The short answer: if your credit score is below 640 or your down payment is under 5%, start with FHA. If your score is 680 or higher and you have at least 5% down, run both and compare — conventional often wins on total cost because the mortgage insurance goes away.
Here's how to think through the decision for your situation.
What Makes These Loans Different
FHA loans are insured by the Federal Housing Administration. The government guarantee lets lenders approve buyers with lower credit scores and smaller down payments than they could otherwise offer. In exchange, FHA borrowers pay mortgage insurance premiums (MIP) — an upfront fee at closing plus a monthly premium added to the payment.
Conventional loans are not government-backed. They follow underwriting guidelines set by Fannie Mae or Freddie Mac and are typically stricter on credit and income — but they have one significant advantage: mortgage insurance (PMI) cancels when you reach 20% equity. On FHA, it usually doesn't.
Side-by-Side Comparison
| Factor | FHA | Conventional |
|---|---|---|
| Minimum credit score | 580 (3.5% down) / 500 (10% down) | 620 standard; 740+ for best rates |
| Minimum down payment | 3.5% (580+ score) | 3% (HomeReady/Home Possible) or 5% standard |
| Mortgage insurance | Upfront MIP (1.75%) + monthly MIP; lasts life of loan if <10% down | PMI required if <20% down; cancels at 80% LTV |
| Loan limits | HUD county limits (lower ceiling) | FHFA conforming limits (higher ceiling) |
| Property condition | Stricter — appraiser flags health/safety issues that must be repaired before closing | More flexible — property must be livable but minor repairs generally don't kill the deal |
| Debt-to-income ratio | More lenient — up to 50% with compensating factors | Generally 43–45% max; 50% possible but harder |
| Seller concessions | Up to 6% of purchase price | 2–3% (varies by LTV) |
The Mortgage Insurance Problem with FHA
This is the one buyers underestimate most. On an FHA loan with less than 10% down, you pay two forms of mortgage insurance:
- Upfront MIP: 1.75% of the loan amount, added to your loan balance at closing (not a cash expense, but it increases what you owe)
- Annual MIP: ~0.55% of the loan balance per year, split across 12 monthly payments — and it stays for the entire loan term
On a $400,000 loan, that's roughly $183/month in mortgage insurance that never goes away unless you refinance. On a conventional loan at the same amount with 5% down, PMI might be $120–150/month — and it automatically cancels once you hit 80% LTV, typically after a few years of normal payments (or sooner if home values rise).
The break-even math matters here. A buyer choosing FHA for the slightly lower down payment requirement may pay $15,000–25,000 more in mortgage insurance over the life of the loan compared to a conventional buyer who refinanced or paid down to 80% LTV in year 4 or 5.
When FHA Wins
Your credit score is below 640. Conventional lenders can approve you at 620, but the rates and PMI pricing at that score range are often worse than FHA. Below 640, FHA is almost always the better financial product.
You've had a recent credit event. Bankruptcy, foreclosure, or collections — FHA has more lenient waiting periods and is more forgiving of an imperfect history. Conventional lenders may technically approve you but price the risk into the rate.
Your DTI is above 45%. FHA allows higher debt-to-income ratios with compensating factors (strong reserves, higher credit score, stable employment). If conventional automated underwriting declines you at 47% DTI but you're otherwise a solid borrower, FHA may be the path.
The seller is willing to cover concessions. FHA allows up to 6% seller concessions vs. 2–3% for conventional. In a buyer's market or on motivated sellers, this can offset your closing costs significantly.
When Conventional Wins
Your score is 680+. At this range, conventional PMI pricing gets competitive — especially combined with the ability to cancel it. Run the numbers with your loan officer. In most scenarios above 680, conventional pencils better long-term.
You're buying above Austin's FHA loan limit. FHA limits are set per county and updated annually. In Travis County, the limit is in the mid-$500K range. If you're buying in neighborhoods like West Austin, Tarrytown, or Rollingwood where the median home price exceeds that ceiling, FHA isn't an option — you need conventional or jumbo.
The property has condition issues. FHA appraisers flag safety and structural items that must be corrected before closing — peeling paint on older homes, broken windows, missing handrails, active water damage. If you're buying a fixer-upper or an older home in need of work, FHA may kill the deal. Conventional appraisals are more forgiving of cosmetic issues.
You have 10% or more to put down. At 10% down, the PMI cancellation advantage for conventional is strong. By year 3–5, your conventional loan has no mortgage insurance. Your FHA loan still does — for the full 30 years.
You want to move to a different home in 3–5 years. If you plan to sell before you'd naturally hit 20% equity on conventional, the comparison changes. Run the total cost of ownership including the refi you'd need to escape FHA MIP vs. the monthly savings if you went conventional from the start.
The Hybrid Path: FHA to Conventional Refi
Some buyers start with FHA because it's the only way to get approved today, with the plan to refinance into conventional once their credit improves or their equity grows. This can work, but plan for it intentionally:
- The refi has closing costs — typically 2–3% of the loan amount
- You'll need to hit 20% equity to avoid PMI on the new conventional loan, unless you pay for a new appraisal that supports the value
- Rising home values in Austin have helped buyers reach that threshold faster than expected — but it's not guaranteed
If the FHA-to-conventional strategy is your plan, tell your loan officer upfront so they can structure the initial FHA loan to minimize the refi cost when the time comes.
What Austin Buyers Specifically Should Know
Austin's price range creates a real constraint with FHA. Many entry-level neighborhoods in South Austin, East Austin, and the inner suburbs are priced close to or above the county FHA limit. If you find a home you love at $540K and the FHA limit is $524K, you're done — you need conventional or a jumbo option.
Suburban markets (Round Rock, Pflugerville, Georgetown, Cedar Park) tend to have more inventory under the FHA limit, which is why FHA remains a viable path for buyers targeting those areas. But even there, I run both scenarios before pre-approval because the monthly payment difference often surprises buyers.
The Austin FHA loan page has more on program specifics, or see the full loan programs overview for a comparison of all options including VA, USDA, and non-QM. If you're still deciding, the first-time buyer guide walks through how to approach the full process.
How to Decide: The 3-Question Test
- What's your credit score? Below 640 → FHA. Above 680 → run both. 640–679 → depends on DTI and down payment.
- How much are you putting down? Less than 5% → FHA wins on entry. 5–10% → mortgage insurance comparison matters. 20%+ → conventional wins, no mortgage insurance on either.
- What's the purchase price? Above the FHA county limit → conventional only. Below it → both are on the table.
I run this comparison for every buyer before we go to pre-approval. It takes about 5 minutes and usually makes the decision obvious. The goal isn't to push you into the product that's easiest to approve — it's to find the one that costs you the least over the time you'll actually hold the loan.
How to Get Started
The best way to know which loan wins for your situation is to run both scenarios with real numbers. I'll pull your credit, calculate your qualifying income, and show you side-by-side payments on FHA vs. conventional before you decide — not after you're under contract.
Start your application here and we can have this conversation before you spend a weekend touring houses. Or schedule a 15-minute call if you want to talk through your situation first.
FAQ: FHA vs Conventional Loans in Austin
What is the main difference between FHA and conventional loans?
FHA loans are government-backed, accept lower credit scores, and require mortgage insurance for the life of the loan if you put less than 10% down. Conventional loans are not government-backed — they require stronger credit but let you cancel mortgage insurance once you hit 20% equity. That cancellation is the biggest long-term cost advantage of going conventional when you qualify.
What credit score do you need for an FHA loan vs conventional?
FHA accepts 580+ for 3.5% down and 500–579 for 10% down. Conventional typically requires 620 minimum, with meaningfully better pricing above 740. If your score is below 640, FHA is usually the right move. From 640 and up, run both scenarios — the gap in monthly cost often surprises buyers.
Which loan requires less money down — FHA or conventional?
FHA starts at 3.5% down. Conventional can go as low as 3% through Fannie Mae HomeReady or Freddie Mac Home Possible for qualifying buyers, or 5% as a standard option. The difference is small, but FHA's mortgage insurance costs more long-term — so a 5% conventional loan may cost less per month than a 3.5% FHA loan depending on your credit score.
Can you cancel mortgage insurance on an FHA loan?
Not easily. If you put less than 10% down, FHA mortgage insurance stays for the full loan term. The only way to remove it is to refinance into a conventional loan once you've built sufficient equity. If you put 10% or more down, MIP cancels after 11 years. Conventional PMI cancels automatically when you reach 80% of the original home value — no refinance required.
Is FHA or conventional better for first-time buyers in Austin?
It depends entirely on your credit score, down payment, and the purchase price. If your score is below 640, start with FHA. If your score is 680+ and you can put down 5–10%, run both — conventional often wins on total cost. In Austin specifically, FHA loan limits matter if you're buying above ~$524K; above that ceiling, you need conventional or jumbo regardless of your score.
What are the FHA loan limits in Austin TX?
FHA loan limits are county-specific and updated annually by HUD each January. Travis County (Austin) follows the standard national FHA loan limit — check HUD's website for the current 2026 figure. If the home exceeds that limit, FHA is off the table and you'll need a conventional conforming or jumbo loan. Conventional conforming limits are set by FHFA and are higher than FHA limits in most markets.
Bottom line: FHA and conventional are both good loans — the right one is the one that costs you the least over the time you'll hold it. Run both before you commit.
Talk soon,
Adam Styer
Adam Styer | Mortgage Solutions LP
NMLS# 513013 | (512) 956-6010