The FHA vs conventional loan question comes up in almost every first conversation I have with a buyer who is putting less than 20% down. Most people have heard that FHA is the easy loan and conventional is the better loan. Both of those are half true, and the half that is missing is where buyers lose real money.
Here is how an FHA vs conventional loan actually compares for a buyer in Fulshear, Katy, Richmond or Brookshire: the down payment, the credit score, the mortgage insurance that nobody explains well, how sellers read your offer, and a simple way to decide which one fits you.
An FHA loan is insured by the Federal Housing Administration, which is part of HUD. The lender makes the loan, and the government insures it against default. That insurance is why FHA can accept lower credit scores and smaller down payments.
A conventional loan is not government-insured. Most follow the rules set by Fannie Mae and Freddie Mac. When you put less than 20% down, the lender requires private mortgage insurance, or PMI, from a private company instead.
So both loans can work with a small down payment, and both charge you for mortgage insurance when you do. The real difference is how that insurance is priced and, more important, how long it stays.
These are the numbers most buyers ask about first.
FHA. With a credit score of 580 or higher, you can put down as little as 3.5%. HUD’s rule is that borrowers at 580 and above are eligible for maximum financing, while scores between 500 and 579 are limited to 90% loan-to-value, which means 10% down.
Conventional. Some conventional programs allow as little as 3% down, according to Fannie Mae. Lenders generally want a higher score than FHA to approve you, and pricing improves as your score climbs.
So on an FHA vs conventional loan, the down payment gap is smaller than people think. The bigger gap is credit. If your score is in the high 500s or low 600s, FHA is often the only door open right now. If you are there, our guide to what credit score you need for a mortgage walks through what lenders actually see. For a deeper look at how much cash to bring, see our post on the down payment on a house.
This is the part I most want buyers to understand, because it is where the long-term cost lives.
FHA mortgage insurance comes in two pieces. There is an upfront premium, usually rolled into the loan, and an annual premium paid monthly. Under HUD’s current schedule in Mortgagee Letter 2023-05, a 30-year FHA loan with a base amount of $726,200 or less carries an annual premium of 0.55% when you put down less than 5%, and 0.50% when you put down 5% or more.
The duration is the catch. Put down less than 10% and that annual premium runs for the life of the loan. Put down 10% or more and it drops off after 11 years. For most FHA buyers, who put down 3.5%, the only way out is to sell or refinance.
Conventional PMI is priced by the insurer based mostly on your credit score and down payment. Strong credit usually means cheaper PMI. Weaker credit can make it more expensive than FHA’s premium. What matters most is that it goes away. The Consumer Financial Protection Bureau explains the rule: you can ask your servicer to cancel PMI when your balance is scheduled to hit 80% of the home’s original value, and the servicer must end it automatically at 78% if you are current on payments.
Round numbers make the FHA vs conventional loan math easier to see. This is an illustration, not a quote. Your lender’s loan estimate is the real number.
FHA with 3.5% down. The base loan is $337,750. The upfront premium adds about $5,900 to the loan. The annual premium of 0.55% starts at roughly $155 a month and, because the down payment is under 10%, it stays until you sell or refinance.
Conventional with 5% down. The loan is $332,500. The PMI cost depends on your credit, so ask the lender for it in writing. At an assumed 6.5% interest rate on a 30-year loan, the balance is scheduled to reach 80% of the original value in a little over 10 years, which is when you can request removal. With extra principal payments, it comes sooner.
So the FHA loan might look cheaper in year one, especially with a lower score. By year eleven, the conventional buyer has often dropped PMI entirely while the FHA buyer is still paying. That is the tradeoff most buyers are never shown.
In a market where a seller has more than one offer, the FHA vs conventional loan choice can shape how your offer reads.
Appraisal and property condition. FHA appraisals include a check against HUD’s minimum property standards. Peeling paint on an older home, a missing handrail, or a roof near the end of its life can get flagged and have to be fixed before closing. Conventional appraisals focus more on value and less on condition. On newer homes in Cross Creek Ranch or Jordan Ranch this rarely matters. On an older home in Katy or a rural property near Brookshire, it can.
Seller concessions. FHA allows the seller to contribute up to 6% of the price toward your costs. For conventional loans, Fannie Mae’s limits are 3% when you put down less than 10%, 6% between 10% and 25% down, and 9% with more than 25% down. If you are counting on the seller to help with closing costs, a low-down-payment FHA buyer can often ask for more. Our breakdown of closing costs in Texas shows what that money usually covers.
Perception. Some sellers still see FHA offers as riskier. A well-prepared FHA offer with a strong pre-approval is a good offer, and I will make that case for you. Still, it helps to know the bias exists.
FHA is not the second-best loan. For some buyers it is clearly the best one.
That last point is common and it is a real strategy. Buy with FHA now, build equity and credit, then refinance and drop the mortgage insurance. Just do not count on rates cooperating. Plan as if you may keep the FHA loan longer than you hope.
For many buyers with good credit and 5% to 10% down, the FHA vs conventional loan comparison is not close once you run the numbers past year five. The PMI ends, and the FHA premium does not.
Ask your lender for two loan estimates on the same house, one FHA and one conventional, with the same down payment. Compare four lines: the interest rate, the monthly mortgage insurance, the cash to close, and how many years until the mortgage insurance can come off. Then think about how long you will really live there.
If you are early in the process, our home buying checklist lays out the steps in order. And if you would like a second opinion before you choose, I am happy to walk through your two estimates with you. I am a Texas Affordable Housing Specialist, and helping buyers sort through an FHA vs conventional loan decision is a big part of what I do. Call Terra Point Realty at (713) 766-1697.
Stacy Burgin is the Broker and Founder of Terra Point Realty and a Texas Affordable Housing Specialist (TAHS), trained through Texas REALTORS® in the down-payment assistance and first-time buyer programs available across Fort Bend and Waller Counties — including USDA, FHA, VA, TDHCA (Texas Department of Housing and Community Affairs), and county-level assistance programs. She has been licensed in Texas real estate since 2013 and has closed over 300 career real estate transactions — including 130+ home sales representing nearly $30 million in sales volume — across the greater Houston area, from $20,000 entry-level properties to $1.2M luxury homes. HAR Platinum Agent (4.89/5 across 124+ post-transaction client surveys). TREC License #630159. Terra Point Realty, LLC — TREC Broker License #9002493. Member, Houston Association of Realtors.
If you are weighing an FHA or conventional loan for a home in Fulshear, Katy, Richmond or Brookshire, call us at (713) 766-1697 or reach out through the contact form. We’re a boutique brokerage; the person you talk to first is the person you work with through close.
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