In 1996, Schumacher finished third in the Drivers' Championship, as well as helping Ferrari edge out his old team Benetton for second in the constructors' race. He won three races, more than the team's total tally for the period from 1991 to 1995. During the initial part of the 1996 season, the car had had reliability trouble and Schumacher did not finish 6 of the 16 races. He took his first win for Ferrari at the Spanish Grand Prix, where he lapped the entire field up to third place in the wet, using an uncharacteristically flamboyant oversteering style. In the French Grand Prix Schumacher qualified in pole position, but suffered engine failure on the race's formation lap. However at Spa-Francorchamps, Schumacher used well-timed pit-stops to fend off the Williams' Jacques Villeneuve. Following that, at Monza, Schumacher scored a momentous win in front of the tifosi. Schumacher's ability, combined with the improving reliability of Ferrari, enabled him to end the season, putting up a challenge to eventual race and championship winner Damon Hill at Suzuka.

Michael Schumacher and Jacques Villeneuve vied for the title in 1997. Villeneuve, driving the superior Williams FW19, led the championship in the early part of the season. However, by mid-season, Schumacher had taken the Championship lead, winning five races, and entered the season's final Grand Prix with a one-point advantage. During the race, held at Jerez, Schumacher and Villeneuve collided as Villeneuve passed his rival. Schumacher retired from the race and Villeneuve scored four points to take the championship. Schumacher was held to be at fault for the collision and was disqualified from the Drivers' Championship.

In 1998, Finnish driver Mika Häkkinen became Schumacher's main title competition. Häkkinen won the first two races of the season, gaining a 16 point advantage over Schumacher. With the Ferrari improving significantly and being faster in the second half of the season, Schumacher won six races and had five other podium finishes. Ferrari took a 1-2 finish at the Italian Grand Prix, which tied Schumacher with Häkkinen for the lead of the Drivers' Championship with 80 points, but Häkkinen won the Championship by winning the final two races. There were two controversies; at the British Grand Prix Schumacher was leading on the last lap when he turned into the pit lane, crossed the start finish line and stopped for a ten second stop go penalty. There was some doubt on if this counted as serving the penalty, but the win stood. At Spa, Schumacher was leading the race by 40 seconds in heavy spray, but collided with David Coulthard's McLaren when the Scot, a lap down, slowed in very poor visibility to let Schumacher past. After both cars returned to the pits, Schumacher rushed to McLaren's garage and accused Coulthard of trying to kill him.Schumacher's efforts helped Ferrari win the Constructors title in 1999. He lost his chance to win the Drivers' Championship at the British Grand Prix: At the high-speed Stowe Corner, his car's rear brake failed, sending him off the track and resulting in a broken leg. During his long absence, he was replaced by Finnish driver Mika Salo. After missing six races, he made his return at the inaugural Malaysian Grand Prix, qualifying in the pole position by almost a second. He then assumed the role of second driver, assisting team mate Eddie Irvine's bid to win the Drivers' Championship for Ferrari. In the last race of the season, the Japanese Grand Prix, Häkkinen won his second consecutive title. Schumacher would later say that Häkkinen was the opponent he respected the most.