FHA vs Conventional Loan FAQ 2026

FHA requires a minimum 580 FICO for 3.5% down payment. Borrowers with FICO 500-579 must put 10% down. Scores below 500 are ineligible for FHA financing. Source: HUD 4000.1 II.A.1.c. Many lenders apply overlays requiring 620-640 despite HUD allowing 580.

Fannie Mae and Freddie Mac set a minimum of 620 for conventional purchase loans. However, the best rates require 740-760+. At 620, expect PMI rates 0.8-1.2% and rates 0.5-0.75% above 740 FICO. Most conventional lenders will not approve below 620 even with compensating factors.

Technically yes -- HUD 4000.1 allows 500-579 FICO with 10% down. In practice, finding a lender willing to originate a 500-FICO FHA loan is difficult. Most lenders impose overlays of 580-620. Manual underwriting is required below 580, and many lenders do not offer manual FHA underwriting. Your best bet is a non-bank FHA lender (Carrington, Angel Oak) or a community bank with in-house underwriting.

FHA: Medical collections do not count toward DTI. Non-medical collections over $2,000 must be resolved or a payment plan established. Conventional: Collections are more lender-discretionary; Fannie DU typically ignores collections in DTI but the underwriter may require explanations for large balances. Charged-off accounts are treated more harshly on conventional.

FHA: 3.5% with 580+ FICO, 10% with 500-579 FICO. Conventional: 3% with HomeReady/Home Possible (income-limited), 5% standard, 20% to avoid PMI entirely. For a $300k home: FHA 3.5% = $10,500; conventional 3% = $9,000; conventional 5% = $15,000.

Yes. FHA explicitly allows the entire down payment to come from a gift from a family member, employer, charitable organisation, or government agency. The donor must provide a gift letter stating no repayment is required. Source: HUD 4000.1 II.A.4.c. Conventional also allows gifts but typically requires the borrower to contribute 3-5% from own funds on investment or multi-unit properties.

UFMIP (Upfront Mortgage Insurance Premium) is 1.75% of the base loan amount, charged on all FHA loans. It can be financed into the loan (increasing the balance), paid at closing, or split. Most borrowers finance it. On a $289,500 base loan, UFMIP is $5,066, bringing the actual loan to $294,566. Source: HUD ML 2024-04.

Most closing costs (title, escrow, recording) are similar. The main differences: FHA requires an FHA-approved appraiser ($50-150 premium), FHA origination is capped at 1%, and the UFMIP is the largest unique cost. Conventional has no UFMIP equivalent but may have higher lender fees for lower-credit borrowers. See our full closing costs comparison for line-item detail.

For loans closed since June 3, 2013: if you put less than 10% down, MIP is permanent for the life of the loan. If you put 10%+ down, MIP cancels at 11 years. The only way to eliminate permanent MIP is to refinance into a conventional loan once you have 20% equity. Source: HUD ML 2013-04.

Under the Homeowners Protection Act (12 USC 4902): PMI automatically cancels at 78% LTV based on the original amortisation schedule, regardless of current market value. You can request early cancellation when you reach 80% LTV with a good payment history and current appraisal. Lenders must cancel at 80% LTV upon written request.

FHA annual MIP rates (HUD ML 2024-04): For 30-year loans with LTV above 90%, the annual MIP is 0.55% ($137.50/mo per $300k balance). With 10%+ down (LTV 90% or under), annual MIP is 0.50% for the first 11 years before cancelling. Plus the 1.75% UFMIP paid upfront or financed.

PMI deductibility has been on-again, off-again in Congress. As of 2026, check IRS Publication 936 for the current-year status. The mortgage interest deduction does not automatically include PMI. Even when deductible, the benefit phases out above certain income levels ($100,000-$109,000 AGI). Do not count on the deduction in long-term cost modelling.

On a $280,000 loan with 680 FICO: FHA annual MIP = $1,540/yr (0.55%). Conventional PMI = approximately $1,008/yr (0.36% at 680 FICO). Difference = $532/yr. Conventional PMI also cancels at 78% LTV -- FHA MIP (if under 10% down) never cancels. Over 30 years: FHA total MIP = $46,200; conventional total PMI = ~$12,000 before cancellation at year 9.

FHA 2026 limits: Floor $524,225 (1-unit, low-cost areas). Ceiling $1,209,750 (1-unit, high-cost areas like LA, SF, NYC). 2-unit floor $671,200 / ceiling $1,548,975. 3-unit floor $811,275 / ceiling $1,872,225. 4-unit floor $1,008,300 / ceiling $2,326,875. Alaska and Hawaii receive a special 150% ceiling adjustment above the national high-cost limit.

Fannie/Freddie 2026 conforming limits: Baseline $806,500 (1-unit). High-cost $1,209,750 (1-unit). 2-unit baseline $1,032,650. 3-unit baseline $1,249,150. 4-unit baseline $1,551,950. High-cost multipliers apply in designated counties. AK and HI use the 150% of baseline limits. Source: FHFA 2025 announcement.

No. FHA will not insure loans above the county limit regardless of down payment or credit score. Options: (1) Bring cash to cover the gap above the FHA limit; (2) Use conventional financing; (3) Purchase a different property. In high-cost areas where FHA ceiling = conforming ceiling ($1,209,750), a jumbo conventional loan is the only option above that threshold.

FHA appraisers must flag: peeling paint (any age home, not just pre-1978); roof with less than 2 years remaining life; missing handrails on stairs with 3+ steps; inoperable appliances if included in the sale; foundation cracks; plumbing leaks; electrical hazards; windows that don't open in sleeping areas; standing water in basement. Source: HUD 4000.1 II.A.8.a.

Yes, significantly. FHA condos must be on HUD's approved condo list (search HUD.gov) or go through spot approval. Requirements include: 50%+ owner-occupied, under 10% single-entity ownership, adequate reserves (10% of dues), no active litigation. Conventional condos require a condo questionnaire (usually quicker). Many condo associations that reject FHA approval are fine for conventional.

No. FHA requires owner-occupancy. The borrower must intend to use the property as their primary residence within 60 days of closing. FHA does allow 2-4 unit properties (borrower must occupy one unit). Using FHA for a property you don't intend to live in is mortgage fraud. Conventional allows investment property loans with 15-25% down and higher rates.

Yes, with restrictions. The home must be on a permanent foundation, titled as real property (not personal property), built after June 15, 1976 (HUD date standard), and meet HUD installation standards. Many lenders do not offer FHA manufactured home loans despite HUD allowing them. Home Possible (Freddie Mac) also covers manufactured homes.

FHA requires a 2-year employment history but not necessarily at the same employer. Job changes within the same field are acceptable. Gaps up to 30 days are generally acceptable with explanation. Longer gaps require documented reason (maternity leave, medical, education). Recent graduates can qualify with employment offer letter and school transcript showing the gap was education. Source: HUD 4000.1 II.A.4.d.

Yes. Social security income is qualifying income for both FHA and conventional. If the income is non-taxable, lenders can gross it up by 25% (divide by 0.75) to account for the tax advantage. A $2,000/mo SS benefit becomes $2,667 qualifying income. Documentation required: award letter from SSA, 1-2 years of SSA-1099s.

FHA uses a 2-year average of net income from Schedule C (sole proprietor), Schedule K-1 (partnership/S-corp), or W-2 from owned business. Lenders review business tax returns for trending -- if income is declining, the lower year may be used. Depreciation and depletion can be added back. One year of self-employment may be used if the borrower was previously in the same field as an employee.

FHA Streamline is a simplified refi available to existing FHA borrowers. No appraisal required (usually), no income verification required, reduced documentation. Requirements: loan must be 6 months old with 6 payments made, no 30-day lates in last 12 months, net tangible benefit (rate drop of 0.5%+ or reduced term). Source: HUD 4000.1 III.A.2.i.

The ideal trigger: LTV reaches 80% or below, either through payments + appreciation or extra principal. At 80% LTV you can eliminate PMI on conventional. The refi makes financial sense when: (1) your MIP savings exceed closing costs within 3-4 years, (2) you have 620+ FICO for conventional approval, (3) you plan to stay long enough to break even. See our refi break-even calculator.

Yes. FHA Cash-Out allows up to 80% LTV (vs conventional cash-out at 80% LTV as well). FHA cash-out requires 12 months of on-time payments and a new FHA appraisal. If you currently have a conventional loan, you can refinance into FHA cash-out -- sometimes useful if your FICO has dropped and you cannot qualify for conventional cash-out.

No mandatory waiting period for a conventional rate/term refi from FHA -- you just need sufficient equity and to qualify on income/credit. For FHA Streamline, the seasoning is 6 months and 6 payments. If you received Chenoa Fund DPA as a forgivable second, the 36-month forgiveness period means you will owe the second at payoff if you refi within 3 years.