FHA vs Conventional: I Rate-Shopped Both and Here's When Each Wins (Spoiler: It's Not Always Obvious)

When I started shopping for a mortgage in February 2024, I assumed FHA was always better for first-time buyers.

What I’d heard: “FHA has low down payments, flexible qualification, and easier approval than conventional.”

What I didn’t know: Conventional loans can sometimes be cheaper—even for buyers with limited savings.

My situation:

• Credit score: 662 (middle score from 655, 662, 670)
• Savings: $26,000 (enough for 3.5% FHA OR 10% conventional)
• Home price: $225,000
• Income: $60,000/year ($5,000/month gross)
• Debts: $520/month (car $395, credit cards $125)

I applied for BOTH FHA and conventional to compare:

FHA loan (3.5% down):

• Down payment: $7,875
• Rate: 6.75%
• Monthly payment: $1,628 (P&I $1,459 + MI $169)
• Cash at closing: $12,675 (down payment + closing costs)

Conventional loan (10% down):

• Down payment: $22,500
• Rate: 6.50%
• Monthly payment: $1,365 (P&I $1,280 + PMI $85)
• Cash at closing: $27,300 (down payment + closing costs)

Monthly savings with conventional: $263/month

BUT: Conventional required $14,625 MORE cash upfront ($27,300 vs. $12,675).

Break-even: $14,625 ÷ $263/month = 56 months (4.6 years to recoup upfront cost difference)

My decision: FHA (because I didn’t want to drain my savings completely—I’d have only $11,300 left after conventional closing vs. $13,325 after FHA closing).

Here’s my full rate-shopping experience—what I learned comparing FHA vs. conventional, when each loan type wins, and the break-even analysis that determines which saves more money.

My Rate Shopping Process: Applying for Both FHA and Conventional

Why I Applied for Both

My assumption before shopping: “I’ll do FHA because I’m a first-time buyer with 662 credit—conventional is for people with 740+ credit and 20% down.”

What my loan officer told me: “You might qualify for conventional at 5-10% down with 662 credit. Let me run both options—sometimes conventional is cheaper even with lower down payment.”

I was skeptical—but applied for both.

Applications submitted:

• FHA lender #1: Guaranteed Rate
• FHA lender #2: Rocket Mortgage
• Conventional lender #1: Better.com
• Conventional lender #2: Local credit union

Total lenders contacted: 4 (2 FHA, 2 conventional)

Time invested: 6 hours over 3 days (filling out applications, submitting docs)

My FHA Loan Quotes (3.5% Down)

Lender #1: Guaranteed Rate

Loan amount: $217,125 ($225,000 - $7,875 down)
Rate: 6.875%
Monthly P&I: $1,429
Upfront MI (1.75%): $3,800 (financed into loan)
Annual MI (0.80%): $175/month
Total monthly payment: $1,604 (P&I + MI + taxes $220 + insurance $90)
Closing costs: $4,800
Total cash at closing: $12,675

Lender #2: Rocket Mortgage

Loan amount: $217,125
Rate: 6.750%
Monthly P&I: $1,406
Upfront MI (1.75%): $3,800 (financed)
Annual MI (0.80%): $175/month
Total monthly payment: $1,581 (P&I + MI + taxes $220 + insurance $90)
Closing costs: $4,800
Total cash at closing: $12,675

Best FHA quote: Rocket Mortgage at 6.75% = $1,628/month (updated after I recalculated with slightly higher insurance $95/month)

My Conventional Loan Quotes (5-10% Down)

Lender #1: Better.com

5% down ($11,250):

• Loan amount: $213,750
• Rate: 6.625%
• Monthly P&I: $1,372
• PMI (0.75%): $134/month
• Total monthly payment: $1,506 (P&I + PMI + taxes $220 + insurance $90)
• Closing costs: $4,550
• Total cash at closing: $15,800

10% down ($22,500):

• Loan amount: $202,500
• Rate: 6.50%
• Monthly P&I: $1,280
• PMI (0.50%): $84/month
• Total monthly payment: $1,364 (P&I + PMI + taxes $220 + insurance $90)
• Closing costs: $4,800
• Total cash at closing: $27,300

Lender #2: Local Credit Union

5% down ($11,250):

• Loan amount: $213,750
• Rate: 6.875% (higher than Better.com)
• Monthly P&I: $1,407
• PMI (0.85%): $151/month
• Total monthly payment: $1,558
• Closing costs: $3,950
• Total cash at closing: $15,200

10% down ($22,500):

• Loan amount: $202,500
• Rate: 6.625%
• Monthly P&I: $1,295
• PMI (0.60%): $101/month
• Total monthly payment: $1,396
• Closing costs: $4,200
• Total cash at closing: $26,700

Best conventional quotes:

• 5% down: Better.com at 6.625% = $1,506/month
• 10% down: Better.com at 6.50% = $1,364/month

The Side-by-Side Comparison

Monthly savings vs. FHA:

• 5% down conventional: $122/month less
• 10% down conventional: $264/month less

Extra cash required vs. FHA:

• 5% down conventional: $3,125 more
• 10% down conventional: $14,625 more

My gut reaction: “Conventional at 10% down saves me $264/month—that’s huge! But $14,625 more upfront is a lot…”

I needed to run the break-even analysis.

Break-Even Analysis: FHA vs. Conventional 10% Down

The Math

FHA (3.5% down):

• Monthly payment: $1,628
• Cash at closing: $12,675
• Cash remaining after closing: $26,000 - $12,675 = $13,325

Conventional (10% down):

• Monthly payment: $1,364
• Cash at closing: $27,300
• Cash remaining after closing: $26,000 - $27,300 = -$1,300 (I’m $1,300 SHORT!)

Problem: I only had $26,000 saved—not enough for conventional 10% down + closing costs ($27,300).

Options to make conventional work:

1. Borrow $1,300 from parents (gift funds—allowed by conventional)
2. Use 5% down conventional instead ($15,800 at closing—I’d have $10,200 left)
3. Wait 2 months to save another $2,000 ($1,000/month savings rate)

What I chose: I considered 5% down conventional vs. FHA.

FHA vs. Conventional 5% Down Comparison

FHA (3.5% down):

• Monthly payment: $1,628
• Cash at closing: $12,675
• Cash remaining: $13,325

Conventional (5% down):

• Monthly payment: $1,506
• Cash at closing: $15,800
• Cash remaining: $10,200

Monthly savings with 5% conventional: $122/month

Extra cash required: $3,125

Break-even: $3,125 ÷ $122 = 26 months (2.2 years)

After 2.2 years, I’d break even on the extra upfront cost—then save $122/month forever.

But: I’d have $3,125 LESS in reserves ($10,200 vs. $13,325)—less cushion for emergencies.

My Decision: FHA 3.5% Down

Why I chose FHA despite higher monthly payment:

Reason #1: Preserved cash reserves

• FHA left me $13,325 after closing
• Conventional 5% would’ve left me $10,200 (24% less)
• I wanted 6 months expenses in reserves ($9,000)—FHA gave me more breathing room

Reason #2: Faster path to refinance

• FHA 3.5% down = starting at 96.5% LTV (loan-to-value)
• Conventional 5% down = starting at 95% LTV
• Both would hit 20% equity (80% LTV) in similar timeframe (4-5 years)
• Once I hit 20% equity, I’d refinance to conventional anyway and eliminate MI/PMI

Reason #3: Slightly lower closing costs

• FHA closing costs: $4,800
• Conventional closing costs: $4,550 (only $250 less—not significant)

Reason #4: Peace of mind

• Having $13,325 after closing vs. $10,200 reduced my stress
• If I had unexpected expenses (car repair, medical bills), I had cushion
• I didn’t want to feel “house-poor” immediately after buying

Conventional would’ve saved me $122/month—but I’d have felt financially stretched.

FHA cost me $122/month more—but I felt comfortable with my cash position.

For me, FHA was the right choice.

When FHA Beats Conventional (My Scenarios)

Scenario 1: You Have Limited Savings (Under $15,000)

Example: You have $12,000 saved, buying a $200,000 home.

FHA (3.5% down):

• Down payment: $7,000
• Closing costs: $4,500
• Total needed: $11,500
• You qualify—have $500 left for reserves

Conventional (5% down):

• Down payment: $10,000
• Closing costs: $4,300
• Total needed: $14,300
• You’re $2,300 short

Conventional (10% down):

• Down payment: $20,000
• Closing costs: $4,500
• Total needed: $24,500
• You’re $12,500 short

FHA wins—it’s the only option you can afford.

Scenario 2: You Have Low-to-Mid Credit (620-679)

Example: 645 credit score, $225,000 home, 5% down.

FHA (3.5% down):

• Rate: 6.75%
• MI: 0.80% ($150/month)
• Monthly payment: $1,628

Conventional (5% down):

• Rate: 6.875% (0.125% higher than FHA for 645 credit)
• PMI: 1.00% ($188/month—higher PMI for lower credit)
• Monthly payment: $1,670

FHA payment: $1,628
Conventional payment: $1,670

FHA wins—saves $42/month ($15,120 over 30 years)

Why: Conventional charges higher PMI rates for credit scores under 680 (0.90-1.20% PMI vs. FHA’s flat 0.80% MI regardless of credit score).

Check your real FICO middle credit score to see if you’re in the 620-679 range where FHA often beats conventional.

Scenario 3: You Plan to Refinance in 3-5 Years

Example: You’re buying now with the goal of refinancing once you hit 20% equity.

FHA (3.5% down):

• Monthly payment: $1,628
• Path to 20% equity: 4-5 years (principal paydown + appreciation)
• Refinance to conventional: Eliminate $150/month MI, reduce rate

Conventional (5% down):

• Monthly payment: $1,506
• Path to 20% equity: 4-5 years (similar timeline)
• PMI automatically drops at 22% equity (no refinance needed—but you might refinance for lower rate anyway)

FHA wins if:

• You don’t want to drain savings (preserve $3,000-$5,000 extra cash)
• You’re comfortable paying $122/month more for 4-5 years ($7,320 total extra cost)
• You value the flexibility of lower upfront cost

Conventional wins if:

• You have ample savings (can afford 5-10% down without feeling stretched)
• You want to save $122/month NOW (not wait 4-5 years for refinance)
• PMI drops automatically at 22% equity (easier than FHA refinance requirement)

For me, FHA won—I wanted to preserve cash reserves.

Scenario 4: You Have High DTI (Over 40%)

Example: 44% DTI, buying with FHA vs. conventional.

FHA:

• Standard DTI limit: 43%
• With compensating factors: Up to 50%
• Your 44% DTI: Approved with reserves + stable employment

Conventional:

• Standard DTI limit: 43%
• With high credit (740+) + reserves: Up to 45%
• With automated underwriting: Up to 50% (rare)
• Your 44% DTI: Requires excellent credit (740+) or automated approval—harder to qualify

FHA wins—easier to qualify at 44% DTI with compensating factors.

When Conventional Beats FHA (The Counter-Scenarios)

Scenario 1: You Have Excellent Credit (700+)

Example: 720 credit score, $225,000 home, 5% down.

FHA (3.5% down):

• Rate: 6.75%
• MI: 0.75% ($141/month—FHA MI slightly lower at 720+ credit)
• Monthly payment: $1,619

Conventional (5% down):

• Rate: 6.375% (0.375% lower than FHA for 720 credit)
• PMI: 0.40% ($75/month—significantly lower PMI for 720+ credit)
• Monthly payment: $1,417

FHA payment: $1,619
Conventional payment: $1,417

Conventional wins—saves $202/month ($72,720 over 30 years)

Why: Conventional offers much better rates (0.25-0.50% lower) and much lower PMI (0.30-0.50% vs. FHA’s 0.75-0.80%) for borrowers with 700+ credit.

Scenario 2: You Have 10-15% Down Saved

Example: $30,000 saved, buying $225,000 home.

FHA (3.5% down):

• Down payment: $7,875
• Monthly payment: $1,628
• Cash remaining: $30,000 - $12,675 = $17,325

Conventional (10% down):

• Down payment: $22,500
• Monthly payment: $1,364
• Cash remaining: $30,000 - $27,300 = $2,700

Conventional (15% down):

• Down payment: $33,750
• Monthly payment: $1,278 (P&I $1,208 + PMI $70)
• Cash remaining: -$3,750 (you’re short—need to save $4,000 more)

If you have exactly $30,000:

• FHA leaves you $17,325 (better reserves)
• Conventional 10% down leaves you $2,700 (tight reserves)

If you have $35,000+:

• Conventional 10% down saves $264/month
• Extra $14,625 upfront pays back in 56 months (4.6 years)
• After 4.6 years, you’re saving $31,680 over remaining 25.4 years

Conventional wins if you have ample savings (don’t need to preserve cash).

Scenario 3: You Want PMI Removed Automatically (Not Refinance)

Example: You plan to stay in the home 7+ years.

FHA:

• MI lasts for life of loan (3.5% down = 30 years of MI)
• Only way to remove: Refinance to conventional at 20% equity (costs $4,000-$6,000)

Conventional:

• PMI automatically drops at 22% equity (typically 5-7 years)
• No refinance needed—lender removes PMI automatically when you hit 22% LTV

Conventional wins—PMI removal is automatic and free (FHA requires refinancing, which costs $4,000-$6,000).

If you hit 20% equity in Year 5:

• FHA: Pay $141/month MI for Years 1-5 ($8,460) + refinance cost $5,000 = $13,460 total MI cost
• Conventional: Pay $75/month PMI for Years 1-5 ($4,500) + $0 to remove = $4,500 total PMI cost

Conventional saves $8,960 (by avoiding FHA refinance requirement).

Scenario 4: You’re Buying a High-Value Home ($400,000+)

Example: $450,000 home.

FHA:

• Down payment (3.5%): $15,750
• Loan amount: $434,250
• Upfront MI: $7,599 (financed)
• Annual MI: 0.80% = $295/month
• Total monthly MI: $295

Conventional:

• Down payment (10%): $45,000
• Loan amount: $405,000
• PMI (0.50%): $169/month
• Total monthly PMI: $169

Monthly savings with conventional: $126/month ($45,360 over 30 years)

But: Conventional requires $29,250 more upfront ($45,000 down + closing vs. $15,750 down + closing)

Break-even: $29,250 ÷ $126 = 232 months (19.3 years—very long!)

Conventional wins if:

• You have $50,000+ saved (can afford 10% down without draining savings)
• You plan to stay 15+ years (long enough to break even)

FHA wins if:

• You only have $20,000-$25,000 saved (can’t afford 10% down)
• You plan to refinance in 5 years anyway (break-even doesn’t matter)

My Personal Break-Even Timeline: FHA vs. Conventional

If I’d Done Conventional 10% Down Instead of FHA

Extra cash upfront: $14,625 ($27,300 conventional - $12,675 FHA)

Monthly savings: $264/month ($1,628 FHA - $1,364 conventional)

Break-even: $14,625 ÷ $264 = 55 months (4 years 7 months)

Year-by-year comparison:

Year 1:

• FHA total cost: $1,628 × 12 = $19,536 + $12,675 closing = $32,211
• Conventional total cost: $1,364 × 12 = $16,368 + $27,300 closing = $43,668
• FHA cheaper by $11,457

Year 2:

• FHA total cost: $32,211 + $19,536 = $51,747
• Conventional total cost: $43,668 + $16,368 = $60,036
• FHA cheaper by $8,289

Year 3:

• FHA total cost: $51,747 + $19,536 = $71,283
• Conventional total cost: $60,036 + $16,368 = $76,404
• FHA cheaper by $5,121

Year 4:

• FHA total cost: $71,283 + $19,536 = $90,819
• Conventional total cost: $76,404 + $16,368 = $92,772
• FHA cheaper by $1,953

Year 5:

• FHA total cost: $90,819 + $19,536 = $110,355
• Conventional total cost: $92,772 + $16,368 = $109,140
• Conventional cheaper by $1,215 (break-even crossed in Year 5!)

After Year 5, conventional saves $264/month forever ($79,200 over remaining 25 years).

But: I’d have only $11,375 left in savings after conventional closing (vs. $13,325 after FHA)—a tighter cash position for 4+ years.

For me, FHA was the right choice in Years 1-4—I valued the extra $2,000 in reserves more than saving $264/month.

How I’m Planning to Refinance Out of FHA (Year 4-5)

My Refinance Target: 2027-2028 (4-5 Years from Purchase)

Current situation (2024):

• Home value: $225,000
• Loan balance: $220,925 (original $217,125 + $3,800 upfront MI)
• FHA rate: 6.75%
• FHA MI: $175/month
• Monthly payment: $1,628

Projected situation (2027—Year 3):

• Home value: $245,000 (3% annual appreciation)
• Loan balance: $204,500 (paid down $16,425 over 3 years)
• Equity: $40,500 (16.5%—not quite 20% yet)

Projected situation (2028—Year 4):

• Home value: $252,350
• Loan balance: $198,800
• Equity: $53,550 (21.2%—over 20%!)

My refinance plan (2028):

• Refinance to conventional at 20%+ equity (no PMI)
• Improve credit from 662 to 700+ (by paying cards, aging accounts)
• Target rate: 5.75-6.00% (assuming rates drop 0.75-1.00% by 2028)
• New monthly payment: $1,320 (P&I $1,160 + taxes $230 + insurance $95 + $0 MI/PMI)
• Monthly savings: $308/month ($1,628 FHA - $1,320 conventional)

Refinance costs: $5,000 (appraisal, title, lender fees)

Break-even on refinance: $5,000 ÷ $308 = 16 months (payback refinance costs in 1.3 years)

After 16 months, I’m saving $308/month in pure profit ($92,400 over remaining 24.7 years).

Why waiting 4 years to refinance is worth it:

• FHA got me into the home NOW (vs. waiting to save 10% down for conventional)
• I built $53,550 equity over 4 years (vs. $0 if I’d kept renting)
• I can refinance to conventional at 20% equity and save $308/month for life of loan

FHA was my bridge to homeownership—conventional will be my long-term loan.

The Bottom Line: FHA vs. Conventional Isn’t One-Size-Fits-All

I rate-shopped both FHA and conventional:

• FHA: $1,628/month, $12,675 at closing, $13,325 reserves left
• Conventional 10%: $1,364/month, $27,300 at closing, -$1,300 (short on cash!)

I chose FHA because:

• I only had $26,000 saved (not enough for conventional 10% down comfortably)
• FHA left me $13,325 in reserves (vs. being $1,300 short with conventional)
• I plan to refinance in 4-5 years anyway (once I hit 20% equity + improve credit to 700+)

Conventional would’ve been better if:

• I’d had $35,000+ saved (enough for 10% down + $7,700 reserves)
• I’d had 700+ credit (better conventional rates + lower PMI)
• I’d wanted PMI to drop automatically (vs. refinancing FHA MI)

My advice:

Choose FHA If:

✅ You have limited savings (under $15,000)
✅ Your credit is 620-679 (FHA MI cheaper than conventional PMI at this credit range)
✅ Your DTI is 44-50% (FHA more flexible than conventional)
✅ You plan to refinance in 3-5 years (FHA gets you in NOW, conventional later)

Choose Conventional If:

✅ You have 10-20% down saved (enough to avoid feeling cash-poor)
✅ Your credit is 700+ (much better conventional rates + lower PMI)
✅ You want PMI removed automatically (drops at 22% equity—no refinance needed)
✅ You’re buying high-value home ($400,000+—FHA MI more expensive at higher loan amounts)

Rate Shop BOTH

✅ Don’t assume FHA is always cheaper (conventional can be better for 700+ credit)
✅ Don’t assume conventional is always cheaper (FHA can be better for 620-679 credit)
✅ Apply to 2-3 FHA lenders + 2-3 conventional lenders (rates vary 0.25-0.50%)
✅ Run break-even analysis (calculate how long to recoup extra upfront cost)

Connect with mortgage specialists who can:

• Run side-by-side FHA vs. conventional comparisons
• Show your exact break-even timeline
• Calculate total cost over 5, 10, 30 years
• Help you decide which loan saves more money for YOUR situation

FHA vs. conventional isn’t black-and-white.

For me, FHA won—but for you, conventional might be better.

Rate shop both and run the numbers.