FHA loans, explained: Down payments, MIP and who qualifies

I priced the same $400,000 home two ways: with an FHA loan at 3.5% down, and with a conventional loan at 20% down. To keep the comparison honest, I held the interest rate at 7.40% for both — the average 30-year fixed rate in Freddie Mac’s Primary Mortgage Market Survey for the week of October 15, 2026. The FHA route gets you through the door with $66,000 less cash. The conventional route costs $680.66 less every month and carries no mortgage insurance at all. Neither loan is “better” in the abstract — but one of them is better for your bank balance and your credit score, and the numbers below show which.

What an FHA loan actually is

An FHA loan is a mortgage insured by the Federal Housing Administration, part of the U.S. Department of Housing and Urban Development (HUD). The government does not lend you the money — a bank or mortgage company does — but FHA insures the lender against loss if you default. That insurance is what lets lenders approve buyers they would otherwise turn away: smaller down payments, lower credit scores, higher debt loads.

You pay for that insurance yourself, in the form of mortgage insurance premium (MIP), and it is the defining cost of the program. A conventional loan, by contrast, is not backed by any government agency. Put less than 20% down on one and you pay private mortgage insurance (PMI) instead — a similar charge with one crucial difference I will come back to: PMI can be cancelled, and on a low-down-payment FHA loan, MIP effectively cannot.

The same $400,000 home, priced two ways

Both loans are 30-year fixed at 7.40%. The FHA loan amount is the $386,000 base loan plus the 1.75% upfront MIP ($6,755), which most borrowers finance. Taxes and homeowners insurance are excluded — they are the same either way.

Two gaps do all the damage on the FHA side. First, the loan is bigger: you borrowed the $66,000 of down payment you did not make, plus the upfront premium, so you pay 7.40% interest on it for 30 years — $108,592.64 more interest in total. Second, the $176.92 monthly MIP starts on day one and, at 3.5% down, never stops. That is the entire trade: FHA sells you time to save and rebuild credit, and charges you monthly rent on the money while you do it.

What FHA mortgage insurance really costs

MIP comes in two parts. The upfront MIP is 1.75% of the base loan — $6,755 on this loan — usually rolled into the amount you borrow. The annual MIP is 0.55% of the loan amount per year on most 30-year FHA loans, collected monthly: $176.92 in the first year, recalculated as your balance falls. Keep the loan for all 30 years and the annual premiums alone add up to roughly $43,600 on this example, on top of the upfront premium. This is also the line most likely to go missing when you use a generic FHA loan calculator — if the tool does not break MIP out as its own row, its payment is understated by roughly $177 a month on a loan this size.

Who qualifies for an FHA loan

HUD sets the floor; individual lenders are free to be stricter, and many are. The baseline rules for 2026:

• Credit score 580 or higher: you qualify for the 3.5% minimum down payment.
• Credit score 500–579: you can still qualify, but with 10% down. Below 500, FHA is not an option.
• Debt-to-income ratio: 43% is the standard benchmark, though approvals above that are possible with compensating factors such as cash reserves or minimal payment increase.
• Primary residence only: you must move in within 60 days of closing and intend to live there at least a year.
• Loan limits: for 2026, FHA insures single-family loans from $541,287 in most counties up to $1,249,125 in high-cost areas, with higher limits in Alaska, Hawaii, Guam and the U.S. Virgin Islands.
• Property standards: the home must pass an FHA appraisal covering basic safety and structural soundness — peeling paint and a failing roof can delay or kill a deal.

In practice, many lenders overlay their own minimum credit score of 620 or higher on top of HUD’s floor, so a 580 score qualifies you on paper but still means shopping around.

The conventional side: cheaper to keep, harder to enter

The conventional column above assumes 20% down, which is why it wins every row. But conventional loans also go as low as 3% down, and that comparison is closer than most people expect. On this same home, a conventional loan at 3% down borrows $388,000: principal and interest of $2,686.43, plus PMI that I would estimate around $258.67 a month in year one (0.80% of the loan per year, inside Freddie Mac’s published range of $30–$70 a month per $100,000 borrowed). That is a first-year total of about $2,945.10 — slightly more than the FHA payment. The same warning applies in mirror image, by the way: a conventional loan calculator that quotes only principal and interest at 3% down is hiding the PMI that dominates the early years of the loan.

Here is the flip, though: that PMI can be cancelled the month your balance reaches 80% of the home’s value — month 145 on the original schedule — while FHA’s MIP at 3.5% down never cancels. And PMI pricing depends heavily on your credit score in a way MIP does not: a 760 score gets cheap PMI, a 600 score gets expensive PMI or an outright no, while every FHA borrower pays the same MIP rate. That is precisely the gap FHA exists to fill.

How I choose between them

• You have 20% down: conventional, and it is not close. You skip mortgage insurance entirely and pay $680.66 less a month on this example.
• You have good credit but little cash: price both at 3–3.5% down. FHA is often cheaper in year one; conventional usually wins over the full holding period because its insurance ends.
• Your credit score is under 640, or your debts are high: FHA is built for you. Take it, then treat a conventional refinance as a planned second step the moment you reach 20% equity and a stronger score — that refinance is how you stop paying MIP for life.

Sources: U.S. Department of Housing and Urban Development (HUD) — FHA mortgage insurance premiums, eligibility rules and 2026 loan limits; Freddie Mac Primary Mortgage Market Survey, week of October 15, 2026 (30-year fixed-rate average 7.40%); Freddie Mac estimate of PMI cost ($30–$70 per month per $100,000 borrowed). All payments and totals recomputed cent by cent; PMI figures are illustrative estimates.