FHA vs Conventional Loan: Which Saves You More Money in 2026?

FHA is usually better if your credit score is below 680 or you have limited savings (3.5% minimum down per FHA Handbook 4000.1 Section II.A.2). FHA allows higher DTI ratios (up to 50%+ under manual underwriting per HUD Handbook 4000.1 Section II.A.5.d) and is more forgiving of credit blemishes. Conventional is better if your score is 680+ and you can put 10%+ down, because conventional PMI auto-terminates at 78% LTV under the Homeowners Protection Act (12 U.S.C. § 4901), while FHA MIP is permanent if you put less than 10% down (HUD Mortgagee Letter 2013-04). Many first-time buyers start with FHA and refinance to conventional after building equity and improving credit.

Per FHA Handbook 4000.1 Section II.A.5 and HUD Mortgagee Letter 2023-05, FHA has two components: an upfront MIP of 1.75% of the loan amount (typically financed into the loan) plus an annual MIP of 0.55% for loans with LTV above 95% and terms over 15 years. The critical difference is that FHA MIP is permanent if you put less than 10% down, per the life-of-loan rule in HUD Mortgagee Letter 2013-04. Conventional PMI (0.3-1.5% annually per MGIC / Radian / Essent rate cards) auto-terminates at 78% LTV under the Homeowners Protection Act (12 U.S.C. §§ 4901-4910) and is requestable at 80%. On a $380,000 loan, FHA MIP costs $174/month for the life of the loan, while conventional PMI at $158/month ends in 6-7 years.

Yes. This is a common strategy. After 2-3 years of payments (building equity) and potential credit improvement, you can refinance to a conventional loan under Fannie Mae Selling Guide B5-2 (Limited Cash-Out Refinance) and eliminate the permanent FHA MIP. This makes financial sense once you have 20% equity (avoiding PMI entirely under HPA 12 U.S.C. § 4902) or at least enough equity that the lower conventional PMI rate justifies the refinance closing costs ($3,000-$6,000, disclosed on the CFPB Loan Estimate per 12 CFR § 1026.37).

Per the FHFA Conforming Loan Limit announcement of 25 November 2025 (HERA § 1124, 12 U.S.C. § 4542), the 2026 conventional conforming limit is $832,750 for one-unit properties, up from $806,500 in 2025. In high-cost areas it reaches $1,249,125. FHA loan limits per HUD Mortgagee Letter 2025-26 and HUD Handbook 4000.1 Section II.A.2.a.ii: floor $541,287 (65% of FHFA baseline per 12 U.S.C. § 1709(b)(2)(A)(ii)), ceiling $1,249,125 (150% of FHFA baseline). Look up your specific county at entp.hud.gov/idapp/html/hicostlook.cfm. Loans exceeding the conforming limit are jumbo.

FHA rates are typically 0.25-0.50% lower than conventional rates because the government insurance reduces lender risk. The Freddie Mac PMMS reports the national average conventional 30-year fixed; FHA rates trade at a slight discount in most lender rate sheets. However, FHA charges upfront MIP (1.75%) and annual MIP (0.55%) per HUD Handbook 4000.1 Section II.A.5, which often makes the total cost higher than conventional for borrowers with good credit. The lower FHA rate is most advantageous for short hold periods (under 5 years) where the upfront MIP is amortised over fewer months.

Yes. FHA appraisals include Minimum Property Requirements (MPR) per HUD Handbook 4000.1 Section II.B.2 (Appraiser and Property Requirements) that do not apply to conventional loans. The appraiser inspects for health and safety hazards: peeling paint (especially in pre-1978 homes per HUD lead-based-paint rules at 24 CFR Part 35), missing handrails, electrical hazards, roof damage, foundation problems, and adequate water and septic systems. Issues must be repaired before closing. Conventional appraisals follow USPAP and the Fannie Mae Selling Guide B4-1 (Property Appraisal) and focus primarily on market value, not property condition.