FHA 3.5% Down or Conventional 3% Down? The Mortgage Insurance Is the Real Difference

• The minimums
• How the mortgage insurance works
• A rough example
• How people usually decide
• Free tools

Two low-down-payment routes look similar on a lender’s sheet, but they behave very differently over time because of mortgage insurance.

§The minimums

• FHA: 3.5% down with a credit score of 580 or higher (10% down if 500 to 579).
• Conventional 3% programs: Fannie Mae HomeReady, Freddie Mac Home Possible (income limits apply), and standard 97% loan-to-value loans for first-time buyers.

§How the mortgage insurance works

FHA charges an upfront premium of 1.75% of the loan (usually added to the balance) plus an annual premium, commonly about 0.55% of the balance per year on standard loans. With less than 10% down, the annual premium lasts for the life of the loan. With 10% or more down, it ends after 11 years. In practice, the only way out early is to refinance.

Conventional PMI is priced on your credit score and down payment. You can ask to cancel it once the balance reaches 80% of the original home value, and it ends automatically at 78%. Extra principal payments or a new appraisal after value gains can bring that date forward.

§A rough example

$300,000 home. FHA with 3.5% down: base loan $289,500, upfront premium about $5,066 added on, annual premium about $1,600 in year one. Conventional with 3% down: loan $291,000, PMI depends heavily on credit score; with strong credit it can be lower than FHA’s premium, with a weaker score it can be higher.

§How people usually decide

• Strong credit (roughly 700+): conventional often wins because the PMI can be removed.
• Lower scores or higher debt-to-income: FHA’s approval rules may be easier, and refinancing to conventional later is an option once equity builds.

Ask each lender for a Loan Estimate on both options and compare the total monthly payment and the month the mortgage insurance would end.

§Free tools

• Down payment calculator: https://smartbudgetsheets.surge.sh/calculators/down-payment-calculator/?utm_source=nostr
• How much house can I afford: https://smartbudgetsheets.surge.sh/calculators/how-much-house-can-i-afford-calculator/?utm_source=nostr
• Mortgage calculator: https://smartbudgetsheets.surge.sh/calculators/mortgage-calculator/?utm_source=nostr
• Debt Payoff Planner, up to 8 debts (Payhip): https://payhip.com/b/PtBLU?utm_source=nostr
• 42 free budget templates, pay what you want ($0 is fine): https://smartbudgetsheet.gumroad.com/l/ngpkrb?utm_source=nostr

General information, not financial advice. Figures are rounded examples.