Conventional vs. FHA: which is really cheaper long-term?

I get this question on almost every first-time buyer call. Someone read online that FHA is the "worse" loan because the mortgage insurance never goes away. So they want conventional, even if it costs them more.

That advice isn't wrong. It's incomplete. Let me show you the math I actually run.

The two kinds of mortgage insurance

If you put less than 20% down, you'll pay mortgage insurance either way. It just works differently.

• Conventional PMI is priced mostly on your credit score and down payment. Strong credit means cheap PMI. Weaker credit means expensive PMI. The good news: it comes off. You can ask to remove it at 80% loan-to-value, and it drops automatically at 78% on your original schedule.
• FHA mortgage insurance (MIP) has two parts: an upfront premium of 1.75% of the loan, usually rolled into the balance, plus an annual premium paid monthly. The annual premium barely changes with credit score. With less than 10% down, it stays for the life of the loan. With 10% or more down, it comes off after 11 years.

Example 1: strong credit (760)

Let's take a $350,000 home. The FHA buyer puts 3.5% down. The conventional buyer puts 5% down.

Example 2: fair credit (650)

Same house, same down payments. The only change is the credit score.

The "right" loan isn't the one with the better reputation. It's the one that costs you less over the time you'll actually have it.

But FHA MIP lasts forever, right?

Technically, with less than 10% down, yes. In practice, most people don't keep a mortgage for 30 years. They sell, or they refinance.

That gives FHA borrowers a common path: take the FHA loan now, build equity and improve credit, then refinance into conventional once you have 20% equity. The MIP disappears when the FHA loan is paid off.

That strategy only works if rates cooperate when you want to refinance. I'd never promise you they will. But it's a real option, and it's why "MIP for life" is usually less scary than it sounds.

Other things that tip the scale

• Debt-to-income ratio. FHA allows higher ratios. If your debts are on the heavy side, FHA may be the one that gets approved.
• Recent credit events. FHA has shorter waiting periods after bankruptcy or foreclosure.
• The property. FHA appraisals are stricter about condition. Peeling paint or a missing handrail can hold up closing.
• Condos. FHA needs the condo project to be approved. Many aren't.
• Loan size. FHA loan limits are lower than conventional limits in most counties.

How I decide with clients

1. I price both loans on your real credit and down payment, not averages.
2. I compare the monthly cost and the 5-year total cost side by side.
3. I ask how long you realistically plan to stay.
4. I factor in when conventional PMI would drop off for you.
5. I tell you which one I'd pick in your shoes, and why.

Around 700 credit, the answer can go either way. Above that, conventional usually wins. Below that, FHA often does. The only way to know for sure is to price both.

Figures in this article are illustrative examples, not rate quotes. Your actual rate, mortgage insurance and costs depend on your credit, down payment, property and loan program. This is not a commitment to lend. All loans subject to credit approval and underwriting guidelines. Rates and terms are subject to change without notice.