Buying · Financing
Conventional, FHA, and VA loans, and what each one actually costs
The three main residential mortgage products work very differently underneath. Knowing which costs scale with the loan, which scale with the home, and which roll into the financed balance matters more than the rate quoted on the rate sheet.
On a $400K home at 7.0% / 30yr, the four mortgage programs cost between $$446K and $$613K in total interest plus mortgage insurance over 30 years — a ~$$166K spread, almost entirely from how each program treats mortgage insurance.
Total cost premium (interest + mortgage insurance) over 30 years on a $400K home at 7.0%, by mortgage program. Brass is mortgage insurance — the editorial point is that program-to-program differences are dominated by MI structure, not rate. The ranges shown ignore the down payment itself (equity, not cost), and assume the same rate across programs to isolate structural cost. FHA and VA real-world rates typically run 10–25 bps below conventional, which would shift totals slightly but not change the rank order.
Source · Internal calculation · Methodology at /tools/mortgage-payment
Key takeaways
- Conventional loans (Fannie Mae and Freddie Mac eligible) need 5–20% down with PMI required under 20%, and PMI cancels automatically at 78% LTV.
- FHA loans accept down payments as low as 3.5% with FICO down to 580, but carry both upfront and annual mortgage insurance, where the annual portion is non-cancellable for the loan's life on most loans.
- VA loans (eligible veterans and active-duty service members) require no down payment and no monthly mortgage insurance, carrying a one-time funding fee instead.
- Loan-program choice usually comes down to a down-payment-versus-MI trade-off, where conventional minimizes long-term cost when 20% is achievable, and FHA or VA win when the down payment is the binding constraint.
Quick answers
- What's the difference between conventional, FHA, and VA loans?
- Conventional loans follow Fannie Mae and Freddie Mac guidelines and typically require 5–20% down with PMI under 20%. FHA loans accept lower credit scores and as little as 3.5% down, but carry MIP for life or 11 years depending on origination LTV. VA loans are reserved for eligible service members and veterans, require no down payment, and carry no monthly mortgage insurance, only an upfront funding fee.
- When is FHA better than conventional?
- FHA tends to be better when a borrower has a lower credit score (580–619 range), a smaller down payment, or a higher debt-to-income ratio than conventional accepts. The trade-off is the lifetime MIP on most FHA loans, which makes FHA more expensive over the long run for buyers who could qualify for conventional with PMI.
- How does PMI work on conventional loans?
- PMI applies when the down payment is under 20% on conventional loans. It's a monthly premium calculated from the loan balance, credit score, and LTV. The federal Homeowners Protection Act requires automatic PMI cancellation when the loan reaches 78% of the original property value, and homeowners can request cancellation at 80% LTV.
About 95% of US residential mortgage originations fall into three buckets: conventional loans (sold to Fannie Mae or Freddie Mac, or held in portfolio), FHA loans (insured by the Federal Housing Administration), and VA loans (guaranteed by the Department of Veterans Affairs). Each was designed for a different borrower and a different lender risk profile, which is why their costs are structured so differently.
The headline rate is usually similar across the three on a given day. The differences live in the down payment requirements, the mortgage insurance treatment, and the upfront fees that may or may not roll into the loan balance.
Quick comparison
| Program | Min down | Min FICO (typical) | Mortgage insurance | Upfront fee |
|---|---|---|---|---|
| Conventional, 20%+ down | 20% | 620 (best rates 740+) | None | None |
| Conventional, under 20% down | 3–5% | 620 | PMI monthly until 78% LTV | None |
| FHA | 3.5% with FICO 580+; 10% with FICO 500–579 | 580 | UFMIP 1.75% + monthly MIP, often for the life of the loan | UFMIP rolled into balance |
| VA (eligible service members) | 0% | No formal floor; lenders often 580–620 | None monthly | Funding fee 1.25–3.30%, rolled in, waived for service-connected disability |
The full mechanics of each program follow.
Conventional: the default product
A conventional loan is any mortgage not insured or guaranteed by a federal program. The big subset is the conforming loan: under the Fannie/Freddie loan-size limit (revised annually, county-specific in high-cost areas) and meeting their underwriting standards.1 Above the limit, the loan is a jumbo, which is a separate product priced and underwritten differently.
Down payment minimums on conforming conventional are 3% for some first-time-buyer programs, 5% standard, with private mortgage insurance (PMI) required when the down payment is less than 20%. PMI on a conventional loan is paid monthly until the loan-to-value ratio reaches 78% on the original schedule, at which point the lender is required by federal law to cancel it. The borrower can also request cancellation at 80% LTV with proof of value (an appraisal). This cancellation feature is the main reason conventional often beats FHA over the long run for borrowers who can clear the 20%-equity threshold.
FHA: lower barrier to entry, higher long-run cost
FHA loans are insured by HUD and underwritten with more flexible credit and down payment requirements: as low as 3.5% down with a credit score of 580+, and somewhat more accommodating debt-to-income flexibility.2 The tradeoff is mortgage insurance that works very differently from PMI:
- An upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount, charged at closing. The UFMIP is typically rolled into the financed loan balance, meaning the borrower doesn't pay it in cash but does pay interest on it for the life of the loan.5
- A monthly mortgage insurance premium (MIP) of roughly 0.50% to 0.85% of the loan annually, depending on the loan-to-value at origination.
- The MIP stays on for the life of the loan when the down payment is less than 10%. Above 10% down, MIP drops off after 11 years. There is no automatic cancellation at 78% LTV the way there is on conventional.
The "MIP for life" feature is the catch most FHA borrowers don't fully understand at closing. Over a 30-year term it adds tens of thousands of dollars to the cost of the loan compared to a conventional loan that drops PMI at year 7 or 8. For borrowers who plan to refinance into conventional once equity is built up, the gap is smaller.
VA: the most generous program for those who qualify
VA loans, guaranteed by the Department of Veterans Affairs, are available to qualifying service members, veterans, and certain surviving spouses.3 The terms are unusually borrower-friendly:
- No down payment required, in most cases.
- No monthly mortgage insurance, ever. Conventional and FHA both charge it; VA simply doesn't.
- A one-time VA funding fee at closing, ranging from 1.25% to 3.30% of the loan, depending on down payment, service category, and whether it's the first VA loan use.4
- The funding fee is waived entirely for veterans with service-connected disabilities and certain other categories.
The funding fee is typically rolled into the financed loan balance, so the borrower doesn't pay it in cash. For a borrower who qualifies, the no-down-payment + no-monthly-MI combination is a meaningfully cheaper monthly payment than a comparable conventional or FHA loan, even after the funding fee is included in the financed balance.
The PITI calculator at /tools/mortgage-payment models all three programs side-by-side, including the UFMIP/funding-fee roll-in math and MIP duration rules.
A rough decision frame
Without recommending any specific path, the broad shape of how these products usually shake out is roughly this. Strong credit with a 20%+ down payment is the cleanest case, conventional with no PMI from day one. With strong credit but 5–19% down, conventional with PMI is usually still the answer, because the PMI is cancelable; FHA is rarely cheaper unless credit pushes the conventional rate up materially. Lower credit (580–660) with a small down payment often makes FHA the only practical option, with the long-run MIP cost as the tradeoff for getting in the door. Service eligibility tilts almost everything toward VA, where the funding fee is real but the absence of monthly MI usually offsets it within a few years.
The decision is rarely "which program is cheapest in the abstract." It's "which program is cheapest for this borrower, this property, this timeline", and the answer comes from comparing actual Loan Estimates, not rate-sheet headlines.
Frequently asked
What's the difference between conventional, FHA, and VA loans?
Conventional loans follow Fannie Mae and Freddie Mac guidelines and typically require 5–20% down with PMI under 20%. FHA loans accept lower credit scores and as little as 3.5% down, but carry MIP for life or 11 years depending on origination LTV. VA loans are reserved for eligible service members and veterans, require no down payment, and carry no monthly mortgage insurance, only an upfront funding fee.When is FHA better than conventional?
FHA tends to be better when a borrower has a lower credit score (580–619 range), a smaller down payment, or a higher debt-to-income ratio than conventional accepts. The trade-off is the lifetime MIP on most FHA loans, which makes FHA more expensive over the long run for buyers who could qualify for conventional with PMI.How does PMI work on conventional loans?
PMI applies when the down payment is under 20% on conventional loans. It's a monthly premium calculated from the loan balance, credit score, and LTV. The federal Homeowners Protection Act requires automatic PMI cancellation when the loan reaches 78% of the original property value, and homeowners can request cancellation at 80% LTV.Can VA loans be used more than once?
Yes, VA loan eligibility can be reused as previous loans are paid off, and partial entitlement allows a second active VA loan in some cases. Each use may incur a different funding-fee tier (subsequent uses typically cost more than first use). Specific eligibility depends on the borrower's Certificate of Eligibility from the VA.What credit score do I need for each loan type?
Conventional conforming loans typically require 620+ for the lowest qualifying tiers, with the best rates at 740+ and especially 760+. FHA accepts scores down to 580 with 3.5% down, and 500–579 with 10% down. VA loans don't have a hard minimum from the VA itself, but most lenders require 620+ in practice.