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How Much Does It Cost To Get Into a Home With FHA vs Conventional?

FHA vs conventional loan upfront and ongoing costs.

FHA and conventional loans require about the same out-of-pocket costs to close the transaction. Down payment, closing costs, and points are quite similar.

But there are differences. Let’s take a look.

FHA vs Conventional Overall Costs: Summary

Conventional: Slightly lower upfront costs when choosing the minimum down payment of 3%

FHA: Lower monthly cost than conventional with less than 5% down and a credit score below 740.

FHA vs Conventional: All-in Out-Of-Pocket Costs to Close

All of the following costs are estimates, and every person’s situation will be different. However, here are potential out-of-pocket costs when buying a home with each program assuming the minimum down payment available.

Cost ($350,000 home)

FHA

Conventional

Down Payment

$12,250 (3.5%)

$10,500 (3%)

Appraisal

$500

$500

Title Insurance/Escrow Services

$2,000

$2,000

Lender points

$1,700 (0.5%)

$1,700 (0.5%)

Lender Processing/Underwriting

$750

$750

County Recording

$100

$100

Credit Report

$75

$75

Flood Certification

$30

$30

6 Months Taxes Due at Closing

$1,750

$1,750

14 Months Homeowners Insurance Due at Closing

$1,050

$1,050

10 Days of Interest (assuming closing on the 20th)

$600

$600

Total Estimated Due at Closing For A $350,000 Home

$20,805

$19,055

*All figures are estimates and will depend on your scenario. Contact a lender for an accurate quote.

Are closing costs different for FHA vs conventional?

In this example scenario, it costs $1,750 more to close an FHA loan versus conventional. The variance comes from the slightly higher down payment for FHA. But closing costs are not significantly different between for FHA vs conventional.

However, let’s look at monthly cost comparisons.

FHA vs Conventional: All-In Final Loan Amount

FHA requires upfront mortgage insurance, a cost that you don’t need to pay with a conventional loan.

Here’s how that affects your final loan amount.

Cost ($350,000 home)

FHA

Conventional

Down Payment

$12,250 (3.5%)

$10,500 (3%)

Base Loan Amount

$337,500

$339,500

Upfront Mortgage Insurance

$5,906 (1.75%)

$0

Final Loan Amount

$343,406

$339,500

*All figures are estimates and will depend on your scenario. Contact a lender for an accurate quote. Assumes FHA loan with 3.5% down and upfront mortgage insurance and conventional loan with 3% down.

FHA vs Conventional: All-In Final Monthly Payment

So far FHA has been the more expensive option as far as upfront costs and final loan amount. So is this loan a bad deal? Hardly. Monthly payment is where FHA shines.

Take a look at this scenario for a buyer with a 670 credit score. Not only is FHA’s mortgage rate lower, but monthly mortgage insurance is a fraction of conventional’s cost.

Cost ($350,000 home)

FHA

Conventional

Final Loan Amount

$343,406

$339,500

Principal and interest

$2,235

$2,332

Monthly mortgage insurance cost

$157

$449

Taxes/Insurance/HOA

$400

$400

Total Payment

$2,792

$3,181

*All figures are estimates and will depend on your scenario. Not a quote or commitment to lend. Contact a lender for an accurate quote. Payment example based on $350k FHA loan at 6.6% rate and conventional loan at 7.016%, the average from Optimal Blue as of May 23, 2023. Standard FHA mortgage insurance of 0.55% per year. Conventional mortgage insurance estimate of 1.54% per year from MGIC based on 670 credit score with 3% down.

Thanks to less expensive mortgage insurance, FHA is often the cheaper option monthly. Conventional mortgage insurance can get quite spendy unless you have a credit score of at least 740 and put 5% down or more.

Cancellable Conventional PMI

Even though FHA can be cheaper monthly, its mortgage insurance is not cancellable like conventional private mortgage insurance (PMI).

With conventional, you can remove PMI when you hit 22% equity in the home without refinancing. This could save you the hassle and expense of refinancing out of FHA when you gain enough equity in the home.

If you plan to hold the loan more than five to seven years, a conventional loan may be better than FHA in overall long-term cost.

However, if rates drop in the next few years, you may end up refinancing anyway. Most people hold a mortgage just eight years, so don’t go with conventional because you think you’ll have your mortgage forever.

Bottom Line: Which Loan Comes With Lower Costs?

If you’re just looking to get into a home for the least amount of money upfront, a conventional loan may be better, but only slightly. Just be aware of the potentially higher monthly payment.

FHA is probably your best bet for lower monthly costs if you have less than 5% down and a credit score below 740.

About The Author:

Tim Lucas spent 11 years in the mortgage industry and now leverages that real-world knowledge to give consumers reliable, actionable advice. Tim has been featured in national publications such as Time, U.S. News, MSN, The Mortgage Reports, and more.

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