FHA 3.5% Down vs. Conventional 5% Down - I Ran the Numbers for My $310,000 Purchase

I spent three months comparing FHA and conventional loan options before purchasing my first home in August 2024. Every article I read said “FHA is for low credit, conventional is for high credit,” but with 668 credit score, I qualified for both programs—and the decision wasn’t as simple as I expected.

Here’s the actual math I ran on my $310,000 home purchase, comparing FHA 3.5% down versus conventional 5% down, including all the hidden costs nobody talks about.

My Starting Financial Position

Before diving into loan comparisons, here’s where I stood:

• Purchase price: $310,000 (3-bedroom home in suburban Ohio)
• Middle credit score: 668 (Experian 675, Equifax 668, TransUnion 661)
• Down payment savings: $17,500 available
• Annual income: $78,000 gross ($6,500/month)
• Monthly debts: $485 car payment + $120 student loan + $95 credit card minimum = $700 total
• Debt-to-income ratio: 10.8% before mortgage

I had been saving for two years and finally hit my target. The question was whether to use $10,850 for FHA 3.5% down or $15,500 for conventional 5% down—and whether the conventional option’s extra $4,650 down payment would save enough money to justify depleting more of my savings.

FHA 3.5% Down Analysis

Down Payment: $10,850 (3.5% of $310,000)

This left me with $6,650 in remaining savings for closing costs, moving expenses, and emergency fund—which felt more comfortable than draining nearly all my savings.

Loan Amount: $299,150

Upfront Mortgage Insurance Premium (UFMIP): $5,235

This is the part that shocked me. FHA charges 1.75% of the loan amount as upfront mortgage insurance, which gets added to your loan balance. So my actual loan amount became $304,385 even though I was only borrowing $299,150 for the home.

Interest Rate: 6.625%

At 668 credit, FHA lenders quoted me 6.625% rate in August 2024 market. FHA is more forgiving of mid-600s credit than conventional, so the rate was competitive despite not having 740+ score.

Monthly Principal & Interest: $1,941

Based on $304,385 loan at 6.625% over 30 years.

Annual Mortgage Insurance: $2,433 ($203/month)

FHA charges 0.80% annually on loans with less than 5% down payment. On my $304,385 loan balance: $304,385 × 0.80% = $2,435 per year = $203 per month.

Here’s what killed me: this mortgage insurance never goes away. FHA loans originated after June 2013 require mortgage insurance for the life of the loan unless you refinance out of FHA or pay down to 78% LTV and refinance.

Total Monthly Payment: $2,404

• $1,941 principal & interest
• $203 mortgage insurance
• $260 estimated property taxes ($3,100 annual)
• $0 HOA (no association in my neighborhood)

Total: $2,404 per month

Debt-to-Income Ratio: 47.3%

($700 existing debts + $2,404 mortgage payment) / $6,500 income = 47.7% DTI

FHA allows up to 50% DTI with compensating factors, and my loan officer said 47.7% would qualify easily since I had stable 4-year employment history and 6+ months reserves after closing.

5-Year Total Cost:

• Down payment: $10,850
• Principal paid (5 years): $29,420
• Interest paid (5 years): $87,045
• Mortgage insurance (5 years): $12,180
• Upfront MIP (financed): $5,235

Total 5-year out-of-pocket: $144,730

Conventional 5% Down Analysis

Down Payment: $15,500 (5% of $310,000)

This would leave me with only $2,000 after down payment—much tighter for closing costs and emergencies.

Loan Amount: $294,500

No Upfront Mortgage Insurance

Conventional loans don’t charge upfront MI—only monthly PMI. This means my loan amount stayed at $294,500 instead of ballooning like FHA.

Interest Rate: 7.00%

Here’s where conventional hurt me. At 668 credit with 5% down, I was quoted 7.00% rate—0.375% higher than FHA. Conventional lenders price more aggressively for credit scores below 680, especially with minimal down payment.

Monthly Principal & Interest: $1,959

Based on $294,500 loan at 7.00% over 30 years. Ironically, this was $18 higher per month than FHA despite smaller loan amount, because the interest rate was higher.

Monthly PMI: $172

Conventional PMI varies by credit score, down payment, and loan amount. At 668 credit with 5% down, I was quoted 0.70% annually on my loan balance: $294,500 × 0.70% = $2,062 per year = $172 per month.

The key difference from FHA: this PMI automatically cancels when I reach 78% LTV (around year 6-7 with normal payments, or earlier if I make extra principal payments or my home value increases).

Total Monthly Payment: $2,391

• $1,959 principal & interest
• $172 PMI
• $260 property taxes

Total: $2,391 per month

This was $13 less per month than FHA—not a huge difference, but it added up over time.

Debt-to-Income Ratio: 47.6%

($700 existing debts + $2,391 mortgage payment) / $6,500 income = 47.6% DTI

Conventional lenders typically cap DTI at 45% for borrowers with less than 680 credit and minimal down payment. My loan officer said I was borderline—I would need to either pay off my car loan (dropping DTI to 40%) or increase my down payment to 10% to get approved.

This was a major problem. I didn’t want to drain my car savings, and I didn’t have $31,000 for 10% down.

5-Year Total Cost:

• Down payment: $15,500
• Principal paid (5 years): $28,115
• Interest paid (5 years): $89,420
• PMI paid (5 years): $10,320

Total 5-year out-of-pocket: $143,355

Side-by-Side Comparison

Why I Chose FHA Despite Higher 5-Year Cost

The math showed conventional would save me $1,375 over five years ($144,730 FHA vs. $143,355 conventional), but I chose FHA anyway. Here’s why:

I Got Denied for Conventional

The DTI issue wasn’t theoretical—I actually applied for conventional first and got denied. The underwriter said I needed to either pay off my $12,200 car loan entirely (dropping my DTI below 45%) or increase my down payment to 10% ($31,000).

I couldn’t do either. Paying off the car would have drained my down payment savings below FHA minimums. And I didn’t have $31,000.

FHA approved me at 47.7% DTI with no issues because their guidelines allow up to 50% DTI with compensating factors like stable employment and reserves.

I Needed More Cash After Closing

FHA left me with $6,650 after down payment. Conventional would have left me with $2,000. I needed:

• $2,800 for closing costs (title, appraisal, prepaid taxes, escrow setup)
• $1,500 for moving expenses
• $2,000 minimum emergency fund

FHA gave me enough cushion. Conventional would have required me to borrow money from family or drain every dollar I had—which felt risky for my first home purchase.

Permanent MI Didn’t Bother Me Long-Term

Everyone warns about FHA’s permanent mortgage insurance, but I planned to refinance within 3-5 years anyway once my credit improved and my home built equity. At 668 credit, I knew I wasn’t getting optimal pricing on any loan program.

My strategy: buy now with FHA, improve my credit to 720+, let my home appreciate, and refinance to conventional when my loan-to-value dropped below 80%. At that point, I could eliminate mortgage insurance entirely and get better rate.

The $203/month FHA mortgage insurance wasn’t permanent for me—it was temporary until I could refinance into better terms.

What Happened After I Closed

I closed on the FHA loan in August 2024. Eight months later, here’s where I am:

My credit improved to 697 through normal on-time payments and paying down credit cards. I’m on track to hit 720+ by summer 2025, which will qualify me for much better conventional rates.

My home appraised at $328,000 (up from $310,000 purchase). Between appreciation and principal paydown, I’m already at 89% LTV after just 8 months.

I’m planning to refinance in summer 2025 when my credit hits 720+ and my LTV drops to 85% or better. At that point, I’ll refinance to conventional with no PMI and lower rate—saving $200-$300 per month compared to my current FHA payment.

The temporary FHA mortgage insurance is costing me about $1,600 total over the 12-15 months I’ll keep it before refinancing. That’s way less than the $4,650 extra I would have needed for conventional 5% down plus the emotional stress of having only $2,000 left after closing.

When Conventional 5% Down Makes More Sense

Even though FHA worked better for my situation, conventional is the better choice if:

Your credit is 680+. Conventional pricing improves dramatically at 680+ credit, while FHA pricing stays relatively flat. If you have 690+ credit, conventional will likely offer lower rate than FHA even with minimal down payment.

You have enough savings to leave 6+ months reserves after 5% down. If you have $25,000 saved and only need $15,500 for down payment, conventional makes sense because you maintain strong emergency fund.

Your DTI is below 43% without needing to pay off debts. Conventional approval is easier at lower DTI ratios. If your mortgage payment keeps you below 43% total DTI, you avoid the borderline qualification issues I faced.

You plan to keep the loan long-term. If you’re not planning to refinance within 5 years, conventional’s removable PMI saves thousands compared to FHA’s permanent mortgage insurance over 10-15 year horizon.

You’re buying in an expensive market where PMI removal takes longer. In markets where homes aren’t appreciating quickly, reaching 80% LTV on FHA takes 8-12 years or longer. Conventional’s automatic PMI cancellation at 78% LTV is much more valuable in flat markets.

Resources That Helped Me Compare

I used several tools during my FHA vs. conventional analysis:

Browse Lenders connected me with loan officers who ran quotes for both programs side-by-side with identical terms. This transparency helped me see the actual pricing difference instead of relying on generic online calculators.

Middle Credit Score education helped me understand why my 668 credit was getting penalized more heavily on conventional than FHA. The credit tier structure explained why I was quoted 7.00% conventional vs. 6.625% FHA—and why improving to 680+ would flip that pricing advantage.

Cash-Out Refinance planning tools helped me model my refinance strategy for summer 2025. Understanding that FHA wasn’t permanent—just a stepping stone to conventional—made the permanent mortgage insurance less scary.

The biggest lesson: there’s no universal “FHA is cheaper” or “conventional is cheaper” answer. It depends entirely on your credit score, down payment amount, DTI ratio, and how long you plan to keep the loan.

For me at 668 credit with $17,500 savings, FHA was the only realistic option—and it gave me homeownership 12-18 months earlier than if I had waited to improve credit and save more for conventional 5% down.

If you’re deciding between FHA and conventional, I recommend getting actual quotes from lenders for both programs with your real credit score and down payment amount. The difference in your specific situation might be $50/month—or it might be $200/month. You won’t know until you run your real numbers with multiple lenders and compare total costs over your expected holding period.