Conventional vs. FHA Loan: What First-Time Homebuyers Need to Know

Who Qualifies—and Why It Could Make or Break Your Budget

For most first-time buyers, the first question is: which loan do I even qualify for?

FHA loans are designed to help more people become homeowners, especially those with lower credit scores, smaller down payments, or non-traditional income. You can qualify with a score as low as 580 if you're putting down 3.5%. FHA also allows higher debt-to-income (DTI) ratios—often up to 56.9%—depending on your credit score and reserves. That means even if a significant portion of your income goes toward other debts, you may still get approved.

Conventional loans have stricter qualification standards. A minimum 620 score gets you in the door, but to access competitive rates and affordable PMI, most lenders look for a score of 700 or higher. DTI caps are generally lower—around 43% to 45%—and borrowers with higher ratios may need compensating factors to qualify.

If you’re a W-2 employee with strong credit and stable income, conventional is often the more cost-effective route.

But if you’re stretching your budget or working to rebuild credit, FHA could give you the flexibility you need - but at what cost? We'll explore that below.

If your credit is in the high 600s or low 700s, talk to a Texas mortgage broker like LendFriend. You might be closer to qualifying for a conventional loan than you think.

Do FHA Loans Actually Have Lower Rates?

At first glance, FHA rates are often lower than conventional rates by about 0.5-1% on average depending on the borrower's profile. That’s because the loan is insured by the federal government, reducing risk for lenders. But don’t be fooled by the headline number.

When you factor in FHA’s upfront mortgage insurance and monthly MI, the effective cost of borrowing can be higher. Conventional loans might start with a slightly higher base rate, but the total cost over time—especially for buyers with good credit—is typically lower.

If you qualify for conventional and plan to stay in the home more than a few years, that lower long-term cost can add up to significant savings.

What Are the Upfront Costs—and Which Loan Charges More?

One of the biggest differences between FHA and conventional loans is how they handle mortgage insurance upfront.

FHA loans come with a 1.75% Upfront Mortgage Insurance Premium (UFMIP). On a $400,000 loan, that’s $7,000—usually rolled into the loan balance, but still something you’re paying interest on for the life of the loan.

Conventional loans don’t charge upfront MI. If you’re putting less than 20% down, you’ll pay PMI monthly, but there’s no large fee added to your closing costs on day one. That makes conventional more affordable up front, especially for buyers who are tight on cash to close.

How Long Do You Have to Pay Mortgage Insurance?

Here’s the deal: all loans with less than 20% down require some kind of mortgage insurance.

With FHA, you’re paying monthly MI that doesn’t go away unless you refinance or sell the home. The monthly amount is based on your loan size and term—but it’s fixed and doesn’t reward higher credit scores or shrinking loan balances. Unless you put down 10% or more, that monthly MI lasts for the full 30 years.

Conventional PMI is far more dynamic. It’s priced based on your credit score, down payment, and loan-to-value ratio. For example, a borrower with a 760 score and 10% down might pay half—or even a third—of what someone with a 640 score pays on the same loan. PMI costs can also be structured differently: some lenders offer lender-paid PMI (baked into the rate), upfront PMI (paid at closing), or split-premium options. That flexibility can be a real advantage, especially if you're optimizing for monthly budget.

More importantly, PMI on a conventional loan doesn’t last forever. You can request to remove it once you hit 20% equity, and lenders are required to cancel it automatically at 22%. That means your payment actually drops over time—something FHA doesn’t offer.

The takeaway? Mortgage insurance isn’t just a monthly line item—it affects your long-term wealth-building potential. Understanding how it's calculated (and how long you’ll pay it) can shape your total cost of ownership. For a deeper breakdown on how PMI works and how to avoid it, check out our full article: The Ins and Outs of Private Mortgage Insurance—and How to Avoid It.

What Kinds of Homes Can You Buy with Each Loan?

FHA appraisals are known for being stricter. The home must meet specific health and safety standards set by HUD. That means even cosmetic issues like peeling paint or loose handrails can delay or derail a closing.

FHA also limits your property options. You can only use an FHA loan for a primary residence—no vacation homes, investment properties, or even certain condos that aren’t FHA-approved.

Conventional loans are more flexible. The appraisal process is less rigid, and you can use a conventional loan to buy second homes, rentals, and a wider variety of condo units. That flexibility can be a major advantage in markets with older housing stock or limited FHA-approved inventory. 

Can You Refinance Later—and Should You?

Many first-time buyers start with an FHA loan because it’s easier to qualify. But once you build equity and your credit improves, refinancing into a conventional loan becomes a smart strategy.

And in today’s market, refinancing isn't a matter of "if"—it's a matter of "when." Rates are expected to come down in the next 12–24 months, and nearly every buyer in 2025 will have a future opportunity to refinance. That makes your upfront cost structure even more important to evaluate today.

If you qualify for both FHA and conventional, it’s worth running a breakeven analysis. FHA may offer a lower interest rate right now—but that comes with a hefty upfront mortgage insurance premium and monthly MI that lasts much longer. Conventional loans often come with slightly higher rates but no upfront MI and PMI that falls off once you hit 20% equity.

Ask yourself: how long will it take for the monthly savings from that lower FHA rate to offset the upfront cost? If you plan to refinance in a year or two, that breakeven point may never come. In that case, conventional could end up being the cheaper, more flexible choice—even if the monthly payment starts slightly higher.

On the other hand, if you don’t qualify for conventional yet or need more time to improve your credit, starting with FHA can still make sense. Just be strategic: know your numbers and make a plan to refinance when the time is right.

FHA vs. Conventional Loan Comparison Chart

Here’s a quick side-by-side summary to help you compare FHA vs. conventional loans at a glance:

Final Thoughts: Which Loan Program Is Right For You?

There’s no one-size-fits-all answer, but here’s the rule of thumb: If you qualify for conventional, it almost always makes more sense. Lower long-term costs, no upfront mortgage insurance, and easier property standards make it the better value for most buyers.

That said, FHA is an excellent option if you need help qualifying. It opens the door to homeownership for buyers who otherwise couldn’t get approved. Just make sure you understand the long-term costs and plan ahead for a future refinance. At the end of the day, don't let the loan program dictate your home purchase. If you can't qualify for conventional, don't let it stop you from becoming a homeowner.

At LendFriend Mortgage, we help educate first-time buyers all over Texas about the differences between FHA vs. conventional loans. We’ll run the numbers for your exact situation, explain your approval odds, and help you understand what your monthly payment and closing costs will really look like.

If you're ready to explore first-time homebuyer loans in Texas, schedule a call with me today or get in touch with me by completing this quick form, and discover how working with the right team can make all the difference.