FHA vs Conventional Loan: Which Is Better for House Hacking?
If you're house hacking your first property, the loan you pick shapes everything: how much you put down, how strict the credit bar is, how much rent counts toward qualifying, and what happens to your monthly payment over time. The two real options for owner-occupied 2-4 unit properties are FHA and conventional. Most beginners pick FHA without realizing conventional has been getting steadily more competitive since Fannie Mae lowered down payments on multi-unit owner-occupied properties in late 2023. This guide walks through the five differences that actually matter and gives you a clear answer for each common scenario.
This article is for first-time investors who already understand the basic idea of house hacking and now need to choose a loan product. If you're brand new to the concept, start with house hacking for beginners and come back here once you're ready to underwrite.
Key Takeaways
- FHA: 3.5% down on 1-4 units, credit score min 580, mortgage insurance for the life of the loan.
- Conventional: 5% down on owner-occupied 2-4 units (Fannie Mae, since November 2023), 15-20% down typical for stricter scenarios, credit score min usually 620-680, PMI removable at 20% equity.
- Both require you to live in one unit for at least 12 months and let you count rental income toward qualifying (FHA: 75% of fair market rent; conventional: similar with documentation).
- The biggest cost difference: FHA's lifetime mortgage insurance vs. conventional's removable PMI. On a $400,000 loan, FHA MIP costs roughly $270/month forever (or until you refi); conventional PMI runs $150-200/month and falls off when you hit 20% equity.
Table of contents
- The decision in one paragraph
- What FHA gives a house hacker
- What conventional gives a house hacker
- The five differences that actually matter
- A worked example: same property, two loans
- When FHA wins
- When conventional wins
The decision in one paragraph
If your credit score is 580-679 OR you have less than 5% saved, FHA is the right answer. If your credit is 680+ AND you can put 5% down, conventional is usually better long-term because the mortgage insurance comes off when you build equity. There are exceptions on both sides, covered below.
What FHA gives a house hacker
FHA stands for Federal Housing Administration. It's a U.S. government program that insures loans made by private lenders for owner-occupied properties, including 2-4 unit small multifamily.
The headline numbers (per HUD's Single Family Handbook 4000.1):
- 3.5% down with credit score 580+
- 10% down with credit score 500-579
- 1-4 units allowed (you must occupy one)
- 60-day occupancy rule, 12-month minimum residency
- Loan limits vary by metro: standard limit for single-unit ~$524k as of 2026; high-cost metros go up to ~$1.2M for fourplexes. See HUD's loan limit lookup.
The trade-off: FHA charges mortgage insurance for the life of the loan. There's an upfront 1.75% premium financed into the loan, plus a monthly premium of 0.50-0.55% of the balance per year, which never goes away unless you refinance into a conventional loan.
For a $400,000 loan at 3.5% down, that's roughly $270/month in MIP indefinitely. Over 10 years if you keep the loan, that's $32,400 paid in mortgage insurance alone.
What conventional gives a house hacker
Conventional just means a loan that conforms to Fannie Mae or Freddie Mac guidelines and isn't government-backed. The lender sets the rates, the down payment minimums follow Fannie/Freddie rules.
The headline numbers (per Fannie Mae Selling Guide):
- 5% down on owner-occupied 2-4 unit properties (since November 2023; was 15-25% before)
- 3% down on owner-occupied single-family
- Credit score min 620 typically; better rates at 680+
- 1-year occupancy rule similar to FHA
- Standard loan limit ~$766k for single-family in 2026; higher for 2-4 units
The trade-off: below 20% equity, you pay private mortgage insurance (PMI). PMI runs 0.3-1.5% of the loan balance per year depending on credit and LTV. Once you hit 20% equity (through paydown or appreciation), you can request PMI removal, meaning the cost permanently goes away.
For a $400,000 loan at 5% down with 700 credit, PMI runs about $150-200/month. If property values rise modestly and you make principal payments, you might hit 20% equity in 3-4 years and shed the PMI permanently.
The five differences that actually matter
1. Down payment
FHA: 3.5% down. Conventional: 5% down on 2-4 unit owner-occupied (post-Nov 2023).
On a $400k duplex: $14,000 vs. $20,000. The $6,000 gap matters when you're scraping together your first deal but doesn't make the long-term math obvious.
2. Credit score
FHA: 580 with 3.5% down. 500-579 with 10% down. Conventional: 620 minimum, but most lenders quote unfavorable rates below 680.
If your score is below 620, FHA is usually the only option. For the full score-by-score path including the FHA 500-579 band and VA loans, see house hacking with bad credit. If it's 680+, you have a real choice.
3. Mortgage insurance: the long-term cost driver
FHA MIP stays on for the life of the loan. To remove, you refinance. Conventional PMI comes off automatically at 22% equity (lender-tracked) or by request at 20%.
Over a 10-year hold, this can be a $20,000-$35,000 difference in your favor with conventional, depending on the loan size and how fast you build equity.
4. Property condition standards
FHA appraisals also serve as inspections. Peeling paint, broken handrails, and missing smoke detectors all flag the property and require repairs before close. The seller usually has to fix them.
Conventional appraisals only verify value. Property condition is your problem to inspect for.
For house hackers, this cuts both ways. FHA makes some sellers reluctant (they don't want to fix items pre-close). Conventional moves faster but requires a careful inspection on your dollar.
5. Rental income counting
Both let you use projected rental income from the units you won't occupy to qualify. FHA counts 75% of fair market rent (per HUD 4155.1). Conventional counts 75% as well (Fannie Mae B3-3.1-08), though for properties with no rental history, requirements get stricter.
This is significant for first-time house hackers. On a duplex where each side rents for $1,500, you get an extra $1,125/month in qualifying income, which can let you afford a property that would otherwise stretch your debt-to-income ratio.
A worked example: same property, two loans
Imagine a $400,000 duplex in a midwestern metro. Each side rents for $1,500/month. Your credit is 700.
FHA path:
- Down payment: $14,000 (3.5%)
- Closing costs: ~$10,000 (estimated 2.5%)
- Cash needed: ~$24,000
- Estimated P&I (at 6.5%, 30-year): $2,440/month
- MIP: $270/month
- Property tax + insurance: $660/month
- Total monthly housing: $3,370
- Less rent collected: -$1,500
- Out-of-pocket: $1,870
Conventional path:
- Down payment: $20,000 (5%)
- Closing costs: ~$10,000
- Cash needed: ~$30,000
- Estimated P&I (at 6.4%, 30-year): $2,378/month
- PMI: $180/month
- Property tax + insurance: $660/month
- Total monthly housing: $3,218
- Less rent collected: -$1,500
- Out-of-pocket: $1,718
Conventional is $152/month cheaper from day one ($1,824/year). Plus, the PMI comes off at 20% equity (typically year 3-4 with appreciation and paydown), saving another $180/month from that point forward.
Over a 10-year hold, conventional saves roughly $25,000 in cumulative payments compared to FHA's lifetime MIP, before accounting for the higher initial cash outlay of $6,000.
These are illustrative numbers; rates and PMI specifics vary by lender.
When FHA wins
- Credit score 580-680: conventional rates and PMI become unfavorable below 680. FHA is the better path.
- Less than 5% saved: 3.5% down is a meaningful gap.
- Property needs visible cosmetic work: FHA appraisal forces the seller to address it pre-close, which is rare leverage.
- You plan to refinance within a few years: the lifetime MIP becomes irrelevant if you'll refi out of it after building equity.
When conventional wins
- Credit score 680+: you get the better rate AND removable PMI.
- You can stretch to 5-10% down: the long-term math favors conventional.
- You plan to hold the property long-term: removable PMI saves five-figures over a decade.
- The property is in good condition: no benefit from FHA's stricter inspection.
For most credit-680+ buyers with at least $20-25k saved, conventional is the better long-term math. For credit-580-679 or sub-$15k cash buyers, FHA is often the only realistic option.
If you're not sure where you fit, the free PDF guide has a one-page worksheet for running both scenarios side by side.
Frequently Asked Questions
Can I switch from FHA to conventional later?
Yes, by refinancing. Once you have 20% equity in the property (through appreciation, principal paydown, or both), you can refinance into a conventional loan and remove the FHA mortgage insurance permanently. Many house hackers do this at year 3-5 once equity has built up. Refinance closing costs typically run 2-3% of the new loan amount, so make sure the savings justify the upfront cost.
What's the FHA self-sufficiency test for 3-4 unit properties?
FHA requires that the projected rental income from a 3-4 unit property (after vacancy adjustments) cover 100% of the principal, interest, taxes, and insurance payment. This is called the self-sufficiency test. Duplexes are exempt. For triplexes and fourplexes, this can disqualify properties in expensive markets where rents don't keep up with prices. Conventional has no equivalent test.
Does conventional 5% down work for all 2-4 unit properties?
It works for owner-occupied 2-4 unit properties under Fannie Mae's HomeReady or Standard programs as of November 2023. The property has to qualify as a 2-4 unit residential dwelling, you have to occupy one of the units, and you have to meet the lender's overlays (some lenders impose stricter rules than Fannie Mae's minimums). Always verify with your specific lender before assuming the 5% rule applies.
How much rental income can I count toward qualifying?
Both FHA and conventional count 75% of fair market rent from the units you won't occupy. The 25% reduction accounts for vacancy and operating expenses. You'll need a market rent appraisal addendum (FHA Form 1007 or Fannie Mae Form 1007) to document the figures. If the property has existing leases, those rents typically take precedence over market estimates.
Which loan has lower closing costs?
FHA closing costs are usually 0.5-1% higher than conventional because of the upfront 1.75% mortgage insurance premium that gets financed into the loan. Conventional doesn't have an equivalent upfront premium. Other closing costs (title insurance, appraisal, origination) are similar.
Can my partner or co-borrower not occupy the property?
FHA generally requires all borrowers to occupy the property. Conventional has more flexibility: a non-occupant co-borrower can be added to strengthen the application without occupying. This matters if a parent is helping a younger buyer qualify.
If you're still unsure which fits your situation, the smartest move is to get pre-approved with one FHA-specialist lender and one conventional lender. The numbers they quote will make the choice obvious. Both pre-approvals are free and don't commit you to either lender. The 28-day course walks through the lender outreach and side-by-side comparison process in week 3.