California Mortgages: FHA Loan vs Conventional loan

Loans are complicated. Let us simplify things and help you decide which loan type is best for you.

For starters, the two most common loans are the FHA loan and conventional loan. They vary in benefits and requirements, so choosing the right one is critical to getting a great deal on your California mortgage.

What is an FHA Loan?

An FHA (Federal Housing Administration) loan is a government backed program that makes it easier for you to buy a home. They are generally not as difficult to qualify for, and you aren’t required to have a stellar credit score or a large down payment (phew). Yes, the initially cost of this loan is less than others, but it could end up being more in the long-run.

If you have a credit score of 580 or greater, you can likely qualify for an FHA loan and have a minimum down payment amount of 3.5%. That’s the case for most people. If you have a credit score less than 580, you’ll have to make a larger down payment of about 10% to qualify (and you should focus on improving your credit score).

FHA Loan Benefits

  • Low minimum down payment amount of 3.5%
  • Easier to qualify and be approved
  • Lower credit scores are accepted
  • Lower interest rates than other loans

FHA Loan Disadvantages

  • Smaller maximum loan amount (about $270,000)
  • Mortgage insurance is required
  • Higher monthly cost of insurance
  • Higher overall cost during the lifetime of the loan

What is a Conventional Loan?

The conventional loan is another great option for your California mortgage. These loans are used if the loan amount is more than $271,500, but still less than the amount of a jumbo loan. These are the typical the loan type that is used for an investment or second home, because unlike the FHA loan, the owner isn’t required to occupy the property. These loans require a larger down payment and more expenses up front, but you’ll save by avoiding paying for PMI and you’ll have lower monthly costs.

Conventional Loan Benefits

  • Overall cheaper throughout the lifetime of the loan
  • Larger maximum loan amount (about $424,000)
  • No Private Mortgage Insurance with a 20% down payment
  • Mortgage insurance is less expensive
  • Can be used for an investment property

Conventional Loan Disadvantages

  • Requires a better credit score (about 620 or higher)
  • Larger down payment requirement
  • Higher interest rates than FHA loan
  • More difficult to qualify for

There you have it. You should now start to see which of these two blogs is best for you. For more insights into California mortgages, check out our other resources. 

Discover what loan types are right for you in our free guide »

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