FHA vs conventional at a 680–740 score: the five-year cost

FHA or conventional with a small down payment: the short answer

• FHA fits you if your score sits at the low end of the range, a conventional mortgage insurance quote comes back high, or a past credit event is still inside Fannie Mae's wait.
• Conventional may fit you if a written mortgage insurance quote, added up across the first several years, comes in low enough on a $400,000 example loan.
• Either way, the fair test is two loan estimates from the same day with mortgage insurance included.
• Write-offs on your returns can mean the cheaper loan isn't one underwriting will approve on paper.

I compared the two on HUD's and Fannie Mae's published rules, plus my own arithmetic on FHA's premiums for a $400,000 example loan. The dollar figures are approximate, and they aren't a quote.

FHA vs conventional side by side

FHA and conventional differ most in how mortgage insurance is charged and how long it lasts. Across five years, that gap counts for more than the minimum down payment does.

Mortgage insurance protects the lender if a borrower stops paying. According to the Consumer Financial Protection Bureau (CFPB), every FHA loan carries it. FHA calls its version the mortgage insurance premium. A conventional loan with a small down payment uses private mortgage insurance (PMI), priced by a private insurer.

Sources: HUD Mortgagee Letter 2023-05 and HUD Handbook 4000.1 for FHA's premiums and rules, the CFPB, Fannie Mae's Selling Guide, and FHFA's and HUD's 2026 loan limits. HUD sets FHA's premium rules in the table, so the private mortgage insurance quote is the piece that decides the comparison. Both rates and that quote depend on your score, your loan and the day you ask.

FHA loans: who they fit, what they cost, what to watch

Who FHA fits

FHA fits a buyer whose score or file won't price well on a conventional loan. HUD gives a score of 580 or higher FHA's maximum financing, and the CFPB notes FHA's low minimum down payment. That leaves room for a file that conventional pricing punishes.

You need to live in the home. Except where its handbook says otherwise, HUD limits FHA to owner-occupied principal residences of one to four units, so a rental or second home is usually out.

In California, HUD's 2026 one-unit FHA limit for San Diego County is $1,104,000. Most counties nationally top out at $541,287 (2026). Here in San Diego, that higher cap leaves room for a fairly large one-unit FHA loan.

What FHA costs

FHA's cost starts with a 1.75% upfront premium on the base loan, according to HUD. On a loan longer than 15 years and $726,200 or less, HUD adds an annual premium of 0.5% to 0.55% of the loan. Larger loans pay a higher tier, shown in the table above.

Say, as an example, you borrow $400,000 on an FHA loan longer than 15 years under HUD's current premium schedule (Mortgagee Letter 2023-05). 1.75% of $400,000 is $7,000 upfront. At 0.5%, the annual premium is $2,000 a year; at 0.55%, it's $2,200.

That's arithmetic on the starting balance, not a quote. The annual premium is usually figured on a balance that shrinks as you pay, so the real total can land a bit lower.

What to watch with FHA

Watch how long the annual premium runs. HUD keeps it 11 years at 90% of the value or less, and above 90% it stays as long as the loan does.

With a small down payment you start above 90%, so the way out is refinancing into a different loan or paying it off. If you stay for decades, that charge keeps adding up long after year five.

Conventional loans: who they fit, what they cost, what to watch

Who conventional fits

Conventional fits a 680–740 borrower whose private mortgage insurance quote comes in low enough to beat FHA's life-of-loan premium. Fannie Mae buys conventional purchase loans with a small down payment, under its Selling Guide's conditions, so this option stays open too.

The Federal Housing Finance Agency (FHFA) sets the 2026 conforming limit for a one-unit home at $832,750 in most of the country and up to $1,249,125 in high-cost areas. A bigger loan is a jumbo loan, with its own rules, so check your county's figure before you compare.

What conventional costs

Conventional's big cost difference is PMI, and its price moves with your credit score. I won't put a number on it because there isn't one number. It's a quote for your file, on the day you ask.

Get the monthly PMI figure in writing and multiply it by the number of months you expect to pay it.

Old collections don't automatically push you toward FHA. Fannie Mae's automated underwriting system, Desktop Underwriter (DU), doesn't require a buyer of a one-unit principal residence to pay off collections first, and medical collections needn't be paid in full at closing.

What to watch with conventional

Above 95% of the value, Fannie Mae's Selling Guide requires at least one first-time homebuyer on a purchase loan it buys, along with the Guide's other conditions. If nobody on the loan is a first-time homebuyer, ask what the most you can borrow is at 95% of the value.

Private mortgage insurance can usually come off once you build enough equity, which FHA's life-of-loan premium can't. Ask the lender how removal works on your loan. A score dip before closing can also raise the insurance quote, so ask what new credit could do to it.

When FHA wins anyway

Conventional loses when its private mortgage insurance, added up over five years, costs more than FHA's premiums, or when a past credit event keeps you inside a longer Fannie Mae waiting period. HUD's waits are mostly shorter.

Sources: HUD Handbook 4000.1 (Update 18) for FHA; Fannie Mae Selling Guide B3-5.3-07 for conventional.

Say you're three years past a Chapter 7 discharge. HUD's two-year wait has passed, but Fannie Mae's four-year wait hasn't, so FHA is the loan in reach.

Each conventional wait in that table applies to loans sold to Fannie Mae only. Freddie Mac and non-agency lenders aren't covered by those rules, so their waits can differ.

Can a self-employed buyer get either loan?

Both FHA and conventional lenders usually weigh an application against the income your tax returns show. If write-offs shrink that income on paper, the cheaper loan may not be one underwriting approves.

That's when I look at other paths. I'm a broker, so I shop one file across a network of wholesale lenders instead of one bank's rules. We close bank-statement loans that retail banks turn away. Those loans look at your deposits rather than your returns.

Whether to take fewer write-offs in future years is a tax question for your CPA.

How I know this

I've done this work for 21 years as a senior loan officer at Rate Rebel (NMLS #282828) in San Diego, and I lend in California. We're a broker, so I price one file with several wholesale lenders and watch their answers differ. The rules here come from HUD, the CFPB, Fannie Mae and FHFA. The dollar figures are my arithmetic on HUD's percents.

How to choose

Choose by adding up five years of insurance premiums plus interest on two same-day quotes. The rate by itself won't tell you which loan is cheaper.

• If your PMI quote is modest, compare 60 months of it against roughly $17,000 to $18,000 of FHA premiums on the $400,000 example.
• If PMI comes back high, FHA can cost less in the first five years, even though its premium lasts longer.
• If you may sell early, remember FHA's $7,000 upfront premium on the example gets paid in full however briefly you keep the loan.
• If a bankruptcy is recent, check which wait you've cleared; FHA's is often shorter than Fannie Mae's.
• If your returns run thin, ask whether either loan qualifies before you compare price, and ask about a bank-statement loan too.

I'd get two loan estimates on the same day, one FHA and one conventional, with mortgage insurance included, and add up five years of premiums and interest on each. Conventional comes out ahead when its written five-year insurance total lands under FHA's. FHA comes out ahead when the private insurer prices your score high. To see what the payment actually looks like on your numbers, the calculator on this page shows it in a few minutes with no credit pull.

Questions people ask