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David Papazian/Getty Images June 21, 2022 This article was generated using automation technology and thoroughly edited and fact-checked by an editor on our editorial staff. Bankrate senior editor for mortgages Bill McGuire has been writing and editing for more than four decades at major newspapers, magazines and websites. Bankrate logo The Bankrate promise
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict editorial integrity, this post may contain references to products from our partners. Here's an explanation for how we make money. Bankrate logo The Bankrate promise
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our mortgage reporters and editors focus on the points consumers care about most — the latest rates, the best lenders, navigating the homebuying process, refinancing your mortgage and more — so you can feel confident when you make decisions as a homebuyer and a homeowner. Bankrate logo Editorial integrity
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Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information. Bankrate logo How we make money
You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. are mortgages that aren’t backed by the government. They are available through the majority of mortgage lenders in the U.S. — including banks, credit unions and online lenders — and can come in a range of terms, commonly 15 or 30 years, with a fixed or adjustable interest rate. Depending on the characteristics of the loan, a conventional mortgage is either . Often, conventional lenders sell these types of mortgages to Fannie Mae or Freddie Mac after they’re funded. In order to do this, the loan has to conform to, or meet, Fannie and Freddie standards around credit score, loan size and other factors. If it doesn’t, the mortgage is considered nonconforming. In contrast, are backed by the Federal Housing Administration (FHA), meaning the FHA protects FHA-approved mortgage lenders against loss if a borrower stops paying their mortgage. FHA loans are designed to help homebuyers who might have difficulty obtaining conventional financing, primarily by having a lower minimum credit score requirement and other flexible qualification criteria. Both kinds of loans require the borrower to pay if putting down less than 20 percent, but with conventional loans, the borrower can stop paying for insurance when they reach 20 percent equity in the home (such as by paying down the mortgage). Most FHA loan borrowers continue to pay insurance for the entire loan term, regardless of equity level.
Conventional vs FHA loan credit score
FHA loan borrowers can qualify with a as low as 500 or 580 depending on their down payment amount: as low as 500 with 10 percent down, or as low as 580 with 3.5 percent down. Conventional loans usually require a credit score of at least 620. If you have excellent or good credit, a conventional loan is often the better choice.
Conventional vs FHA DTI ratio
For a conforming conventional loan, the maximum is 43 percent. For an FHA loan, the DTI ratio can go up to 50 percent. The DTI ratio is the measure of all your debt (the mortgage included) relative to your monthly income.
Conventional vs FHA down payment
Depending on the lender and program, some conventional loans require as little as 3 percent or 5 percent for a down payment. If your credit score is at least 580, you can put down just 3.5 percent for an FHA loan; if your score is below 580 (but not lower than 500), you’ll be required to put down 10 percent. Here’s more on . For either loan, if you put down less than 20 percent, you’ll be required to pay for mortgage insurance.
Conventional vs FHA loan limits
Both types of loans have limits on the amount you can borrow. The conventional , set by the Federal Housing Finance Agency each year, is $647,200 or up to $970,800 in more costly housing markets. A conventional loan can exceed these limits, however — at that point, it’d be considered a nonconforming . The is also adjusted each year, and there are different limits based on location and property type. In 2022, the FHA loan limit for a single-family home is $420,680 in most markets, and $970,800 in higher-cost areas.
Conventional vs FHA mortgage insurance
If you don’t have 20 percent of the home’s purchase price for a down payment, you’ll be required to pay for mortgage insurance whether you’re getting a conventional or FHA loan. Both premiums are typically paid via your monthly mortgage payment. includes an upfront premium equal to 1.75 percent of the amount you’re borrowing. Then, you’ll pay an annual premium, which is determined by the size of your down payment, how much you borrowed and the length of the loan (15 years versus 30 years). Aside from differences in premium structure, conventional loan borrowers don’t have to pay for mortgage insurance forever — it can be once there’s 20 percent equity in the home. You can do this simply by following your repayment schedule to pay down the loan balance; making extra payments; or refinancing if your home’s value has risen substantially. In contrast, FHA mortgage insurance can’t be canceled unless you put at least 10 percent down. (If so, it’ll be canceled after 11 years.)
Conventional vs FHA rates
While your interest rate is primarily determined by your credit score, the type of loan can also be a factor. FHA loans sometimes have more favorable rates. Currently, the average 30-year fixed for a conventional conforming loan is , according to Bankrate’s national survey of large lenders. The average 30-year fixed is .
How to decide which is right for you
While each borrower has unique circumstances, generally, a conventional loan is best for those with strong credit and a bigger homebuying budget. FHA loans are geared toward those who have lower credit scores. Ultimately, the decision comes down to the type of home you want and your financial situation. Consult with a loan officer to weigh your options. SHARE: This article was generated using automation technology and thoroughly edited and fact-checked by an editor on our editorial staff. Bankrate senior editor for mortgages Bill McGuire has been writing and editing for more than four decades at major newspapers, magazines and websites. Related Articles