FHA vs. Conventional Low Down Payment Financing: What Michigan Realtors Should Know

Buyers who can bring less than 20 percent to a purchase often ask whether FHA or a conventional loan is the better fit. There is no single answer that works for every Michigan file. The useful comparison is about minimum investment, mortgage insurance, cancellation rules, property standards, and loan limits — not about which program is “easier” or which offer a seller should accept. This article is educational. It is not a pricing quote, a credit decision, or a commitment to lend. Confirm current figures with the official sources and with the lender who will underwrite the file.

A typical FHA purchase requires a minimum cash investment of 3.5 percent of the adjusted value when the borrower meets FHA’s standard credit parameters. FHA also allows a 10 percent minimum investment in some lower-credit situations, and lenders can set overlays above the handbook minimums. A conventional conforming purchase can, in some programs, be structured with as little as 3 percent down — including Fannie Mae HomeReady and the standard 97 percent LTV option Fannie describes in its Selling Guide, and Freddie Mac Home Possible. Those 3 percent options have income, occupancy, or other eligibility rules. They are not available on every conventional file, and a lender may require more.

Mortgage insurance is the second major difference. FHA charges an upfront mortgage insurance premium, or UFMIP, and an annual premium that is usually collected monthly. HUD Mortgagee Letter 2023-05, which remains the current MIP schedule as of the retrieval date in the sources, sets UFMIP at 1.75 percent of the base loan amount for most Title II forward mortgages. The letter also sets annual MIP by term, base loan amount, and loan-to-value ratio. The usual schedule for terms of more than 15 years, at or below the national conforming loan limit, is shown in the table below. The 2023 letter illustrated the loan-amount breakpoint as $726,200, which was then the national conforming limit, and said the breakpoint is the national conforming loan limit. Confirm the current breakpoint in HUD Handbook 4000.1, Appendix 1.0, because a later table that reprints the 2026 conforming figure of $832,750 was not independently located for this article.

Conventional loans with less than 20 percent down typically use private mortgage insurance, or PMI, rather than FHA MIP. PMI pricing is set by the mortgage insurer and the lender, not by a single federal table, so this article does not quote a PMI rate. What is set in federal law is cancellation. Under the Homeowners Protection Act, 12 U.S.C. 4902, a borrower with a “good payment history” on a residential mortgage can generally request cancellation of borrower-paid PMI when the balance is first scheduled to reach 80 percent of the original value, and the servicer must automatically terminate PMI when the balance is first scheduled to reach 78 percent of the original value, if the borrower is current. There are details and exceptions in the statute, including construction loans and certain high-risk categories. The important Realtor takeaway is the contrast: conventional PMI often has a statutory off-ramp as equity grows, while FHA annual MIP on a minimum-investment purchase generally lasts for the life of the loan unless the borrower refinances or otherwise leaves the FHA program.

Property standards also differ. FHA property acceptability, including safety, soundness, and security items, is in HUD Handbook 4000.1. Cosmetic items are not automatically required repairs. Conventional appraisals follow Fannie Mae or Freddie Mac selling-guide and UAD standards, including condition ratings. A property that is a stretch for one program is not automatically ineligible for the other. The appraiser and the underwriter decide.

Loan limits matter in Michigan in 2026. FHFA set the 2026 baseline conforming loan limit for a one-unit property at $832,750 in most U.S. counties, announced November 25, 2025. FHA’s 2026 national floor — 65 percent of that conforming limit — is $541,287 for a one-unit property, with higher floors for two- to four-unit properties, effective for case numbers assigned on or after January 1, 2026 (HUD Mortgagee Letter 2025-23). A conventional conforming loan can therefore reach a higher amount than an FHA loan in a county that sits at the FHA floor. Oakland, Macomb, and Wayne Counties, and every other Michigan county returned in HUD’s official FHA Mortgage Limits lookup on the retrieval date, showed the 2026 one-unit FHA limit at that national floor. Michigan does not appear on HUD’s 2026 Areas at Ceiling list. Always confirm the county in the official lookup before you talk about a limit on a live listing.

Seller concession caps differ too. For a Fannie Mae conventional principal residence or second home, financing concessions are generally limited to 3, 6, or 9 percent of the lower of sales price or appraised value, depending on LTV, and 2 percent for investment property (Selling Guide B3-4.1-02). FHA generally uses a 6 percent of sales-price framework. Unused credit typically cannot be paid in cash to the buyer. A concession is not a down payment.

For a Michigan Realtor, the practical habit is to compare the actual file rather than the program nickname. A first-time buyer in Macomb County with a modest down payment may fit FHA or a conventional 3 percent program. A move-up buyer in Oakland County whose price is above the FHA floor may need conventional or another path. Credit, occupancy, property type, and concession structure all matter. Shane can help walk through those questions in a strategy conversation. Education on this page is free and is not conditioned on a referral.

A working comparison, used in a strategy conversation rather than in a social post, might look like this. For a buyer who can make only a minimum investment, ask whether a conventional 3 percent program is even available on the file, or whether FHA’s 3.5 percent path is the one the loan officer can actually support. Ask how long mortgage insurance would last in each path, and remember that FHA’s annual MIP on a high-LTV purchase generally lasts for the term, while conventional PMI has a statutory cancellation framework. Ask whether the property is likely to raise FHA repair items. Ask whether the contract price sits above the FHA county limit. Then let the loan officer run the figures. A resource page can frame the questions. It cannot answer them for a particular buyer.

Educational only. Not a loan approval, a legal opinion, or a commitment to lend. Not all applicants will qualify.