FHA vs. Subprime Conventional Loans: Which Is Better for Bad Credit in 2025?

Borrowers with bad credit (580-660 scores) face a choice between FHA loans and subprime conventional financing. FHA allows lower credit scores (500+) and smaller down payments (3.5-10%), but requires mortgage insurance for the life of the loan on 3.5% down purchases. Subprime conventional loans start at 620 credit scores and require larger down payments (10-20%), but mortgage insurance can be removed once you reach 20% equity. Understanding which option costs less over time and fits your financial situation determines whether you save or waste thousands of dollars in unnecessary fees.

This guide compares FHA and subprime conventional loans across credit score requirements, down payments, mortgage insurance, interest rates, and total costs to help you make the right decision.

Credit Score Requirements: FHA vs. Conventional

FHA Minimum Scores

• 500-579: 10% down payment required, manual underwriting
• 580-619: 3.5% down payment, manual underwriting common
• 620-660: 3.5% down payment, may qualify through automated underwriting

FHA does not have an official minimum score, but most FHA lenders impose 580 minimums (some go as low as 500 with strong compensating factors).

Conventional Minimum Scores

• 620-639: Minimum for most lenders, requires 10-20% down and higher rates
• 640-659: More lenders approve, still considered subprime with rate penalties
• 660-679: Approaching “near-prime” pricing with better rate options

Automated underwriting (Fannie Mae Desktop Underwriter, Freddie Mac Loan Prospector) rejects most applications under 620. Manual underwriting for conventional rarely approves below 620.

Winner for Bad Credit: FHA by a landslide. FHA approves 500+ scores while conventional requires 620 minimum.

Down Payment Requirements

FHA Down Payments

• 3.5% down: 580+ credit scores
• 10% down: 500-579 credit scores

FHA allows down payment gifts from family members (must be documented with gift letters), making 3.5% down accessible even for borrowers with limited savings.

Example: On a $250,000 home, FHA requires $8,750 down (3.5%) for 580+ scores or $25,000 down (10%) for 500-579 scores.

Conventional Down Payments

• 10-15% down: Typical for 620-659 credit scores
• 15-20% down: Better rates and approval odds for lower scores
• 5-10% down: Rare, requires excellent compensating factors

Conventional lenders view bad credit as high risk and require larger down payments to offset that risk.

Example: On a $250,000 home, conventional typically requires $25,000-$50,000 down (10-20%) for bad credit borrowers.

Winner for Bad Credit: FHA. 3.5% down is far more accessible than conventional’s 10-20% requirements.

Mortgage Insurance Costs

This is where the FHA vs. conventional decision gets complicated:

FHA Mortgage Insurance (MIP)

FHA requires two types of mortgage insurance:

1. Upfront MIP: 1.75% of the loan amount, financed into the loan

Example: $250,000 loan × 1.75% = $4,375 upfront MIP (added to loan balance)

2. Annual MIP: 0.45-1.05% of the loan amount annually, paid monthly

• 15-year loans: MIP for 11 years (if 10%+ down), or life of loan (if under 10% down)
• 30-year loans with 3.5% down: MIP for the life of the loan (cannot be removed without refinancing)
• 30-year loans with 10%+ down: MIP for 11 years

Example: $250,000 loan with 3.5% down (30-year term)

• Annual MIP: 0.55% (typical rate for 30-year loans over $726,200)
• Monthly MIP: $250,000 × 0.0055 ÷ 12 = $114/month
• Total over 30 years: $114 × 360 months = $41,040

Critical FHA Issue: If you put less than 10% down, MIP lasts for the entire 30-year loan term. You cannot remove it without refinancing to conventional or paying off the loan entirely.

Conventional Private Mortgage Insurance (PMI)

Conventional loans require PMI if you put down less than 20%. PMI rates vary by credit score:

PMI Rates by Credit Score (approximate 2025 rates):

• 620-639: 1.2-1.8% annually
• 640-659: 0.9-1.4% annually
• 660-679: 0.7-1.1% annually
• 680-699: 0.5-0.9% annually
• 700+: 0.3-0.7% annually

Example: $250,000 loan, 10% down ($225,000 financed), 630 credit score

• Annual PMI: 1.5% (mid-range for 620-639 scores)
• Monthly PMI: $225,000 × 0.015 ÷ 12 = $281/month

Conventional Advantage: PMI automatically cancels when you reach 20% equity (through payments or home value appreciation). You can also request cancellation at 20% equity or force cancellation at 22% equity under federal law.

FHA Disadvantage: MIP never cancels on 3.5% down loans—you pay for 30 years or refinance.

Winner: Depends on timeline. Conventional PMI is more expensive initially but cancels after a few years. FHA MIP is cheaper initially but lasts forever on 3.5% down loans.

Interest Rate Comparison

FHA Interest Rates

FHA rates are typically 0.25-0.50% lower than conventional rates for the same credit score because FHA loans are government-backed and less risky for lenders.

Example (2025 estimates for 620 credit score):

• FHA rate: 6.5%
• Conventional rate: 6.75-7.0%

Conventional Interest Rates

Conventional lenders use risk-based pricing, meaning lower credit scores pay higher rates. The rate difference between 620 and 700 can be 0.75-1.5%.

Conventional Rate Penalties by Credit Score:

• 620-639: +0.75-1.0% above prime rates
• 640-659: +0.50-0.75% above prime
• 660-679: +0.25-0.50% above prime

Winner: FHA has lower rates for bad credit borrowers (620-660 scores).

Total Cost Comparison: FHA vs. Conventional

Let’s compare total costs over 5, 10, and 30 years for a $250,000 home purchase:

FHA (3.5% Down, 580 Credit Score)

• Down payment: $8,750
• Loan amount: $241,250 + $4,219 upfront MIP = $245,469
• Interest rate: 6.5%
• Monthly payment: $1,551 (P&I) + $112 (MIP) = $1,663 total

Total Costs:

• 5 years: $8,750 down + ($1,663 × 60) = $108,530
• 10 years: $8,750 + ($1,663 × 120) = $208,310
• 30 years: $8,750 + ($1,663 × 360) = $607,430

Conventional (15% Down, 630 Credit Score)

• Down payment: $37,500
• Loan amount: $212,500
• Interest rate: 7.0%
• Monthly payment: $1,413 (P&I) + $266 (PMI) = $1,679 total (PMI cancels after ~7 years at 20% equity)

Total Costs:

• 5 years: $37,500 down + ($1,679 × 60) = $138,240
• 10 years: $37,500 + [($1,679 × 84) + ($1,413 × 36)] = $229,548 (PMI cancels after year 7)
• 30 years: $37,500 + [($1,679 × 84) + ($1,413 × 276)] = $569,676

Analysis

• Short term (5 years): FHA is cheaper ($108,530 vs. $138,240)—$30,000 less due to lower down payment
• Medium term (10 years): FHA is still cheaper ($208,310 vs. $229,548)—$21,000 less
• Long term (30 years): Conventional becomes cheaper ($569,676 vs. $607,430)—$38,000 less because PMI cancels while FHA MIP continues forever

Winner: FHA for short/medium-term homeownership (5-10 years). Conventional for long-term (15+ years) IF you can afford the larger down payment and higher initial PMI.

When to Choose FHA

Scenario 1: Low Down Payment Savings

If you only have 3.5-10% saved, FHA is your only realistic option. Conventional requires 10-20% down for bad credit.

Scenario 2: Credit Score Below 620

Conventional does not approve under 620. FHA approves 500+ scores.

Scenario 3: Plan to Refinance Within 5-7 Years

If you plan to improve your credit and refinance to conventional within 5-7 years (to remove MIP and lower your rate), FHA’s lower upfront costs make sense. You get into homeownership now and refinance later.

Scenario 4: Need Lower Monthly Payment Initially

FHA’s lower interest rate and lower initial MIP (compared to conventional PMI for bad credit) provide lower payments in years 1-5, giving you breathing room to stabilize finances.

When to Choose Conventional

Scenario 1: You Have 15-20% Down Saved

If you can afford conventional’s larger down payment, PMI cancellation after a few years makes conventional cheaper long-term.

Scenario 2: Credit Score 640-660 (Borderline)

If you are close to 660 (near-prime territory), conventional rates improve significantly and PMI rates drop. Run the numbers—conventional may be cheaper even in the medium term.

Scenario 3: You Plan to Stay in the Home 15+ Years

Long-term homeowners save more with conventional because PMI cancels while FHA MIP lasts forever (on 3.5% down loans).

Scenario 4: You Want to Avoid Refinancing

If you do not want to refinance in a few years, conventional’s automatic PMI cancellation is simpler than FHA’s requirement to refinance to remove MIP.

How to Decide: Run the Numbers for Your Situation

Every borrower’s situation is different. To decide between FHA and conventional:

1. Check your credit score at all three bureaus (lenders use the middle score)
2. Calculate how much you have saved for down payment (3.5%, 10%, 15%, 20%?)
3. Get quotes from both FHA and conventional lenders with your actual credit score
4. Compare total costs over 5, 10, and 30 years using your specific rates and down payments
5. Consider your timeline: Do you plan to stay 5 years or 30 years?

Use MiddleCreditScore.com to understand which lenders approve your score range, and compare both FHA and conventional offers at BrowseLenders.com.

Refinancing Strategy: Start with FHA, Move to Conventional

Many bad credit borrowers use a two-step strategy:

Step 1: FHA at Age 25-30 (Bad Credit, Limited Savings)

• Qualify with 580 credit score and 3.5% down
• Buy home with low upfront costs
• Focus on rebuilding credit for 2-3 years

Step 2: Refinance to Conventional at Age 28-33 (Improved Credit, Built Equity)

• Credit score improves to 680-720 through on-time payments
• Home appreciates 10-20% over 3-5 years
• Refinance to conventional, removing MIP and lowering rate

This approach gets you into homeownership immediately (when you need it most for family, career, etc.) while eventually optimizing to conventional’s better long-term costs.

Once your credit and equity improve, explore refinancing at Cash-OutRefinance.com.

Final Thoughts: FHA vs. Conventional for Bad Credit

For most bad credit borrowers (580-640 scores), FHA is the better choice because:

• Lower down payment (3.5% vs. 10-20%)
• Approves lower credit scores (500+ vs. 620+)
• Lower interest rates for bad credit
• Lower upfront costs

However, if you have 15-20% down saved, a 640+ credit score, and plan to stay in the home 15+ years, conventional becomes cheaper long-term due to PMI cancellation.

The ideal strategy for many borrowers is: Start with FHA, refinance to conventional once your credit improves. This maximizes short-term affordability while minimizing long-term costs.

Compare lenders for both loan types at BrowseLenders.com, verify your credit readiness at MiddleCreditScore.com, and plan your refinancing strategy at Cash-OutRefinance.com.