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.
| Upfront Cost | 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 | $1,750 | $1,750 |
| 14 Months Homeowners Insurance | $1,050 | $1,050 |
| Prepaid Interest to End of Month | $600 | $600 |
| Total Estimated Due at Closing | $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 than a conventional loan. The variance comes from the slightly higher down payment for FHA, but closing costs are not significantly different between FHA and conventional.
However, let’s look at monthly cost comparisons.
FHA vs Conventional: All-In Final Loan Amount
FHA requires upfront mortgage insurance, a cost you don’t need to pay with a conventional loan.
Here’s how that affects your final loan amount.
| Cost | FHA | Conventional |
|---|---|---|
| Home Price | $350,000 | $350,000 |
| 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 in terms of upfront costs and final loan amount. So, is this loan a bad deal? Hardly. FHA shines in terms of monthly payments.
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 | FHA | Conventional |
|---|---|---|
| Home Price | $350,000 | $350,000 |
| 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. Payment example based on $350k FHA loan at 6.6% rate and conventional loan at 7.016%. 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. You can use our conventional and FHA loan calculators to estimate your monthly payment for each loan type, including taxes and insurance.
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.
