It's the most common question I get from first-time buyers: "Should I go FHA or conventional?" The honest answer is that the "right" loan depends less on the label and more on your specific financial picture. Both programs are legitimate paths to owning a home in California, and I've closed plenty of both. Here's how to actually think about the decision.
The 30-second overview
FHA loans are backed by the Federal Housing Administration, a government agency. They exist to help borrowers with lower credit scores, smaller down payments, or higher debt-to-income ratios still qualify for a mortgage. They're often the go-to option for first-time buyers who don't have a strong credit profile yet.
Conventional loans are traditional mortgages, not backed by the government. They're the standard bank mortgage you'd think of. Once you can qualify for a conventional loan, it's usually the preferred path because of how the fees work over time (more on that in a minute).
Neither is universally "better." Each has real trade-offs.
Down payment: closer than you'd think
Everyone assumes FHA has a huge advantage on down payment. In reality, the gap is smaller than most buyers realize.
- FHA: 3.5% minimum down (for credit scores of 580+).
- Conventional: as low as 3% for qualifying first-time buyer programs like Fannie Mae's HomeReady or Freddie Mac's Home Possible; 5% otherwise.
On a $500,000 home, that's the difference between $17,500 (FHA) and $15,000 (conventional 3%). Not nothing, but not the deal-breaker most people think.
Credit and debt-to-income: FHA's real edge
This is where FHA earns its reputation. FHA underwriting is more forgiving:
- FHA: Minimum 580 credit score for the 3.5% down option; 500-579 accepted with 10% down. Debt-to-income ratios up to about 50% considered.
- Conventional: Typically 620+ minimum, but you'll want 680+ to see genuinely competitive pricing. Debt-to-income usually capped near 43-45%.
If your credit is somewhere in the 580-680 range, FHA is often the smoother path. If you're at 700+, you'll likely price out better on conventional.
Mortgage insurance: the real trade-off
Here's where a lot of buyers get surprised. Both programs charge mortgage insurance when you put down less than 20% — but the structure is very different, and the long-term math matters.
FHA has two mortgage insurance charges:
- An upfront MIP of 1.75% of the loan amount, typically financed into the loan.
- An annual MIP paid monthly (roughly 0.15% to 0.75% depending on your loan-to-value and term).
The big catch: if you put less than 10% down on an FHA loan, that monthly MIP typically lasts for the entire life of the loan. To get rid of it, you'd need to refinance into a conventional loan later.
Conventional PMI:
- Only charged if you put down less than 20%.
- Monthly premium varies (roughly 0.3% to 1.5% annually depending on your credit score and down payment).
- Automatically drops off when your loan-to-value hits 78% — no refinance required.
Over the life of a mortgage, this often makes conventional the cheaper path for borrowers who plan to stay in the home for many years and will build equity naturally.
When each one is usually the right call
FHA is often the better choice if:
- Your credit score is between 580 and about 680
- You have limited savings and need the most flexible qualifying
- Your debt-to-income is on the higher side
- You expect to refinance out of MIP once you build equity or improve credit
Conventional is often the better choice if:
- Your credit score is 700 or higher
- You can put down 5% or more (and especially if you can eventually reach 20%)
- You plan to hold the loan long term and want mortgage insurance to eventually disappear
- The property or seller has restrictions that make FHA appraisal requirements a problem
The honest answer
I don't hand my clients a blanket "go FHA" or "go conventional" recommendation. We look at your credit, your down payment, your debt-to-income, your timeline for staying in the home, and any specific quirks of the property you're targeting. Then we run both scenarios side-by-side so you can see the actual numbers — monthly payment, total cost over 5 and 30 years, and how quickly you'd build equity.
Sometimes the answer is surprising. Sometimes the two are so close that other factors (like which pre-approval a seller responds to) end up deciding it. But the choice should always be based on your actual math, not a rule of thumb from the internet.