FHA and conventional loans are the two most popular mortgage options in California, but they serve different borrower profiles and have different long-term cost implications. Choosing correctly can save you tens of thousands of dollars — choosing wrong can cost just as much.
The Quick Comparison
Down payment: FHA requires 3.5% minimum; conventional requires 3% for first-time buyers and 5% for repeat buyers. On paper, FHA is slightly easier, but the difference on a $700,000 home is only $3,500.
Credit score: FHA accepts scores as low as 580 (or 500 with 10% down); conventional requires 620 minimum with meaningful rate improvements at 680, 720, and 740.
Mortgage insurance: This is where the decision gets important. FHA charges an upfront premium of 1.75% plus an annual premium of 0.55% for the life of the loan. Conventional PMI costs 0.2% to 1.5% annually depending on credit and LTV, but it cancels automatically at 78% LTV or by request at 80%.
Loan limits: Both use the same $1,209,750 limit in California's high-cost counties.
When FHA Wins
FHA is the better choice when your credit score is between 580 and 680 — the rate difference compared to conventional at these scores is significant, and FHA's rate is less affected by lower scores. FHA also wins when you have limited savings and need every dollar going toward the down payment rather than closing costs, since the upfront MIP can be financed into the loan. And FHA is more forgiving of recent credit events like bankruptcy or foreclosure, with shorter waiting periods than conventional.
When Conventional Wins
Conventional is better when your credit score is 700 or above, because the combination of better rates and removable PMI creates significant long-term savings. On a $700,000 home with 10% down and a 720 credit score, switching from FHA to conventional might save you $200-$400 per month in combined rate and insurance differences.
Conventional also wins for anyone who can reach 20% down, since that eliminates PMI entirely. And for anyone planning to build equity through payments or appreciation, conventional's PMI cancellation is a major advantage — FHA's permanent MIP means you're paying insurance forever unless you refinance.
A Real California Example
Consider a $750,000 home purchase with 5% down ($37,500) and a 700 credit score.
With FHA, the loan amount would be approximately $726,000 after the upfront MIP is financed. Monthly payment would include the base P&I plus $333 per month in annual MIP that never goes away.
With conventional, the loan amount is $712,500. Monthly PMI at a 700 score might be around $280 per month — but that drops off when you reach 78% LTV (roughly 7-8 years of payments, sooner if the home appreciates). After PMI drops, you save $280 per month for the remaining 22-23 years.
Over 30 years, the conventional loan saves approximately $65,000 to $85,000 compared to FHA in this scenario — primarily because of the PMI elimination.
The Hybrid Strategy
Some borrowers start with FHA and refinance into conventional once they've built enough equity and improved their credit. This makes sense when FHA is the only way to qualify today but you expect your financial profile to improve within 2-3 years.
The risk is that rates might be higher when you're ready to refinance, eating into or eliminating the benefit. But as a strategy for getting into homeownership now versus waiting, it has merit — especially in California's appreciating markets where equity builds relatively quickly.
The Bottom Line
If your credit score is above 700 and you have at least 5% down, conventional is almost always the better long-term choice in California. If your score is below 680 or you need maximum flexibility on qualification, FHA gets you into a home now with the option to refinance later.
Save Financial runs the numbers for both options on every application so you can see the exact difference for your situation.