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Conventional Loan Requirements
Conventional mortgage loans are the most common type of mortgage loan in the U.S., offering flexible terms, competitive rates, and various down payment options.
They are often more adaptable than government-backed loans, allowing borrowers to finance a primary residence, second home, or investment property. Understanding the requirements for a conventional loan, such as credit score, down payment, and debt-to-income ratio, is key to securing favorable loan terms.
Here’s a complete guide to conventional loan requirements, including eligibility criteria, down payment options, and credit score standards, to help you navigate the process with confidence.
Conventional Loan Requirements
Conventional loans generally require:
- Minimum Credit Score: 620
- Down Payment: 3%-20%, depending on loan type and borrower qualifications
- Debt-to-Income (DTI) Ratio: Typically 43%, up to 50% with compensating factors
Lenders also review the applicant’s credit history, employment, and income stability. Here’s a detailed look at key requirements:
| Requirement | Minimum Standard |
|---|---|
| Credit Score | 620 or higher |
| DTI Ratio | Max 43%-50% |
| Down Payment | 3%-20% |
| Income Documentation | 2 years of tax returns and W-2s |
| Waiting Period After Bankruptcy | 4 years |
For more information on requirements and how they vary, consult Fannie Mae’s eligibility page.
Credit Requirements
Mortgage lenders review your credit history, not just your credit score, to evaluate your reliability. Any derogatory history, such as late payments or accounts in collections, will impact your eligibility.
Basic Credit Criteria for Conventional Loans:
- Minimum Credit Score: 620
- No late mortgage payments in the last 6 months
- Waiting Periods: 4 years after bankruptcy or foreclosure
- Debt in Collections: Limited outstanding debt in collections
Lenders may require a higher score or compensating factors for certain loan types or to receive better terms.
Down Payment Requirements
Conventional loans offer various down payment options, typically ranging from 3% to 20%. The required amount will depend on the specific loan type and borrower profile.
| Conventional Loan Type | Down Payment | Credit Score | Additional Details |
|---|---|---|---|
| Conventional 95 | 5% | 620+ | PMI required |
| HomeReady/Home Possible | 3% | 620+ | Income limits apply |
| Conventional 97 | 3% | 680+ | No income limits, PMI required |
| Piggyback 80/10/10 | 10% | 700+ | No PMI, requires 2nd loan for 10% |
Key Points:
- Source of Funds: Down payments cannot be borrowed. They can come from savings, 401(k), or as a gift from family or friends.
- Gifted Funds: If the down payment is a gift, it must come with a letter from the donor stating no repayment is expected.
For more on allowable down payment sources, see the Federal Housing Finance Agency’s guidelines.
Conforming Loan Limits
Conventional loans are subject to loan limits set by the Federal Housing Finance Agency (FHFA). These limits vary by region and are updated annually. Exceeding these limits will require a jumbo loan, which typically has stricter requirements.
| Year | Baseline Loan Limit | High-Cost Area Limit |
|---|---|---|
| 2023 | $726,200 | Up to $1,089,300 |
For more details on current limits, visit the FHFA’s loan limits page.
3% Down Conventional Loans
To assist first-time buyers, Fannie Mae and Freddie Mac offer 3% down payment options, such as the HomeReady and Home Possible programs. These loans are ideal for buyers with moderate credit and income who might not qualify for a larger down payment.
HomeReady and Home Possible Program Requirements:
- Eligibility: First-time homebuyers only
- Minimum Credit Score: 620
- Income Limit: Cannot exceed 80% of area median income
- Employment History: Stable employment history of at least two years
- DTI Ratio: Up to 50% if compensating factors are present
These programs are excellent for low-to-moderate-income buyers, offering competitive interest rates and flexible qualification standards.
Private Mortgage Insurance (PMI)
Conventional loans require PMI if the down payment is less than 20%. PMI protects the lender in case of default and is based on factors such as credit score, down payment, and loan type.
Key Details on PMI:
- PMI Cancellation: PMI can be canceled once the loan reaches 78% loan-to-value (LTV).
- PMI Cost: Typically 0.3% to 1.5% of the loan amount annually, depending on the borrower’s credit profile.
- Reducing PMI Costs: A higher down payment or better credit score can help reduce PMI rates.
To understand more about PMI, check out this guide by Investopedia.
Debt-to-Income Ratio (DTI)
Your DTI ratio is a critical factor in determining your eligibility for a conventional loan. This ratio compares your monthly debt obligations to your income.
General DTI Requirements for Conventional Loans:
- Standard DTI: 43%
- Expanded DTI: Up to 50% if you have strong compensating factors
Compensating Factors for High DTI:
- High Down Payment: A down payment over 20% can offset a high DTI.
- Excellent Credit: A score above 700 can make lenders more flexible.
- Significant Cash Reserves: Having extra funds in savings can enhance approval chances.
- Stable, High Income: Demonstrates financial responsibility and capability to handle payments.
Eligible Property Types
One advantage of conventional loans is their flexibility with property types. Unlike FHA or VA loans, which are typically for primary residences, conventional loans allow you to purchase a variety of property types.
Eligible Property Types:
- Primary Residences: Single-family homes, townhouses, condos
- Second Homes: Vacation or secondary residences
- Investment Properties: Rental homes or fix-and-flip properties
- Properties in Need of Repair: Conventional loans allow financing for homes that may need improvements.
Conventional loans are ideal for borrowers looking to invest in real estate or buy a second home.
The Bottom Line
Conventional loans offer flexible terms and the broadest range of options, making them the most popular mortgage type today. Whether you’re buying a first home, a vacation property, or an investment property, a conventional loan provides numerous benefits with fewer restrictions on property types and borrower qualifications.
Key Takeaways:
- Flexible Options: Down payments from 3%-20%
- PMI Avoidance: Avoid PMI with a 20% down payment
- Versatile Property Types: Use for primary residences, vacation homes, or investments
- Credit Flexibility: Minimum score of 620, with some exceptions for compensating factors
This comprehensive guide should help you understand the ins and outs of conventional loans and their requirements. For those looking to buy soon, it’s wise to get pre-approved and explore your options. Pre-approval gives you a clear picture of what you can afford and strengthens your offer when shopping for a home.
For more on conventional loan options and requirements, visit the Consumer Financial Protection Bureau (CFPB) for resources on mortgage lending.
Frequently Asked Questions
What credit score do I need for a conventional loan?
Most conventional loans require a minimum credit score of 620, though higher scores can qualify for better rates and terms.
How much down payment is required for a conventional loan?
Conventional loans require a down payment between 3%-20%, depending on the loan type and borrower profile. A 20% down payment eliminates PMI.
What is private mortgage insurance (PMI) for conventional loans?
PMI is insurance required if your down payment is less than 20%. It protects the lender and can be canceled once you reach 78% loan-to-value.
Can I get a conventional loan with high debt-to-income (DTI) ratio?
Typically, conventional loans allow a DTI up to 43%, but lenders may accept higher DTI with compensating factors like high credit scores or cash reserves.
Are there specific property types eligible for conventional loans?
Yes, conventional loans can finance primary residences, second homes, vacation properties, and investment properties, including fix-and-flip homes.
How long after a bankruptcy or foreclosure can I apply for a conventional loan?
Most lenders require a waiting period of 4 years after bankruptcy or foreclosure, but extenuating circumstances may reduce this to 2 years.
Do conventional loans have a maximum loan amount?
Yes, conventional loans are subject to conforming loan limits, which vary by location. Loans above these limits require a jumbo loan with stricter criteria.