FHA vs. Conventional Loans for Texas Homebuyers

The Core Decision Framework

FHA vs. conventional is not a question with a universal answer — it’s a calculation that depends on your specific credit score, down payment amount, expected hold period, property condition, and purchase price. The buyers who make this decision correctly are the ones who run their actual numbers side-by-side; the buyers who get it wrong are the ones who default to one program based on a general preference or a lender’s recommendation without understanding the financial logic behind the choice.

This guide provides the framework for making the correct decision for your specific situation in Texas’s market and tax environment.

The LLPA Effect: Why Score Tier Drives the Decision at Low Down Payments

Fannie Mae’s Loan Level Price Adjustment (LLPA) matrix — publicly available at fanniemae.com — applies pricing penalties to conventional loans by credit score and LTV. These LLPAs are the primary reason FHA frequently produces lower total monthly cost than conventional for buyers with scores below 680, even though FHA has ongoing MIP:

• 620 FICO, 95% LTV: LLPA approximately 3.25% = $9,750 on $300,000, or roughly +0.65% in effective rate
• 640 FICO, 95% LTV: LLPA approximately 2.25% = $6,750, or +0.45%
• 660 FICO, 95% LTV: LLPA approximately 1.75% = $5,250, or +0.35%
• 680 FICO, 95% LTV: LLPA approximately 1.25% = $3,750, or +0.25%
• 700 FICO, 95% LTV: LLPA approximately 0.75% = $2,250, or +0.125%
• 720+ FICO: Minimal LLPA; near par pricing

FHA has no LLPAs — every FHA borrower regardless of credit score gets the same rate structure. This creates the counterintuitive situation where a 620-score FHA borrower often has a lower monthly payment than a 620-score conventional borrower, despite FHA’s MIP, because the LLPA-loaded conventional rate more than offsets the MIP cost.

Side-by-Side Comparison at Key Score Tiers

Scenario: $280,000 Texas purchase, 5% down, 30-year fixed

At 620 FICO:

• FHA (3.5% down): UFMIP $4,723 financed. Loan $271,473. Rate 6.875%. P&I $1,784. MIP $124. P&I+MIP: $1,908/month.
• Conventional (5% down): Loan $266,000. Rate 7.50% (+0.625% LLPA). P&I $1,861. PMI $188 (0.85% at 620/95%). P&I+PMI: $2,049/month.
• FHA saves $141/month at 620 FICO. FHA wins at 5% down.

At 680 FICO:

• FHA (3.5% down): Same structure. P&I+MIP: $1,908/month. MIP never cancels.
• Conventional (5% down): Loan $266,000. Rate 7.125% (+0.25% LLPA). P&I $1,793. PMI $166 (0.75%). P&I+PMI: $1,959/month.
• FHA saves $51/month at 680 FICO. Small advantage, but FHA’s lifetime MIP vs. conventional PMI canceling ~year 10 means long-term (10+ year) comparison favors conventional. For 5-year hold: FHA wins. For 15-year hold: conventional wins.

At 720 FICO:

• FHA: Same P&I+MIP: $1,908/month.
• Conventional (5% down): Loan $266,000. Rate 6.875% (minimal LLPA at 720). P&I $1,748. PMI $130 (0.585%). P&I+PMI: $1,878/month.
• Conventional saves $30/month at 720 FICO. Conventional wins modestly in monthly cost, plus PMI cancels ~year 9. Conventional is better for any hold period at 720 with 5% down.

The Down Payment Dimension

Down payment amount interacts with score tier to determine the better program. At 20%+ down with 680+ score, conventional wins conclusively — no PMI, minimal LLPAs, lower rate than FHA. The comparison is closest in the 5–15% down range where both programs have mortgage insurance.

At 10% down, 680 FICO:

• FHA (10% down): MIP 0.50%, cancels at year 11. UFMIP financed. Loan ~$256,540. Rate 6.875%. P&I $1,685. MIP $107. P&I+MIP: $1,792/month.
• Conventional (10% down): Loan $252,000. Rate 7.0% (LLPA at 680/90% is lower). P&I $1,677. PMI $126 (0.60%). P&I+PMI: $1,803/month. PMI cancels ~year 9.
• Nearly identical in years 1–9. FHA MIP cancels at 11 years; conventional PMI cancels at 9. Conventional wins for long holds at 10% down and 680+ FICO.

Texas-Specific Factors That Shift the Comparison

Property tax DTI impact: Texas’s 1.7–2.4% property tax rates add $400–$700/month to PITI on a $280,000–$400,000 home versus the national average. FHA’s higher DTI ceiling (up to 57% with compensating factors vs. conventional’s practical 45%) directly addresses this Texas-specific challenge. Texas buyers who would qualify comfortably on conventional in a low-tax state may need FHA’s DTI flexibility to qualify in Texas’s tax environment.

FHA’s student loan treatment: FHA uses documented IDR payment (even $0) in DTI; conventional requires 0.5–1% of balance if no payment is documented. Texas has large populations of recent graduates with significant student debt — physicians, attorneys, engineers from UT, A&M, and other state universities. FHA’s student loan treatment can unlock qualification for buyers who would be DTI-disqualified under conventional’s approach.

FHA MPRs and Texas housing stock: Texas’s older urban housing stock — particularly in Dallas, Houston, Fort Worth, and San Antonio’s established neighborhoods — creates MPR exposure that doesn’t exist on newer construction. FHA buyers targeting sub-$350,000 homes in established neighborhoods face higher MPR risk than buyers in newly developed suburbs. Conventional buyers face fewer condition-based lender requirements. If you’re targeting older Texas homes in the price range where FHA is most relevant, understand that MPR conditions are a real transaction risk, not a theoretical one.

FHA limit at $524,225 (most Texas counties): FHA is unavailable for purchases above $524,225 in most Texas counties. Austin MSA: $602,250. For buyers targeting homes above these limits — Southlake, Westlake, Austin’s west side, Houston’s Memorial — FHA simply isn’t available and the comparison is moot.

The Decision Tree

Walk through these questions in order to reach the right answer for your situation:

1. Is your purchase price above the FHA limit for your county? If yes → conventional or VA required (no FHA available).
2. Is your credit score below 620? If yes → FHA is your primary option (conventional’s LLPA cost makes it prohibitive; VA for veterans).
3. Is your score 620–659? → FHA almost certainly produces lower monthly cost; run both scenarios to confirm.
4. Is your score 660–699? → Compare both scenarios. DTI flexibility and hold period are the tiebreakers.
5. Is your score 700–719 with less than 10% down? → Conventional is usually better; FHA competitive for short holds.
6. Is your score 720+ with 5–10% down? → Conventional wins. Lower LLPA, competitive PMI rates, PMI cancels.
7. Is your score 720+ with 20% down? → Conventional wins decisively. No PMI, minimal LLPA, lower overall cost.
8. Are you a VA-eligible veteran? → Use VA financing at any score tier unless property/program constraints prevent it.