FHA MIP is better for borrowers with lower down payments, higher debt-to-income ratios, and lower credit scores. Conventional PMI is better for borrowers with larger down payments, lower debt-to-income ratios, and excellent credit scores.
Conventional PMI: “Private Mortgage Insurance” issued by a company, not the government.
FHA MIP: “Mortgage Insurance Premium” provided by the U.S. government, specifically the Department of Housing and Urban Development, or HUD, the overseer of FHA loans.
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Cost Comparison
Conventional: 0.25-2.0% of the loan per year, or $60-$500 per month on a $300,000 loan, depending on credit score and down payment.
FHA: Typically 0.55% of the loan per year, or $138 per month on a $300,000 loan.
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Both mortgage insurance types do the same thing. They reimburse the lender for losses in case the borrower defaults. But the borrower pays for it.
This sounds unfair. But in the end, it helps someone buy a house much sooner than savings 20% down. Nearly all mortgages with less than 20% down require some kind of mortgage insurance.
So which is better? Conventional PMI or FHA MIP? It depends on your credit score, mostly.
Conventional PMI Costs
In short, you’re going to pay sky-high sums for conventional PMI if you have a 620-ish credit score.
We’re talking nearly $500 per month on a $300,000 loan with 3% down.
Here’s a breakdown of estimated PMI costs at various credit and down payment tiers.
| 620 Credit | 700 Credit | 760 Credit | |
|---|---|---|---|
| 3% | $465 | $247 | $145 |
| 5% | $355 | $195 | $95 |
| 10% | $235 | $137 | $70 |
This is why PMI makes more sense for those with at least 5% down and excellent credit. Those with a credit score below about 700 are probably better off using an FHA loan, primarily due to the mortgage insurance costs.
One advantage of conventional PMI is that there is no upfront premium. So, if it's not too expensive, use a conventional loan and PMI.
FHA MIP
An FHA mortgage is a great option, although many homebuyers fear it. For one, mortgage insurance is in force until you sell, pay off the loan, or refinance into a conventional loan.
But there are few better tools to enter homeownership than FHA. It’s hands-down the most flexible and widely available home loan program. So if your main goal is homeownership, and you don’t have a perfect homebuyer profile, FHA is probably your ticket.
How PMI and FHA MIP Compare
Cost: FHA mortgage insurance is usually cheaper than conventional PMI unless you have 5% down and a credit score north of 740-760.
| 620 FICO score | 700 FICO score | 760 FICO score | |
|---|---|---|---|
| FHA - 3.5% down | $137 | $137 | $137 |
| Conventional - 3% down | $465 | $247 | $145 |
| Conventional - 5% down | $355 | $195 | $95 |
Here's a breakdown of costs in percentage format.
| Annual Fee* | |
|---|---|
| FHA 3.5% Down | 0.55% |
| FHA 5%+ Down | 0.50% |
| Conventional 3% Down** | 0.87% |
| Conventional 5% Down | 0.66% |
| Conventional 10% Down | 0.46% |
*Percentages are based on the loan amount and collected in 1/12 installments with the mortgage payment. **Conventional PMI assumes 720 Credit. Because PMI is issued by private companies, numbers are estimates only.
Mortgage Insurance Cancellation
PMI on a conventional loan can be cancelled when you reach 20% equity in the property. This can happen when you pay down the loan balance and/or the home value rises.
FHA MIP is due for the life of the loan unless you put 10% down. In this case, you must keep MIP for 11 years.
Upfront Mortgage Insurance Fee
This is another drawback for FHA. You have to pay an upfront mortgage insurance fee of 1.75% of the loan, or $5,250 for a $300,000 loan.
You can wrap this fee into the loan, but you are still paying it. When you sell, that’s about $5,000 less you’ll get at closing.
Conventional PMI does not require an upfront fee.
FHA MIP Refunds
If you refinance you can get a refund of part of your FHA upfront fee. The amount of this refund depends on the age of the borrower’s current FHA loan.
PMI Discounts
Borrowers who earn 80 percent or less of their area’s median income might qualify for PMI discounts on special conventional loan programs like Freddie Mac’s Home Possible.
Borrowers who meet this income requirement will also need a FICO score of 720 to qualify for a discount. The discount could save about $40 per month on a $300,000 mortgage.
FHA MIP doesn’t offer these types of discounts.
Deciding if FHA or Conventional Is Better
FHA MIP is better: for borrowers with lower down payments, higher debt-to-income ratios, and lower credit scores
Conventional PMI is better: for borrowers with larger down payments, lower debt-to-income ratios, excellent credit scores
But where, exactly, is the cutoff point?
Matthew Locke, National Sales Manager at UMB Bank says someone with a credit score under 680 and a debt-to-income ratio over 50 percent would be a clear candidate for FHA.
Canceling FHA MIP with a Conventional Loan Refi Later
Many first-time buyers acquire the house with an FHA loan, then refinance into a conventioal loan a few years later.
By this time, their home value is likely higher, and they may have more stable finances.
Some wait until they have 20% equity and get a no-PMI conventional loan based on the new appraised value.
Just because you get an FHA loan doesn’t mean you’ll have it forever. No mortgage insurance is truly permanent because you won’t have the loan forever.
FHA vs Conventional Mortgage Insurance: Bottom Line
The decision between these two loan types will probably become obvious within a few minutes of speaking to a professional. You might find that FHA is $300 per month cheaper than conventional in your case.
You also might discover you can only qualify for FHA.
Either way, it’s likely not as hard a decision as you think during preliminary research. Be equally open to both loan types and the answer will become clear very quickly.
