📌 Key Takeaways
- FHA loans suit buyers with lower credit or smaller down payments; conventional loans reward strong credit with no permanent mortgage insurance.
- California's high-cost counties have elevated 2025 loan limits, and both programs offer higher-balance options for pricier SoCal homes.
- The right choice comes down to your credit score, your down payment, and how long you plan to keep the loan.
FHA or conventional is the first real fork in the road for most Southern California buyers. Here's how to choose the one that actually fits your situation.
What is an FHA loan?
An FHA loan is insured by the Federal Housing Administration. It's designed to expand access to homeownership, so it allows down payments as low as 3.5% and accepts lower credit scores than most conventional programs. The trade-off is mortgage insurance: FHA loans carry an upfront premium plus a monthly premium that, in most cases, stays for the life of the loan.
What is a conventional loan?
A conventional loan is not government-insured and follows guidelines set by Fannie Mae and Freddie Mac. It can go as low as 3% down for qualified buyers, and its private mortgage insurance (PMI) can be removed once you reach 20% equity. Conventional loans generally reward stronger credit with better pricing.
Side by side
Down payment
FHA requires 3.5% down; conventional can start at 3% for first-time buyers. For larger down payments, conventional usually becomes more cost-effective.
Credit
FHA is more forgiving of lower scores and recent credit blemishes. Conventional typically wants a mid-600s score or higher and rewards excellent credit with the best rates.
Mortgage insurance
This is the biggest long-term difference. Conventional PMI drops off at 20% equity; FHA's monthly premium usually does not, meaning the only way to remove it is to refinance.
Loan limits
Both programs publish annual limits that are higher in expensive California counties. Many LA and Orange County homes still exceed these limits and require a jumbo loan instead.
Which is right for you?
If your credit is still rebuilding or your down payment is tight, FHA can get you in the door. If you have solid credit and plan to stay in the home long enough to build equity, conventional usually wins on total cost because you can shed mortgage insurance. A common strategy is to start with FHA and refinance into a conventional loan later once your credit and equity improve.
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Yes, and many buyers do exactly that. Once your credit improves and you've built 20% equity, refinancing into a conventional loan can eliminate FHA's lifetime mortgage insurance and lower your payment.
It depends on your credit and down payment. With excellent credit, conventional often wins because PMI can be removed. With lower credit or minimal down payment, FHA may price better up front. Compare full quotes from your lender.
In competitive situations some sellers view conventional financing as slightly lower-risk, but a fully underwritten pre-approval matters far more than the loan type. A strong, verified buyer is what sellers want to see.
Mike Basti founded Portfolio Home Realty to give Southern California buyers full-service representation and real cash back at closing. Licensed California broker serving LA County and Orange County. Call (949) 379-5320.