for Every Homebuyer
Conventional, FHA, and USDA
Conventional fixed-rate loans dominate the US mortgage market, comprising anywhere from 64 to 75 percent of all current home loans in the nation. FHA loans, while a far cry from conventional loan prevalence at 10% of US home loans, have been of immense importance to first-time homebuyers and those with bruised credit. USDA loans are seldom used compared to the aforementioned two programs, but are powerful tools for low to moderate income buyers purchasing in rural areas, with 0% down payment requirement and payment assistance.
Conventional
By far the most popular loan program out there. A conventional loan is a strong choice for any borrower with a well-documented income history, minimal to no blemishes on credit history, and large down payments saved up (though you may qualify for conventional financing with as little as 3% down). Conventional loans carry a minimum FICO score requirement of 620, and term options of between 10-30 years, though shorter terms or irregular terms are possible.
FHA
Federal Housing Administration (FHA) loans provide dependable, flexible home financing options for a huge number of first time homebuyers as well as those with a less than perfect credit history or lower down payments. As much as 90% of all FHA borrowers are first time homebuyers! With a minimum of 3.5% down (if your FICO score is 580 or above), and much more forgiving of credit blemishes than conventional loans, FHA loans can be a great alternative when conventional loans fall short.
USDA
USDA programs offer financing on properties located within rural areas, and is one of the handful of mortgage programs with a 0% down payment requirement. There are additional benefits as well, such as the possibility for significantly below-average interest rates on a need-based allocation. However, its strict property location and max income requirements limit this option to a very small group of borrowers.
Conventional
Minimum FICO Score: 620
Available Loan Terms: 5-30 Years
Minimum Down Payment: 3%*
Maximum Rate/Term Refinance LTV: 97%
Maximum Cash Out Refinance LTV: 80%
Time From Bankruptcy: 4 Years Ch.7; 2 Years Ch.13
Time From Foreclosure/Short Sale: 7 Years
Mortgage Insurance (Y/N): Yes, If Below 20% Down
Eligible Use: Primary, Secondary, Investment
Eligible Properties: Residential 1-4 Unit Properties
(Condos & Townhomes Eligible With HOA Review)
*3% Down Only Available if You Have Not Owned a Home in 3 Years
Conventional loans are popular for many reasons; competitive interest rates, favorable terms, and multiple layers of borrower protection have all but guaranteed this program's status as a mainstay in America's housing market. Available in fixed-rate and adjustable options, conventional loans will work best for those who have solid credit and strong income documentation.
Though larger down payments also enhance this program's benefits, they are not necessary with a generous 3% minimum. Do keep in mind that the 3% minimum generally is accessible only by first time homebuyers, or individuals who have not owned a home in the last 3 years. Otherwise, your minimum will be 5% down.
For most of the US, the conforming loan limit, or the maximum conventional financing one can use, is capped at $647,200 as of 2022. However, in high cost of living (HCOL) areas such as certain counties in California, there is a county-specific limit that can reach as high as $970,800. These limits are likely to increase in 2023 and onward.
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Many borrowers are often concerned about private mortgage insurance (PMI) if they put down less than 20% of the purchase price or the home's appraised value. PMI is an additional monthly cost that is usually a small percentage of the loan amount. More about PMI can be found here, but considering that the average down payment in the US is between 7%-10%, PMI is a commonly used tool that is not a cause for alarm.
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If you went into bankruptcy, there will be a lengthy waiting period for conventional mortgages. Chapter 13 bankruptcies have a waiting time as follows: 2 years after discharge, 4 years after dismissal. Chapter 7 bankruptcies: 4 years after discharge or dismissal. Either of these waiting periods can be reduced to 2 years from dismissal or discharge if extenuating circumstances beyond your control can be documented.
FHA
Minimum FICO Score: 500
Available Loan Terms: 15 & 30 Years
Minimum Down Payment: 3.5%
Maximum Rate/Term Refinance LTV: 97.75%
Maximum Cash Out Refinance LTV: 80%
Time From Bankruptcy: 2 Years Ch.7; 0 Years Ch.13
Time From Foreclosure/Short Sale: 3 Years
Mortgage Insurance (Y/N): Yes, Always Required
Eligible Use: Primary*
Eligible Properties: Residential 1-4 Unit Properties
(Condos & Townhomes Eligible With HOA Review)
*Secondary Financing Possible in Rare Cases
FHA loans are an incredible resource for the millions of first time homebuyers that make the leap from renting to ownership each year. With very generous minimum down payment and credit score requirements, FHA loans have opened up the door to homeownership for innumerable individuals and families seeking financing with flexibility. Its seasoning requirements for bankruptcies and foreclosures are also much more lenient than conventional loans, offering respite to those with past housing events. Overall, the FHA loan is a great tool for those that either cannot secure a significant down payment, have less than perfect credit history, or both.
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The FHA loan is a government-backed loan, and one of three such common programs that are either guaranteed or insured by US government entities, the other two being USDA and VA loans. Due to this status, there are new considerations that must be taken into account. In community property states, such as CA, all government loans require that the spouse's outstanding debts are factored into the primary borrower's debt to income ratio. This does not apply to loans originated in non-community property states or for non-government loans. There is also typically a one-time fee that must be paid at closing for each government loan program, though these may be waived depending on the circumstances. And like the other government loan programs, FHA loans are only meant for primary residences, with very few circumstantial exceptions granted in exceedingly rare cases.
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The FHA loan has its own equivalent of PMI, which is known as MIP, or mortgage insurance premium. There are two forms of MIP on FHA loans: the UFMIP, or Up Front MIP, and regular MIP. The UFMIP is a one-time fee paid at closing equal to 1.75% of the loan amount, and can usually be financed into the loan rather than paid out of pocket. MIP a recurring monthly payment, similar to PMI. However, it is required regardless of down payment size on all FHA loans, and can only be removed after 11 years provided that your down payment was 10% or more. If below 10%, MIP will continue indefinitely until you refinance or the loan is paid off.
USDA
Minimum FICO Score: None, But Ideally 640+
Available Loan Terms: 20, 30, 33, and 38 Years
Minimum Down Payment: 0%
Maximum Rate/Term Refinance LTV: 100%
Maximum Cash Out Refinance LTV: Not Allowed
Time From Bankruptcy: 3 Years Ch.7 & Ch. 13
Time From Foreclosure/Short Sale: 3 Years
Mortgage Insurance (Y/N): No
Eligible Use: Primary Only
Eligible Properties: Residential 1-4 Unit Properties
(Condos/Townhomes Eligible With HOA Review & In Rural Area)
USDA loans are lower interest, 0% down payment loans that serve low to moderate income families in their home purchases in rural areas as designated by the USDA. Those eligible for USDA financing can make no more than 115% of the area median income.
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The USDA offers three different types of mortgages. The most common of these is the USDA guaranteed mortgage, which is a mortgage that is backed by the USDA, but offered and funded through outside lending institutions rather than the USDA itself. These require no down payment, though a one-time fee will be assessed if no down payment is made. Section 504 loans, offered directly by the USDA, finance home repairs on primary properties for low-income homeowners that make no more than 50% of the area median income. Section 502 loans allow for home repairs, improvements, and purchases for low income borrowers, with very low interest rates and loan terms of 33 and 38 years to minimize the size of monthly payments.
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USDA loans are relatively uncommon compared to conventional loans and other government-backed loan programs. However, as over 95% of the geographical US falls under USDA loan eligibility, borrowers who are able to meet the strict income and property requirements may consider utilizing this loan program for a rural purchase.
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Getting Prepped for Approval
Documentation requirements for conventional and government-backed loan programs are typically among the most thorough of all mortgage loans. From income, to taxes, and citizenship, you should be prepared to gather information your lender will need to approve you.
Though these prime loan products may be demanding with documentation, your subsequent airtight approval will qualify you for competitive financing options. To see what documents you'll need for conventional loans, check out our prior to approval checklist page.