Summary: This article explains the differences between California FHA and conventional loans, as well as their pros and cons.
You have a lot of options when it comes to choosing a home loan in California. We’ve covered some of your primary financing choices in a separate article. Today, we’ll look at the key differences between California FHA and conventional home loans, with an emphasis on their features and advantages.
California FHA vs. Conventional Home Loans
Let’s start with some basic definitions of these two mortgage options.
California conventional loans: A conventional mortgage product does not receive any kind of government insurance or guarantee. It is not “backed” by the government. These loans are originated, and sometimes insured, solely within the private sector. This factor distinguishes them from FHA loans, which are insured by the government. Conventional is the most common type of mortgage loan, based on lending volume.
California FHA loans: Unlike the option described above, FHA loans do receive government backing. The loan itself is generated by a mortgage lender in the private sector, similar to conventional financing. But the the loan gets insured through the Federal Housing Administration (part of HUD). This insurance gives the lender partial protection from financial losses that might result from borrower default.
In California, conventional home loans are by far the most popular form of mortgage financing. According to the March 2017 “Origination Insight Report” from Ellie Mae (a mortgage software company), conventional home loans accounted for 63% of total lending volume. The FHA program accounted for 23% of volume, while VA loans came in at 10%. The remaining 4% went to the “other” category.
Benefits of Using a Conventional Mortgage
All mortgage options have their pros and cons, and this applies equally to California FHA and conventional loans. With conventional financing, the biggest advantage has to do with private mortgage insurance, or PMI. Home buyers who use this type of loan, in combination with a down payment of 20% or more, can avoid the extra cost of mortgage insurance. This is a common strategy among those who can afford such a down payment.
PMI is generally required when the loan-to-value (LTV) ratio rises above 80%. In other words, it comes into the picture when a person borrows more than 80% of the property value. Mortgage insurance protects lenders from losses relating to borrower default. If you use a conventional loan with an LTV of 80% or less, you could avoid paying PMI.
This is partly why California conventional home loans are more frequently used than their FHA counterpart. It’s a way to avoid the extra insurance cost.
(Note: There are other ways to avoid PMI, even when making a down payment below 20%. Follow the link to learn more.)
Benefits of FHA-Insured Mortgage Loans
The Federal Housing Administration (FHA) loan program has been around since the 1930s. It was created in response to the Great Depression to help increase homeownership in the United States, particularly among borrowers with low to moderate income.
Is a California FHA loan right for you? Consider these features and benefits:
- FHA qualification criteria tend to be more relaxed than conventional.
- Eligible borrowers can put down as little as 3.5% of the purchase price.
- The program offers a lot of flexibility, in terms of credit scores, debt ratios, etc.
- FHA loans are assumable, which could be useful if you sell down the road.
These are just a few points to consider when deciding between California FHA or conventional mortgage financing.
Which Option One Is Right for You?
The “right” mortgage is the one you can qualify for, and that meets your financing needs at minimal cost. Depending on your situation, that might be a California FHA or conventional loan. It’s not a one-size-fits-all situation. It’s a decision that has to be made on an individual basis, based on the borrower’s unique financial situation.
If you’ve previously had trouble qualifying for a conventional loan in California, you might try the FHA mortgage program as an alternative. Generally speaking, FHA home loans are easier to qualify for, when compared to conventional financing. That’s because of the government insurance mentioned earlier. Borrowers with credit scores of 580 or higher can qualify for financing of up to 96.5%, for a low down payment of 3.5%.
Conventional loans are a good option for borrowers who can afford a larger down payment of 20% or more and want to avoid the added cost of mortgage insurance. Conventional mortgages do offer smaller down payments — down to 5% in most cases, and sometimes as low as 3%. But this increases the loan-to-value (LTV) ratio, which could bring mortgage insurance into the picture. So there’s a lot to consider.
Let’s look at your options! The best way to choose between California FHA and conventional loans is to compare them side by side. And we can help. Bridgepoint Funding has served home buyers and mortgage shoppers in California for more than 16 years. We can help you explore your financing options to come up with an ideal solution. Contact our staff to get started.