Purchasing a home for the first time can be exciting. However, the process involves determining the right loan type so you’re less likely to overspend on down payment, interest or the total loan cost. Certain California financing programs can improve your budget strategy and savings. Understanding which factors influence the costs is essential to help you make informed decisions.
An FHA loan is offered by a private lender that’s insured by the Federal Housing Administration (FHA), a Department of Housing and Urban Development (HUD) agency. With this loan, lenders take on less risk, enabling them to offer flexible terms, such as lower down payments and credit score requirements.
Conventional loans are not backed by a government program. They could be conforming loans, which follow loan amount limits, or nonconforming loans, which come with stricter requirements. Whether you choose an FHA loan, a conventional loan or another mortgage type, applying for options that fit your financial situation can improve your approval chances.
Key Differences Between an FHA and a Conventional Loan
Specific factors differentiate FHA from a conventional loan, which influence which option you might want to choose:
| FHA Loan | Conventional Loan | |
|---|---|---|
| Best For | Homebuyers looking for flexibility and budget-friendly options | Homebuyers with a larger down payment looking for better loan terms |
| General Credit Score Requirements | At least 500 | At least 620 |
| General Down Payment Requirements | At least 3.5% | Generally, 3% to 5% |
| Mortgage Insurance Requirements | Mortgage insurance premium for all FHA loans | Private mortgage insurance for some loans without a 20% down payment |
| Loan Limits for one-unit properties | $541,287 to $1,249,125, depending on county | $832,750 to $1,249,125, depending on county |
| Appraisal Requirement | Full appraisal is generally required | Eligible properties can skip appraisals |
The Decision Framework for Choosing Between Loans
Before you sign any agreement, evaluate these factors carefully. Unsuitable loans can come with ballooning costs, and budget-friendliness is key to financing a home you want.
Credit Scores and Down Payment Requirements
Credit scores reflect your credit history, which lenders use to determine trustworthiness. Timely loan payments contribute to higher scores, so the higher the score, the lower the risk you pose for the lender. Good scores contribute to lower interest rates and more favorable terms. Mortgage lenders often pull scores from the three major credit bureaus — Equifax, Experian and TransUnion. Credit scores range from 300 to 850.
| Credit Score Range | Typical Evaluation |
|---|---|
| 670 to 739 | Good |
| 740 to 799 | Very Good |
| 800 and above | Excellent |
Credit scores are often tied to down payment requirements. For instance, FHA loans allow credit scores of 580 and above, except for loans with 10% or more down payment. With at least 10% equity, credit score requirements can be as low as 500. Other FHA loans come with at least 3.5% down payment. Conventional loans generally require down payments ranging from 3% to 5%, and a credit score of at least 620.
When evaluating down payment requirements for an FHA or a conventional loan, consider how much you can pay monthly. Larger down payments can result in lower monthly payments.
Mortgage Insurance
Mortgage insurance reduces lender risks, helping you qualify for more loans. However, this insurance increases loan costs. The amount is included in either your monthly payment, closing costs or both. When comparing the mortgage insurance of FHA and conventional loans, you’ll see two types:
- Mortgage insurance premium (MIP): MIP is required for FHA loans. The cost is generally the same regardless of your credit score. However, if you make a down payment of less than 5%, you get a slight cost increase. MIP is included in both the closing costs and the monthly payment.
- Private mortgage insurance (PMI): PMI rates differ based on your down payment and credit scores. They can be more affordable than FHA rates if your credit’s in good shape. Lenders may require PMI if you cannot make a down payment of 20%. The amount is often added to your monthly payment, with little to no additions to your closing costs.
Loan Limits
Loan limits dictate which mortgages qualify for government programs. For instance, the National Housing Act of 1934 caps FHA loans based on local home prices. Limits also differ for each property type. Maximum mortgage limits follow requirements set by the Housing and Economic Recovery Act. The baseline amount is adjusted annually to reflect the average home price.
In 2026, FHA loan limits are:
| Property Type | Minimum Loan Amount | Maximum Loan Amount |
|---|---|---|
| One-unit | $541,287 | $1,249,125 |
| Two-unit | $693,050 | $1,599,375 |
| Three-unit | $837,700 | $1,933,200 |
| Four-unit | $1,041,125 | $2,402,625 |
Meanwhile, conforming loan limits are:
| Property Type | Minimum Loan Amount | Maximum Loan Amount |
|---|---|---|
| One-unit | $832,750 | $1,249,125 |
| Two-unit | $1,066,250 | $1,599,375 |
| Three-unit | $1,288,800 | $1,933,200 |
| Four-unit | $1,601,750 | $2,402,625 |
Limits adjust if a county’s median home value, multiplied by 115%, costs more than the baseline, capped at 150%. For instance, 150% of the $832,750 baseline amounts to $1,249,125. California has many high-cost counties, making limits vary per location. For instance, Sonoma has a limit of $897,000 while Santa Clara has a limit of $1,249,125. Napa County’s limit is $1,017,750.
Loans that exceed the limits are considered nonconforming or jumbo loans. They’re often more expensive and come with stringent requirements. If you’re choosing between an FHA and a conventional loan, make sure the property value fits the limit.
Appraisal Requirements
Appraisals establish a property’s market value and confirm that it meets HUD’s minimum property requirements for existing homes and minimum property standards for new construction. FHA loans generally require appraisals performed by an approved FHA appraiser.
Properties funded through conventional loans can skip appraisals through the value acceptance program. This program is applicable to certain property types and transactions, such as funding one-unit properties. You can typically work with any state-licensed or state-certified appraiser.
California’s First-Time Homebuyer Benefits
California offers programs that support first-time homebuyers. To be considered a first-time homebuyer, you must not have owned and occupied a home or lived in a home owned by your spouse in the last three years. Exceptions may apply. If you’re eligible, consider opting for:
- MyHome Assistance Program: When applying for FHA loans, the program offers a deferred-payment junior loan, which can amount to the appraised value or up to 3.5% of the property’s purchase price, whichever is less. With conventional loans, you can get the appraised value or up to 3% of the property’s purchase price, whichever is less. These amounts are there to assist you with the closing costs or down payment.
- Dream for All Shared Appreciation Loan Program: This program offers support for down payments and closing costs, particularly for the Dream For All Conventional first mortgage. You’ll pay the loan and a share of the property’s appreciation when you sell or transfer the home, or fully pay the mortgage.
When to Choose FHA vs. Conventional Loans
When evaluating whether FHA or conventional loans are better, determine your goals and financial circumstances. Ask yourself the following:
- Do you have a credit score of at least 500? A score of 500 can get you an FHA loan, but you may consider increasing this score to potentially obtain better interest rates and loan terms. Most mortgage loans are conventional loans, so higher scores can lead to more loan options.
- What is your down payment budget? Larger down payments open the room for conventional loans. Without this budget, FHA loans can be suitable since down payment requirements can be as low as 3.5%.
- What is your budget for monthly payments? All FHA loans require MIP, while only some private lenders charge PMI. These costs add up when placed on top of your monthly payments. Conventional loans can be the better option if you can make a down payment of 20%, as lenders typically omit the PMI in these instances.
- Which limits cover your property’s value? Limits vary per location. Consider whether a conforming conventional loan can cover your property, or if you need an FHA loan to meet the minimum requirement.
- Do you have more budget for an appraisal? FHA appraisals are portable when you switch lenders. With conventional loans, a new lender may ask for its own appraisal.
Compare the pros and cons thoroughly. A trusted partner can help guide your decision-making.
Choose Loan Types Wisely With Pacific Mortgage Group
Since 2006, Pacific Mortgage Group has been helping clients purchase their dream home with custom mortgage solutions. We can help you evaluate FHA and conventional loan options so you can take on a loan that meets your needs and fits your financial situation.
Our team will work with you to navigate the complexities of different funding options and government support, making information transparent and easy to understand. Our comprehensive knowledge of Southern California’s housing market also equips you with everything you need to know for your application. Call us at 951-404-2928 or fill out our online form today to get started.
