3% conventional vs 3.5% FHA loans in Texas

Overview

An eligible conventional purchase can allow 3% down, while an eligible FHA purchase can require a 3.5% minimum investment. The half-point difference does not determine the better loan. Credit, income, debts, property, occupancy, mortgage-insurance cost and duration, cash to close, underwriting results, and total cost decide the stronger fit.

FHA is frequently misunderstood. It is not reserved for first-time buyers, and it can be financially competitive when credit or available cash makes conventional pricing less favorable. The Consumer Financial Protection Bureau's FHA guide says FHA can often be the lower-cost option for borrowers with lower credit scores or smaller down payments, while its conventional-loan guide explains why conventional loans can cost less but may be harder to qualify for. The complete file and current market decide the result.

Both can offer low-down-payment paths, so the down payment alone rarely settles the question. A fair comparison uses the same purchase price, down payment, lock period, and estimated closing date, then compares the official Loan Estimates and total cost.

The factor that usually settles it is how mortgage insurance behaves over time. Mortgage insurance protects the lender, not the borrower, and its structure and duration differ materially by program.

FHA requires upfront and annual mortgage insurance premiums. Under HUD's current schedule, most FHA loans longer than 15 years carry annual mortgage insurance for 11 years when the original loan-to-value ratio is 90% or lower, and for the mortgage term when it exceeds 90%. Conventional borrower-paid private mortgage insurance works differently: federal law provides cancellation and automatic-termination rights when the applicable requirements are met.

The CFPB explains what mortgage insurance does and how conventional PMI cancellation works. FHA's current policy source is the HUD Single Family Housing Policy Handbook 4000.1.

Two more practical differences matter in Texas. FHA generally requires the borrower to occupy the property as a principal residence, though an eligible owner-occupied property may have one to four units. Conventional financing may also permit a second home or investment property. Both FHA and conventional appraisals address value and property eligibility; FHA additionally applies HUD minimum property requirements, while Fannie Mae's property-condition guidance shows that conventional financing can also require repairs when a deficiency affects safety, soundness, or structural integrity. I weigh all of this against the actual file rather than a rule of thumb.

What 3% versus 3.5% means on the same purchase

On a $400,000 purchase, 3% is $12,000 and 3.5% is $14,000, a $2,000 difference. Those figures are only the down payment or minimum investment. They do not include closing costs, prepaid taxes and insurance, initial escrow funding, or available credits.

The conventional 3% route must fit a specific 97% loan-to-value program. Standard Fannie Mae 97%, HomeReady, Freddie Mac Home Possible, and HomeOne have different first-time-buyer, income, property, underwriting, and education rules. FHA's 3.5% path has its own credit, primary-residence, loan-limit, appraisal, property, and mortgage-insurance requirements.

Run both with the same purchase price and timing. Then compare the Loan Estimates, total cash to close, monthly payment, upfront and ongoing mortgage insurance, five-year borrowing cost, and how much cash remains after closing. See the full Texas low down payment guide for the other eligible paths.

Side by side: FHA vs Conventional

Swipe sideways for the full comparison →

The percentages and dollar illustration are program education, not a quote or approval. Actual rate, payment, mortgage insurance, costs, credits, and eligibility require a reviewed file and applicable disclosures. All loans are subject to credit approval.

How to choose

I do not pick a winner for you in the abstract, because the right answer changes with the file. As a neutral starting point, an FHA-insured loan tends to fit:

• when your credit is still being built,
• when your qualifying ratios need more room, or
• when more of your funds are coming from a gift.

A conventional loan tends to fit:

• when your credit is stronger,
• when you have more equity to put in, or
• when the conventional PMI structure and its cancellation rights fit your expected ownership horizon better.

Occupancy can decide it before anything else. FHA generally requires a principal residence, though an eligible owner-occupied property may have one to four units. A second home or property purchased strictly as an investment requires a different path, such as an eligible conventional loan. Property condition can matter too, but conventional is not a blanket workaround for deferred maintenance: both programs can require repairs, and a home needing material work may point toward a renovation loan.

For Texas buyers, loan size is worth a quick check. The 2026 baseline conforming limit for a one-unit property in most of the United States, including Texas, is $832,750, as published in FHFA's 2026 conforming-limit release; FHA county limits are set separately by HUD.

If you are near or above those thresholds, the conversation shifts toward a jumbo loan, and I will tell you where you land.

My rule on every purchase is simple: I run the FHA structure and the conventional structure side by side, then show you both so the choice is yours. Compensation and applicable costs are disclosed on the Loan Estimate and/or Closing Disclosure as required.

Kellibrooke Mortgage Partners is regulated by the Texas Department of Savings and Mortgage Lending; you can verify my license and read consumer information at sml.texas.gov. If you want this mapped to your numbers, start a pre-qualification or just send me your scenario.