Are FHA and conventional closing costs different?

Mostly no. The core closing costs — lender/underwriting (the process by which a lender verifies your income, assets, credit, and the property before approving the loan) fees, title insurance, escrow (the neutral account that holds your funds and documents until closing, and later can hold your tax and insurance payments), recording fees, and prepaid taxes and insurance — run in a similar range for both loan types, commonly cited as roughly 2% to 5% of the loan amount, per CFPB guidance.

The real FHA-specific cost isn't a closing-cost line item — it's the 1.75% upfront MIP shown in the worked example above, which most borrowers finance into the loan rather than pay in cash. FHA appraisals can also run slightly higher than conventional ones, since the appraiser has to evaluate the home against HUD's minimum property requirements in addition to estimating value. Compare full loan estimates from the same lender to see the real difference for your purchase — try the Closing Costs Calculator and the DTI Calculator to see where you land on both fronts before you apply.

How to actually decide

Don't choose on the headline down payment. Get a real quote for both from the same lender on the same day, and compare three things: the all-in monthly payment (including insurance), how long you'll pay that insurance, and the total cost over the years you actually expect to keep the loan. Then let your credit score break the tie — lower score leans FHA, strong score leans conventional.