Should a First-Time Buyer Do FHA or Conventional 3% Down?
The honest answer: if your FICO is 680 or higher and your debt-to-income (DTI) fits inside conventional guidelines, Conventional 3% almost always wins long-term — because the mortgage insurance comes off when you reach 20% equity. FHA mortgage insurance stays for the life of the loan when you put less than 10% down. Below 680, FHA usually wins on payment because conventional MI gets expensive fast at lower scores. The three-way decision is FICO band, MI cost at your score, and how long you plan to keep the loan.
The handbook view (what the rules actually say)
Both programs allow first-time buyers in with low down payments, but the program rules are very different in places that matter:
- FHA: 3.5% minimum down with a 580+ FICO; 10% down for 500–579. An upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount is financed into the loan, plus an annual MIP charged monthly. With less than 10% down, annual MIP runs for the life of the loan. (Source: HUD Handbook 4000.1, II.A.2 and the most recent HUD Mortgagee Letter on MIP rates.)
- Conventional 3% (HomeReady / Home Possible / standard 97): 3% minimum down for qualifying first-time or low-to-moderate-income buyers; 5% on standard conventional. Private mortgage insurance (PMI) is required when LTV is above 80%, but PMI is removable. Under the Homeowners Protection Act of 1998 (12 USC § 4901–4910), the servicer must auto-terminate PMI at 78% LTV based on the original amortization schedule, and must cancel on borrower request at 80% LTV (subject to the request and equity requirements). (Source: Fannie Mae Selling Guide B5-6-01 for HomeReady; B7-1-02 for MI coverage; HOPA cite above.)
The plain-English translation
The single biggest difference between these two loans isn't the down payment — it's the mortgage insurance:
- FHA mortgage insurance is two parts: the upfront 1.75% (financed into the loan) and a monthly amount that you pay forever on a 30-year FHA with less than 10% down. The only way to get rid of it is to refinance out of FHA — usually into a conventional loan once you've built enough equity.
- Conventional PMI is monthly only, no upfront premium, and it falls off automatically when your loan balance hits 78% of the home's original value (or you can request cancellation at 80%). For a buyer in a normal-appreciation market, that's typically 5–8 years on a 3%-down loan with regular payments — sooner if home values go up or you pay extra principal.
- Conventional PMI cost depends heavily on your credit score. At 760+ it can be very cheap; at 620–639 it can be more expensive than FHA MIP. Somewhere between 660 and 700 is where the math usually flips.
Side-by-side: where each program wins
| Scenario | FHA 3.5% | Conventional 3% | Usual winner |
|---|---|---|---|
| FICO 760+, low DTI | Eligible, MIP for life | Eligible, PMI is cheap and falls off | Conventional |
| FICO 700–759 | Eligible | PMI moderate, removable | Conventional (usually) |
| FICO 680–699 | Eligible, payment competitive | PMI starts to bite | Run both — depends on PMI quote |
| FICO 640–679 | Eligible, often cheaper monthly | PMI gets expensive | FHA (usually) |
| FICO 580–639 | Eligible at 3.5% down | Generally not eligible at 3% down | FHA |
| High DTI (45%+) | More flexible — often goes to 50%+ | Tighter — generally caps at 45–50% with strong factors | FHA |
| Buying a 2–4 unit primary residence | Allowed (house-hacking) | 3%-down programs generally restrict to 1-unit | FHA |
| Plan to keep the loan 7+ years | MIP drag never ends without a refi | PMI falls off, then it's just principal + interest | Conventional |
The table is a rule of thumb, not a quote. PMI pricing varies by mortgage insurer and the specific loan profile — two borrowers with the same FICO can get different PMI rates. The right move is to actually price both scenarios with the same loan amount and compare the monthly + the total cost over 7 years.
Why your loan officer might be pushing FHA when Conventional would be better
This is the part most consumer-finance articles won't say out loud. Loan-officer compensation is structurally different on government loans (FHA, VA, USDA) than on conventional, and not every lender prices conventional competitively. The combination creates an incentive to steer borrowers who qualify for both into the program where the LO and the lender make more — even when the borrower's long-term cost would be lower on the other side.
What that looks like in practice:
- You qualify for both, but you're only quoted the FHA payment.
- The Conventional quote you do see has uncompetitive PMI (because the lender hasn't shopped MI providers, or doesn't have access to lower-cost MI partners).
- The "FHA is for first-time buyers" framing gets repeated as if Conventional 3% (a program literally built for first-time buyers) doesn't exist.
How to test it: ask for both quotes side-by-side, with the same loan amount, on the same day. Ask specifically for the PMI rate at your FICO and LTV. If the lender can't or won't produce that, that's the answer.
Lender overlays — where the rules get tighter
The handbook minimums above are the program floor. Individual lenders impose "overlays" — tighter rules on top of the program rule. Two lenders can both legally offer FHA loans yet behave very differently:
- FICO floor: The HUD floor is 500 with 10% down, 580 with 3.5%. Many retail lenders won't touch anything under 620–640. A few wholesale investors go down to 580 (and rarely lower with strong compensating factors). As an independent broker we shop for the investor that will actually do the loan at your score, instead of telling you "we don't do that."
- DTI cap: FHA can go above 50% DTI with AUS approval and compensating factors, but many retail lenders cap at 50% or even 45%. Conventional behaves similarly — the AUS may say yes, the lender may say no.
- PMI partner pricing: Conventional MI is provided by a small set of MI companies (MGIC, Radian, Essent, National MI, Arch, Enact). Lenders don't always shop these — your PMI rate can vary materially depending on which partner the lender defaults to. Brokers usually have access to multiple.
- Manual underwriting on FHA: If AUS returns a "refer" instead of an "accept," only some lenders will manually underwrite. We keep relationships with investors that will.
Which lenders we actually use for this scenario
[Rich's notes — to be added]
For a buyer comparing FHA 3.5% to Conventional 3%, the three lenders we go to first, why we go to them, and which two we generally avoid for this profile.
Real-world cases
[Rich's notes — to be added]
Two anonymized cases: one where FHA was the right call despite a 700+ FICO (specific DTI / property-type factors), one where Conventional 3% beat FHA despite a 620s FICO (specific PMI quote, lender overlay). Both are composites used to illustrate the decision pattern, not specific borrower files.
How the big retail lenders typically handle this
[Rich's notes — to be added]
What Rocket / UWM / a typical megabank actually quotes when a 680-FICO first-time buyer asks for both options — based on quotes we've seen from clients shopping us against them. Numbers will be approximate ranges, not exact, and tied to a recent month so the comparison is honest.
A simple decision rule
For a first-time buyer who hasn't shopped yet, the cleanest 30-second filter:
- 1FICO 680+ and DTI under 45%? Start with Conventional 3% — make the lender prove FHA wins, not the other way around.
- 2FICO 580–679 or higher DTI? Start with FHA — but ask for the Conventional 3% number anyway, in case PMI prices in your favor.
- 3Buying a 2–4 unit you'll live in? Almost always FHA — the 3%-down conventional programs don't allow it.
- 4Plan to keep the loan 7+ years and you qualify for both? Lean Conventional — the MI-removal math compounds.
Related
- FHA loans — full program detail, limits, MIP structure
- Conventional loans — including HomeReady and standard 97
- Refinance — including FHA-to-conventional refinances to drop MIP later
- Why an independent mortgage broker — how shopping multiple wholesale investors changes the answer
Run both numbers, then decide
Our pre-qual tool quotes FHA and Conventional 3% side-by-side with full PITI + PMI/MIP, no credit pull. If the math is close, that's exactly when an actual conversation saves money.