FHA vs Conventional Loan: Which Is Better in 2026?

The 30-second answer

Conventional loans are owned by Fannie Mae and Freddie Mac. They're the default mortgage in the U.S. and reward buyers with strong credit and meaningful down payments by giving them lower rates and the ability to drop mortgage insurance.

FHA loans are insured by the Federal Housing Administration. They were designed for buyers who can't yet meet conventional standards. The trade for easier qualification is a permanent mortgage insurance premium that follows the loan unless you refinance.

The decision usually comes down to credit score. At 740+, conventional almost always wins on monthly payment and total cost. At 580-680, FHA often wins because conventional gets expensive fast at lower scores. The middle range (680-740) is where it pays to run both quotes side by side.

FHA at a glance

FHA is a government-insured loan administered by HUD. The agency doesn't lend money — lenders do — but FHA insures the loan, which is why guidelines are looser.

• Minimum down payment: 3.5% with a 580+ credit score, or 10% with a 500-579 score.
• Mortgage insurance: Two-part. Upfront MIP of 1.75% of the loan amount (financed into the loan) plus annual MIP of 0.55% paid monthly.
• MIP duration: For the life of the loan if you put down less than 10%. Drops after 11 years if you put down 10%+.
• Maximum DTI: Often allowed up to 56.99% with compensating factors.
• Loan limits: $524,225 for single-family in most Arizona counties (2026 figures).
• Property requirements: Must be primary residence. Property must pass a slightly stricter FHA appraisal — peeling paint, missing handrails, or active leaks can hold up closing.

Conventional at a glance

Conventional is the standard 30-year mortgage most people think of. Fannie Mae and Freddie Mac set the rules and buy these loans from lenders.

• Minimum down payment: 3% for first-time buyers (HomeReady or Home Possible programs), 5% for everyone else.
• Mortgage insurance: Private Mortgage Insurance (PMI) only when you put down less than 20%.
• PMI removal: Automatic at 78% LTV based on original value, or by request at 80% LTV. You can also request removal early based on appraised value if the home has appreciated.
• Minimum credit: 620, but pricing improves significantly at 680, 720, and 740+.
• Maximum DTI: 50% in most cases.
• Loan limits: $806,500 for single-family in most Arizona counties (2026 conforming limit).
• Property requirements: Less strict appraisal. Can be used for primary, second home, or investment property.

Side-by-side comparison

Real example: $400,000 home, 5% down

Let's run the numbers on a $400,000 Phoenix home with 5% down ($20,000) for a buyer with a 700 credit score. Loan amount before any financed insurance is $380,000. We'll use representative rates.

FHA scenario

• Base loan: $380,000
• Upfront MIP financed: $6,650 (1.75%)
• Total loan: $386,650
• Rate: ~6.50%
• Principal & interest: $2,443/mo
• Monthly MIP (0.55%): $177/mo
• Total P&I + MIP: $2,620/mo (excluding taxes/insurance)

Conventional scenario

• Loan amount: $380,000
• Rate: ~6.875% (slightly higher base rate at 700 score)
• Principal & interest: $2,496/mo
• Monthly PMI (~0.62% at 700 score): $196/mo
• Total P&I + PMI: $2,692/mo

FHA looks cheaper today by about $72/month. But here's the catch: in five years, when this buyer hits 80% LTV through a mix of payments and Phoenix appreciation, the conventional buyer can drop PMI entirely. Their payment falls to $2,496. The FHA buyer is still paying $177/month in MIP and will be until they refinance. Over the next 25 years, that adds up to roughly $53,000 in extra insurance premiums.

For buyers with 740+ credit, conventional often wins from day one because PMI pricing at high scores can be cheaper than the FHA monthly MIP — and the rate advantage gets even bigger.

When FHA is the right call

FHA is genuinely the better loan when:

• Your credit score is 580-680. Conventional pricing punishes lower scores aggressively. FHA pricing barely flinches.
• Your DTI is over 45%. FHA allows up to 56.99% with compensating factors; conventional caps near 50% and prices it harshly.
• You have a recent credit event. FHA has shorter waiting periods after bankruptcy (2 years vs 4), foreclosure (3 years vs 7), and short sale.
• You're buying with a non-occupant co-borrower (like a parent helping). FHA is more flexible here.
• You plan to refinance within 5-7 years anyway. The MIP issue only matters if you keep the loan long-term.

When conventional is the right call

• Credit score is 720+. The rate and PMI advantage compounds for the entire loan term.
• You're putting down 10%+ and especially 20%+. PMI gets eliminated quickly or skipped entirely.
• You're buying a second home or investment property. FHA can't help you here.
• The home has FHA-flagging issues (older property, fixer-upper, manufactured, condo not on FHA approved list). Conventional is more flexible on the appraisal side.
• You want the option to drop mortgage insurance without refinancing.

Switching later: refinance from FHA to conventional

This is the most common path I help Arizona buyers plan: start with FHA because the entry barrier is lower, then refinance into conventional once two things happen — credit improves and the home builds 20% equity.

In a normal Phoenix appreciation environment (3-5% annually), a buyer who put 3.5% down on a $400,000 home will typically reach 20% equity in years 4-6 just from a combination of price growth and principal pay-down. That's the moment to look at refinancing.

The math has to make sense. You're trading a refinance cost (typically $4,000-$8,000) for the elimination of MIP (around $2,000/year on a $400k loan). Most buyers break even on that within 18-30 months and save real money beyond that. I'll run the numbers for you when you're at the threshold — there's no fee for that conversation.

Frequently asked questions