FHA vs. Conventional Comparer
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FHA vs. Conventional Mortgages: Expert FAQ Guide
What is the difference between an FHA loan and a Conventional loan?
An FHA loan is insured by the Federal Housing Administration, which protects the lender if you default. Because of this government backing, lenders can accept smaller down payments (as low as 3.5%) and lower credit scores (down to 500). A Conventional loan is not government-backed. It is a private mortgage that follows guidelines set by Fannie Mae and Freddie Mac. Conventional loans typically require higher credit scores (620+) and charge higher mortgage insurance rates for lower credit scores, but allow you to cancel mortgage insurance once you reach 20% home equity.
How does Conventional Private Mortgage Insurance (PMI) get removed?
Conventional PMI is a monthly charge that protects the lender if your down payment is less than 20%. Under US federal law (the Homeowners Protection Act), Conventional PMI must automatically terminate once your loan balance reaches 78% of the original purchase price, or you can request cancellation once it reaches 80% LTV through regular principal payments or home value appreciation. If you put 20% down initially, you pay $0 PMI from day one.
Why is FHA Mortgage Insurance Premium (MIP) considered permanent?
FHA loans require two types of mortgage insurance: a once-off **Upfront MIP (1.75% of the loan amount)** and a **monthly Annual MIP (typically 0.55% of the loan amount)**.
• If your FHA down payment is less than 10% (which is the case for most FHA buyers), **monthly MIP cannot be removed** for the entire life of the 30-year loan term. The only way to stop paying MIP is to refinance the loan into a Conventional mortgage once you hit 20% equity.
• If your FHA down payment is 10% or more, monthly MIP is paid for strictly **11 years**.
What are Property Escrow and Escrow Taxes?
Most home buyers in the US do not pay property taxes and homeowners insurance directly. Instead, lenders create an escrow account. Every month, you pay 1/12th of your estimated annual property taxes and homeowners insurance along with your Principal & Interest payment. The lender holds these funds in escrow and pays the bills directly to the local government and insurance provider when they are due. This combined sum is known as your PITI (Principal, Interest, Taxes, and Insurance) payment.