FHA vs Conventional Loan in 2026: The Decision Tree That Actually Commits

The FHA vs conventional decision is not complicated once you have two numbers: your FICO credit score and your available cash for a down payment. Every other factor is secondary to this two-variable matrix.

FICO under 620: FHA is your only realistic path. Conventional lenders set a hard floor at 620 FICO, and even at exactly 620 the loan-level price adjustments (LLPAs) make conventional substantially more expensive. The rate spread at 600 FICO is roughly 1.1 percentage points: FHA at 6.9% vs conventional at 8.0% or higher. On a $300,000 loan that difference is $220 per month and $79,200 over 30 years, before accounting for the fact that conventional PMI at sub-640 FICO runs 1.0-1.5% annually vs FHA MIP at a flat 0.55%.

FICO 620-679: The decision depends on your down payment and planned hold period. At 5% down, conventional edges ahead for most borrowers planning a 7-year or longer hold. PMI at 640-679 FICO is roughly 0.6-0.8% annually and cancels in 8-10 years. FHA MIP is 0.55% annually but runs 30 years. Below 5% down at this FICO band, FHA and conventional are close enough to warrant getting quotes for both.

FICO 680-719: Conventional wins at 5% or more down. The monthly savings on a $300k home are approximately $93 per month, compounding to roughly $18,000 over a 10-year hold. PMI at 680+ FICO is approximately 0.45-0.55% and cancels around year 8. FHA MIP at 0.55% plus the 1.75% UFMIP rolled into the balance creates a structurally higher long-term cost.

FICO 720 and above: Conventional wins decisively at any down payment. PMI rates at 720+ FICO are 0.30-0.35% and cancel in year 8-10. The FHA UFMIP alone on a $300k loan is roughly $5,066. Over 30 years, conventional saves $25,000-50,000 in insurance costs alone at this credit tier.

FHA Minimum Property Requirements (MPR) apply to every FHA appraisal. These are structural and safety thresholds the appraiser must certify. Common items that trigger required repairs include peeling or deteriorating paint on pre-1978 homes (lead paint hazard), handrails on stairways with more than three steps, exposed electrical wiring, non-functional HVAC or plumbing, and a roof with less than two years of remaining useful life.

In a competitive market with multiple offers, an FHA appraisal flagging required repairs gives the seller a reason to prefer the conventional-financed competing offer. The seller is under no obligation to accept repair mandates. This is a strategic disadvantage for FHA borrowers in hot markets. For properties in good condition, the concern is minimal. It applies primarily to older housing stock and deferred-maintenance properties.

For borrowers who choose FHA due to limited down payment or marginal credit, the optimal strategy is not to stay in FHA for 30 years. Use FHA as a bridge and refinance to conventional once you reach 20% equity. On a $300,000 home purchased with 3.5% FHA at 6.8% and 3% annual appreciation, equity reaches 20% around year 4-5.

A conventional refinance at 80% LTV drops MIP entirely. Closing costs of approximately $5,000 recoup in roughly 24 months of MIP savings ($135 per month). Total FHA insurance under this strategy: roughly $8,100 over 5 years, vs $47,520 if you never refinance. This converts the life-of-loan MIP risk into a 5-year transitional cost comparable to conventional PMI.