Conventional mortgage loans are the most common type of mortgage loan used today.
There are different types of conventional loans requiring between 3%-20% down.
This is a complete list of all conventional loan requirements, guidelines, eligibility, and what you need to qualify.
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Conventional Loan Borrower Requirements
Conventional loans require a 620 credit score, 3%-20% down, and a maximum debt-to-income ratio between 43%-50% depending on the type of conventional loan program you qualify for.
2020 Conventional Loan Requirements
• Minimum 620 credit score
• 3% - 20% down payment
• 36-48 month waiting period after a bankruptcy or foreclosure
• Maximum 43% debt-to-income ratio
• Two years of stable employment history
• Proof of income (W2's, tax returns)
Conventional Loan Credit Requirements
Mortgage lenders don’t just look at your credit score, they look at your entire credit report to determine eligibility and loan terms.
Derogatory credit history such as late payments, collection accounts, and excessive debt will affect your ability to qualify regardless of your credit rating.
Conventional Loan Credit Requirements
• Minimum 620 credit score
• 43% maximum debt-to-income ratio
• No mortgage late payments in the last 6 months
• 48 month waiting period after a bankruptcy or foreclosure
• No judgments or liens
• Student loans included in DTI ratio unless on deferred payments
Bankruptcy/Foreclosure Waiting Period
If you have had a bankruptcy, foreclosure, or short-shale there is a waiting period before becoming eligible.
If you have extenuating circumstances that resulted in a loss of income such as a job loss, reduction of income, or medical emergency. Underwriters are looking for borrowers to recover from the economic hardship with an improved credit score and multiple open accounts in good standing.
Waiting Period with Extenuating Circumstances
Bankruptcy - Chapter 7 or 11
Bankruptcy - Chapter 13
Five years from the most recent discharge or dismissal date
3 years from the most recent discharge or dismissal date
Deed-in-Lieu of Foreclosure, Short-sale
Down Payment Requirements
Conventional loans require a down payment between 3%-20% of the purchase price depending on which type of conventional loan you qualify for.
Conventional Loan Type
5% down payment, 620 credit score, PMI required
First-time homebuyer, 3% down payment, income limits
10% down payment, 620 credit score, PMI required
80% LTV conventional loan, 10% second loan, 10% down, no PMI
Fannie Mae program for first-time homebuyers with 3% down & 620 credit score
3% down payment, 680 credit score, no income limits, PMI required
The down payment cannot be a loan. You will need to provide 2-3 months of bank statements showing you have the funds in savings. The down payment can also be can be a gift from a friend or family member.
Conventional Loan Down Payment Guidelines
3% Down Conventional Loans
First-time homebuyers generally have lower credit scores and less money to put down than other buyers. Because of this, Fannie Mae and Freddie Mac, the two biggest buyers of conventional mortgage loans created 3% down payment mortgage loan programs for first-time homebuyers.
HomeReady and Home Possible Loans
They require just a 3% down payment, 620 credit score, and allow for up to a 50% DTI ratio. You must be a first-time homebuyer and not exceed the income limit of 80% of the area median income.
2020 HomeReady™ Home Possible Loan Requirements
Conventional Loan Limits
The loan limit in low-cost areas is $510,400. There are higher costs areas such as Los Angeles and New York, where the loan limit reached $765,600. This is much higher than the FHA loan limits of $331,100 and $625,050 in the highest areas.
2020 Conventional Loan Limits
# of units
Low-cost area limit
High-cost area limit
Private Mortgage Insurance (PMI)
Conventional home loans require private mortgage insurance (PMI) with less than a 20% down payment. PMI will be canceled once the loan-to-value ratio reaches 78%.
Private mortgage insurance companies base their rates on the borrower’s risk profile including, credit score, down payment, and income. The higher your credit score and down payment the lower the PMI rate will be.
Your debt-to-income ratio (DTI ratio) is the amount of monthly debt obligation you have compared to your income. Typically, conventional loans have a maximum debt-to-income ratio of 43%.
The DTI ratio can be stretched to 45% in some cases, and maybe even higher if you have strong compensating factors such as a large down payment, large cash reserves, or an excellent credit score.
Compensating factors for high DTI ratios
- High down payment (Over 20%)
- Excellent credit score (700+)
- Large cash reserves
- High income
- 5+ years at current position/employer
Eligible Property Types
A great benefit of a conventional mortgage is that they are available on many types of properties. They also have less strict property requirements than FHA loans so you can buy fixer-uppers and uncompleted homes.
Home Inspection Checklist
Ensure that the foundation is stable. No cracks in the foundation and walls.
Check that water is flowing away from the foundation.
Is the roof in good condition,with several more years left before it needs replacing. Asphalt shingles have a lifespan of 15-40 years.
The exterior of the home should be in good condition. There should be no rotting wood, cracks in the brick, worn out weather seals.
Check the ceilings, walls, doors, and baseboards. Is everything in acceptable order for you.
All electrical outlets and lights must function properly.
If the property has a sprinkler system installed all zones must be tested to ensure functionability.
Air conditioning and heater
Heating and air condition systems must be inspected to ensure they are completely operational.
All home appliances must be tested to ensure they work properly.
If the home smells, people assume it was the previous owners, not the smell of the house itself. Make sure all areas of the home are dry, and nothing is leaking. Wet areas can cause musty smells.
Interior and exterior of the home should be inspected for termites. Existing termite treatment systems should be checked.
The home must be 100% free of mold.
Water heater must be tested to ensure it is functioning properly.
Conventional Loan Rates
Conventional Loan Rates (October 2020)
30-year fixed-rate mortgage
15-year fixed-rate mortgage
5/1 adjustable-rate mortgage
Using a Conventional Loan for an Investment Property
You can use a conventional mortgage to buy investment properties to either fix and flip or keep as a rental property. If you’re buying an investment property, you will need to get a conventional loan because government-backed loans such as FHA and VA are only available to owner-occupied borrowers.
Real estate investors can use conventional loans to purchase an investment property in good condition or one in need of repairs.
- Primary residence
- Second home/Vacation home
- Fix and flip properties
- Rental homes
Conventional loans offer a wealth of benefits and are the most used type of home loan used today.
Whether you are planning to occupy the property, buying a second home, or an investment property, a conventional mortgage is a great option.
If you’re looking into purchasing a home in the near future, you should speak to a lender about getting pre-approved for a mortgage.
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