FHA vs. Conventional Loan in 2026: Which Costs Less?

An FHA loan lets you buy with as little as 3.5% down, but it comes with mortgage insurance that you pay for longer than most buyers expect. A conventional loan with 20% down has no mortgage insurance at all. On a $420,000 home at 7.4% over 30 years, the FHA loan has the lower cash requirement and the higher monthly cost.

Key points:

• FHA requires a 3.5% minimum down payment if your credit score is 580 or higher.
• FHA charges an upfront premium of 1.75% of the base loan, and an annual premium on top.
• With less than 10% down, the FHA annual premium lasts for the life of the loan.
• On a conventional loan, federal law lets you cancel PMI at 80% of the home's original value, and it ends automatically at 78%.

What an FHA loan requires

The Federal Housing Administration insures the loan, so lenders accept a smaller down payment. The rules are set in HUD Handbook 4000.1. Your credit score decides how much you can borrow:

• A minimum credit score of 580 or higher qualifies you for a loan of up to 96.5% of the value, which is the 3.5% down payment.
• A score between 500 and 579 limits you to 90% of the value, so you need 10% down.
• A score below 500 does not qualify for FHA-insured financing.

For 2026, the FHA loan limit for a one-unit home runs from $541,287 in low-cost areas up to $1,249,125 in high-cost areas. Check the limit for your county before you shop.

The two FHA premiums

FHA charges mortgage insurance in two parts.

The upfront premium (UFMIP) is 1.75% of the base loan amount. You can pay it at closing or add it to the loan. If you add it, the loan is bigger, and interest is charged on the bigger amount.

The annual premium (MIP) is paid monthly as part of your payment. For a 30-year loan with a base amount of $726,200 or less, the rate is:

Loan-to-value (LTV)	Annual MIP
90% or less	0.50%
More than 90%, up to 95%	0.50%
More than 95%	0.55%

HUD lowered these rates by 30 basis points in Mortgagee Letter 2023-05, effective for loans endorsed from March 20, 2023. Loans above $726,200 pay higher rates, so check the rate for your exact loan.

When FHA insurance ends

The length of the annual premium depends on your starting LTV:

• If your LTV is 90% or less at closing, the annual premium lasts 11 years.
• If your LTV is more than 90% at closing, it lasts for the life of the loan, or until you pay the loan off or refinance.

With 3.5% down, your LTV starts at 96.5%. That means the annual premium lasts the whole loan. The only ways out are to pay off the mortgage or refinance into a loan without FHA insurance.

A worked example: $420,000 home

Assume a $420,000 home and the same 7.4% rate for both loans. The rate is an assumption. Real FHA and conventional rates differ by lender and program, so get quotes before you decide.

FHA option, 3.5% down

• Down payment: $14,700 (420,000 − 405,300)
• Base loan: $405,300 (96.5% of $420,000)
• Upfront premium: $7,092.75 (1.75% of $405,300), added to the loan
• Total loan with the upfront premium: $412,392.75
• Principal and interest at 7.4% over 30 years: $2,855.32 a month
• Annual premium: $2,229.15 in the first year (0.55% of $405,300), paid monthly

Conventional option, 20% down

• Down payment: $84,000
• Loan: $336,000
• Principal and interest at 7.4% over 30 years: $2,326.40 a month
• Mortgage insurance: none

Item	FHA, 3.5% down	Conventional, 20% down
Cash to close for the down payment	$14,700	$84,000
Loan amount	$412,392.75 (with upfront premium)	$336,000
Principal and interest per month	$2,855.32	$2,326.40
Annual mortgage insurance	About $2,229 a year	None
Insurance ends	Life of loan	No insurance to end

The FHA buyer keeps $69,300 more in the bank on day one. The cost of that choice is a bigger loan, a higher monthly principal and interest payment, and an insurance premium that does not go away on its own. To see the same comparison with your own price and down payment, try the FHA loan calculator.

Conventional loans and private mortgage insurance

A conventional loan with less than 20% down usually requires private mortgage insurance (PMI). Its cost depends on your credit and your lender, so this article does not give a PMI rate. Federal law sets the rules for ending it, though.

Under the Homeowners Protection Act, you can ask your servicer in writing to cancel PMI when your balance reaches 80% of the home's original value. The servicer must cancel it automatically when the scheduled balance reaches 78%, as long as you are current on payments. If the insurance is still in place at the midpoint of the loan, it ends by law, provided you are current.

On a 30-year loan, that midpoint is month 180. So the rule is much easier on the buyer than FHA's life-of-loan premium.

Which one fits you

Choose FHA if you have limited cash and a credit score that qualifies, and you expect to refinance or sell before the premium becomes a large cost. Choose a conventional loan if you can put down more, if your credit is strong enough to get a good PMI rate, or if you want the insurance to end on a set schedule.

Run both options with your own numbers. The FHA loan calculator is a quick way to see how the upfront premium changes your loan amount and payment, and how much more cash the conventional route requires.

Sources

• HUD Handbook 4000.1, FHA Single Family Housing Policy Handbook: https://www.hud.gov/program_offices/housing/sfh/handbook_4000-1
• HUD Mortgagee Letter 2010-29, minimum credit scores and loan-to-value ratios: https://www.hud.gov/sites/documents/10-29ml.pdf
• HUD Mortgagee Letter 2023-05, reduction of FHA annual MIP rates: https://www.hud.gov/sites/dfiles/OCHCO/documents/2023-05hsgml.pdf
• HUD Mortgagee Letter 2025-23, 2026 forward mortgage loan limits: https://www.hud.gov/sites/dfiles/hudclips/documents/2025-23hsgml.pdf
• Homeowners Protection Act of 1998, 12 U.S.C. § 4902: https://www.law.cornell.edu/uscode/text/12/4902
• Freddie Mac, Primary Mortgage Market Survey (PMMS): https://www.freddiemac.com/pmms