FHA 3.5% Down vs. Conventional 3% Down: Which Is Actually Better?
Conventional requires less money down. FHA has easier credit requirements. The half-percent difference in down payment is the least important part of this comparison — mortgage insurance is what decides it.
The comparison at a glance
| FHA 3.5% Down | Conventional 3% Down | |
|---|---|---|
| Minimum down payment | 3.5% | 3% |
| Typical minimum credit score | 580 | 620 |
| Upfront mortgage insurance | Yes — financed into the loan | None |
| Monthly mortgage insurance | Usually for the life of the loan | Cancels at ~78–80% LTV |
| Mortgage insurance priced by credit | No — same for everyone | Yes — better credit, lower cost |
| Debt-to-income flexibility | More forgiving | Tighter |
| First-time buyer required | No | Yes on most 3% programs |
| Gift funds for down payment | Entire amount allowed | Allowed, some restrictions |
| Property standards | Stricter appraisal requirements | Standard appraisal |
Why the down payment difference barely matters
On a $350,000 purchase, 3% is $10,500 and 3.5% is $12,250. The gap is $1,750 — real money, but not the number that should drive a thirty-year decision.
What should drive it is mortgage insurance, because that cost repeats every single month and the two programs handle it in fundamentally different ways.
The mortgage insurance difference, plainly
FHA charges an upfront mortgage insurance premium, typically financed into the loan balance so you do not pay it at closing, plus an annual premium collected monthly. On most FHA loans made with the minimum down payment, that annual premium stays for the entire life of the loan. The only way out is to refinance into a different loan.
Conventional charges no upfront premium at all. Private mortgage insurance is collected monthly and automatically terminates once the loan reaches 78% of original value, and you can request removal at 80%. In an appreciating market you can often get there faster by requesting a new appraisal.
That single structural difference — permanent versus temporary — is usually worth far more over a decade of ownership than the $1,750 down payment gap.
When FHA is the right call
Choose FHA when your credit score sits below the low 600s, because conventional financing may not be available to you at all. Choose it when your debt-to-income ratio is tight, since FHA's guidelines are more forgiving on that front. Choose it when your entire down payment is coming from a gift, which FHA permits without restriction. And choose it when you have a recent credit event — FHA's seasoning requirements after a bankruptcy or foreclosure are generally shorter than conventional's.
There is also a strategic version of this choice: use FHA to get into the home now, then refinance into conventional financing once your credit improves and you have built equity, dropping the mortgage insurance in the process. That is a legitimate plan, provided you understand refinancing carries its own closing costs and depends on rates cooperating.
When conventional is the right call
Choose conventional when your credit is 680 or better, because PMI pricing starts working strongly in your favor. Choose it when you plan to stay long-term, since cancellable mortgage insurance compounds into real savings over a decade. Choose it when you are buying a property that might not clear FHA's stricter appraisal standards. And choose it if you are not a first-time buyer — most 3%-down conventional programs restrict eligibility to first-time buyers, though 5%-down conventional has no such limit and may still beat FHA on total cost.
The Texas variable people forget
Property taxes in Texas are high, which means your total monthly payment is more sensitive to every added cost than it would be in a low-tax state. When taxes and insurance already consume a large share of the payment, a mortgage insurance premium that never goes away has an outsized effect on affordability over time. It is worth modeling the full payment on both programs rather than comparing rates alone.
Both stack with down payment assistance
An important point that gets lost in the FHA-versus-conventional debate: Texas down payment assistance programs layer on top of both. TSAHC's Home Sweet Texas and Homes for Texas Heroes, along with TDHCA and City of Austin programs, provide three to five percent of the loan amount as a grant or a deferred, zero-interest second lien — and they work with FHA and conventional HFA financing alike.
For many first-time buyers, that assistance matters far more to the actual cash-to-close figure than which of these two programs they choose.
How to actually decide
Do not decide from an article, including this one. The correct approach is to have both loans priced on your real file — your credit score, your down payment, your debt-to-income ratio, the specific property — and compare full monthly payments alongside total cost over the number of years you realistically expect to own the home.
That comparison frequently surprises people. Buyers convinced FHA was their only option discover conventional prices better. Buyers assuming conventional is always superior find that at their credit tier, FHA wins. The only way to know is to run both.