FHA loans are marketed as “easy to qualify” — and they are. But there’s a catch that catches many borrowers off guard: mandatory mortgage insurance that doesn’t go away.
The FHA Promise
- 3.5% down payment
- Credit scores as low as 580 (10% down if 500-579)
- More flexible on credit events (bankruptcies, foreclosures)
- Assumable (great when rates rise)
Sounds great, right? Here’s the catch.
The Mortgage Insurance Problem
Upfront MIP
- 0.15% of loan amount (most borrowers)
- 1.75% for score below 580
- This is added to your loan cost
Monthly MIP
- 0.55% for most loans (annual)
- For a $300,000 loan, that’s $138/month
- It lasts the ENTIRE loan — not until you hit 20% equity
Comparison: FHA vs. Conventional
| $300K Loan, 10% Down | FHA | Conventional |
|---|---|---|
| Rate | 6.0% | 6.25% |
| P&I | $1,797 | $1,943 |
| MI | $138 | ~$100 |
| Total | $1,935 | $2,043 |
FHA looks cheaper here… but wait.
Conventional PMI goes away at 20% equity. FHA MIP lasts forever.
Over 5 years:
- Conventional: ~$6,000 in PMI
- FHA: ~$8,280 in MIP
When FHA Makes Sense
- Credit under 620 (conventional tough to get)
- Recent bankruptcy (3 years vs. 4-7 for conventional)
- Gift funds for down payment (FHA more flexible)
- Buying a fixer-upper (203k renovation loans)
When to Avoid FHA
- Credit 620+ (conventional likely cheaper long-term)
- Planning to stay short-term (5 years or less)
- Can afford 20% down (skip PMI entirely)
- Higher credit score (gets you better PMI rates)
The Bottom Line
FHA isn’t “bad” — it’s a tool. But it’s not always the “cheap” option, despite the lower down payment. Get the full picture before deciding.
Not Sure Which Loan is Best?
The right loan depends on your credit, income, goals, and how long you plan to stay. We’ll run the numbers and find your lowest-payment option.
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