FHA vs conventional vs VA: which loan is actually right for you

If you’re VA-eligible, the answer is almost always VA. If you’re not, and you’re putting less than 5% down with so-so credit, FHA probably wins. Otherwise — conventional. That’s the 30-second answer. The rest of this guide explains why, and walks through the cases where the obvious answer is wrong.

For the program-by-program mechanics (rates, fees, county limits) see the loan types guide. This guide is about how to choose between them.

The decision framework

Run through this in order. Stop at the first “yes.”

1. Are you VA-eligible? (Active duty, veteran, surviving spouse, some National Guard / Reserve.) → Get a VA quote first. It will almost always win.
2. Is your credit below 620, or are you putting less than 3% down? → FHA is probably your only real option.
3. Is your credit 620–700 with less than 5% down? → Quote both FHA and conventional. The math is genuinely close and depends on your exact LLPAs.
4. Credit 700+ with 5%+ down? → Conventional. PMI cancels; FHA MIP doesn’t.

That’s the whole framework. Everything below is the supporting detail.

Side-by-side at a glance

Feature	Conventional	FHA	VA
Min down payment	3% (first-time buyer) / 5% otherwise	3.5% (FICO 580+)	0%
Min FICO	620 (DU/LP)	580 (3.5% down), 500 (10% down)	None from VA; most lenders 580–620
Mortgage insurance	PMI, cancellable	MIP, life-of-loan if <10% down	None
Upfront fee	None	1.75% UFMIP	1.25–3.30% funding fee
Max DTI	50% via DU/LP with comp factors	Up to 56.99% via TOTAL Scorecard	No hard cap (residual income test)
Loan limit (2026 baseline)	$806,500	County FHA limits ($524,225 floor)	None; entitlement-based since 2020
Occupancy	Owner, second home, investment	Owner-occupied only	Owner-occupied only
Max seller credit	3–9% (LTV-dependent)	6%	4% (concessions only; closing costs separate)

The cells that move the decision most are the mortgage insurance row and the upfront fee row. Everything else is roughly comparable for typical buyers.

The MIP-for-life FHA gotcha

This is the single most important thing to understand about FHA. For any FHA loan originated after June 2013 with less than 10% down, the annual mortgage insurance premium (MIP) lasts the life of the loan. It does not cancel when you hit 78% LTV. It does not cancel when you hit 50% LTV. It cancels when you pay the loan off or refinance out of FHA.

For loans with 10% or more down, MIP cancels after 11 years.

(Note: HUD cut annual MIP by 30 basis points in March 2023, taking the common rate from 0.85% down to 0.55% on most 30-year loans — a big improvement, but the cancellation rules above were unchanged.)

Compare this to conventional PMI, which:

• Auto-cancels at 78% LTV based on the original amortization schedule (Homeowners Protection Act)
• Can be requested at 80% LTV
• Can be removed via reappraisal once the home appreciates enough

That difference compounds. On a $400,000 loan at 0.55% annual MIP, you’re paying roughly $1,800–$2,200 per year forever until you refinance. Over 15 years that’s $25k+ in MIP that a conventional borrower would have shed at year 5–7.

The escape hatch: refinance from FHA to conventional once you have 20% equity. Many FHA buyers do exactly this within 3–5 years. But it’s not free — you’ll pay closing costs again, and rates might be higher than when you originated. Run the math in the refinance calculator before counting on this exit.

VA funding fee table

VA has no monthly mortgage insurance, but there’s a one-time funding fee rolled into the loan. The current schedule (effective April 2023) is below. The pre-2023 fees were higher (2.30% first use / 3.60% subsequent on 0% down) — if you see those numbers anywhere, they’re outdated.

Scenario	First use	Subsequent use
0% down	2.15%	3.30%
5–9.99% down	1.50%	1.50%
10%+ down	1.25%	1.25%
IRRRL streamline refi	0.50%	0.50%
Cash-out refi	2.15%	3.30%

Exempt from the funding fee:

• Veterans receiving VA disability compensation
• Purple Heart recipients
• Surviving spouses receiving DIC

The funding fee is almost always financed into the loan rather than paid at closing. On a $400k VA loan with 0% down, first use, that’s $8,600 added to the balance. Even with that, VA usually beats FHA and conventional on lifetime cost because there’s no monthly MI ever.

Worked example: $400k loan, 5% down

Let’s compare apples to apples. Assume a $421k purchase price, 5% down ($21,050), so a $400k loan. Assume current rates of 6.75% conventional, 6.50% FHA, 6.25% VA, and a 30-year term.

Conventional 95% LTV, FICO 740

• Loan: $400,000
• PMI: ~0.50% annually = $167/mo
• P&I: $2,594
• Total monthly (P&I + PMI): $2,761 for ~7 years until PMI drops at 78% LTV via natural amortization, then $2,594
• Lifetime MI cost: ~$14,000

FHA 96.5% LTV (let’s use 5% down to match)

• Base loan: $400,000
• UFMIP financed in: 1.75% = $7,000 → loan balance $407,000
• Annual MIP: 0.55% = $187/mo
• P&I: $2,572
• Total monthly: $2,759 for the life of the loan (because down < 10%)
• Lifetime MI cost (if held 30 years): ~$67,000
• Lifetime MI cost (if refinanced at year 5): ~$11,000 + refi costs

VA 95% LTV, first use

• Base loan: $400,000
• Funding fee financed in: 1.50% = $6,000 → loan balance $406,000
• No MI
• P&I at 6.25%: $2,500
• Total monthly: $2,500 forever
• Lifetime MI cost: $0

Bottom line on this scenario:

• VA wins by ~$260/month and ~$94k over 30 years vs FHA-held-to-maturity
• Conventional beats FHA over 30 years if held that long ($14k vs $67k MI)
• FHA wins month-1 by a tiny margin only because of the rate gap

Run your own numbers in the mortgage calculator — the answer shifts a lot based on credit score (which moves PMI more than MIP) and on whether you’ll refinance.

When FHA is actually better

Despite the MIP penalty, FHA wins for some buyers:

• FICO 580–640. Conventional LLPAs (loan-level price adjustments) punish low credit scores brutally at high LTVs — sometimes 2–3% added to the loan as upfront fee, or rate hits of 0.75%+. FHA prices more uniformly across credit bands. Run yours in the credit score calculator.
• DTI above 45%. FHA underwriters approve higher DTIs more readily.
• Recent credit issues. FHA waiting periods after bankruptcy (2 years Chapter 7, 1 year Chapter 13 with payment history) and foreclosure (3 years) are shorter than conventional’s (4 and 7 years).
• Manual underwriting needed. If you have non-traditional credit history (no credit score, or thin file), FHA accepts manual underwriting more readily.

When conventional wins

• FICO 700+ and 5%+ down. Cancellable PMI beats permanent MIP every time on lifetime cost.
• Investment property or second home. FHA is owner-occupied only.
• Loan amount above FHA county limits but below conforming. Many metro areas have FHA limits well below the conforming limit.
• You want to put 20%+ down. No PMI, no upfront fee, lowest rate.
• First-time buyer with limited down payment. HomeReady and Home Possible (income-limited to 80% of AMI) drop PMI rates significantly, and Conventional 97 (no income limit) gets you in at 3% down. The conventional “first-time buyer” definition is loose: haven’t owned a primary residence in the last 3 years.

When VA always wins

If you’re eligible, VA wins essentially always for primary residences. The only edge cases:

• Funding fee is high enough to matter on a short hold. If you’re putting 0% down on subsequent use (3.30% fee) and selling in 2 years, that fee is a real cost. But you still avoid PMI and get a lower rate, so it usually still wins.
• Disability-rated borrowers get the funding fee waived — the math becomes a no-brainer.
• Seller hostility. Some sellers (incorrectly) believe VA appraisals are stricter and reject VA offers. This is a market problem, not a loan problem — but it can be a reason to write a backup conventional offer.

A USDA aside

For rural and exurban properties within income limits, USDA is a fourth option with 0% down and lower fees than FHA. It’s not covered in detail here — see the loan types guide for the full breakdown. Quick rule: if your property is in a USDA-eligible area and you’re under 115% of area median income, get a USDA quote alongside FHA.

Common mistakes

• Picking FHA “because the down payment is lower.” FHA min is 3.5%; conventional min is 3%. The down-payment advantage is mostly mythical — the real reason to use FHA is credit flexibility.
• Not getting a VA quote because “the funding fee is high.” Run the total monthly. The lack of MI almost always offsets it.
• Assuming FHA MIP cancels. It does not, on most modern loans. Plan for the refinance from day one if you go FHA with <10% down.
• Letting your loan officer pick for you without comparing. Get quotes for at least two programs you might qualify for. Compare total monthly + lifetime MI cost, not just rate.
• Forgetting seller credit caps when negotiating. If you’re asking for $10,000 in seller-paid closing costs on a $250k VA loan, you’re bumping against the 4% cap. Conventional gives you more room. (Note: VA’s 4% cap is for “seller concessions” — things like prepaid taxes, paying off your debts, or the funding fee. Standard closing costs the seller pays are separate and uncapped, but most lenders treat the combined total carefully.)
• Buying down the rate without comparing seller credit options. A 2-1 buydown (rate is 2% lower year 1, 1% lower year 2, then full rate) funded by a seller credit can be more valuable than the same credit applied to closing costs — especially if you expect to refinance before year 3. 1-0 and 3-2-1 structures also exist. Ask.

Tools you’ll use

• Mortgage Calculator — model each program side-by-side
• Affordability — what you qualify for under each
• Credit Score LLPA Impact — conventional cost by FICO
• PMI Removal — when can you drop PMI / refinance out of FHA
• Closing Cost Estimator — includes VA funding fee picker
• Refinance calculator — for the FHA → conventional escape

For program mechanics in depth, see the loan types guide.