2021 Conventional Loan Requirements & Guidelines


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, and what you need to qualify.

Rate Search: Check Mortgage Rates and Get Pre-Approved

Conventional Loan 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.

2021 Conventional Loan Requirements

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.

  • Minimum 620 credit score
  • 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

 

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 95 – 5% down payment, 620 credit score, PMI required
  • Home Possible – First-time homebuyer, 3% down payment, income limits
  • HomeReady – Fannie Mae program for first-time homebuyers with 3% down & 620 credit score
  • Piggyback 80/10/10 – 80% LTV conventional loan, 10% second loan, 10% down, no PMI
  • Conventional 97 – 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 a gift from a friend or family member.

  • Down payment between 3%-20%
  • Mortgage insurance required if the down payment is less than 20%
  • Can be a gift from a friend or family member
  • Down payment can come from savings, 401k, or investment accounts
  • Cannot use a loan

 

Conforming Loan Limits

The loan limit is the maximum loan amount you can get with a conventional mortgage. If you need a loan that exceeds the conforming loan limit, you will need to get a jumbo mortgage.

2021 Conventional Loan Limits

How much home can you afford calculator.

Suppose you need a loan that exceeds the conforming loan limits above. You will need a non-conforming loan, such as a jumbo mortgage.

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

The Fannie Mae HomeReady and Freddie Mac Home Possible loan programs were designed to offer a low down payment loan option for low-income first-time homebuyers.

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.

HomeReady / Home Possible Requirements

  • Only first-time homebuyers are eligible
  • Minimum 620 credit score
  • Two years of stable employment history
  • Alternative credit lines can be considered
  • Income cannot exceed 80% of the area median income
  • 50% maximum debt-to-income ratio

 

Bankruptcy/Foreclosure Waiting Period

If you have had a bankruptcy, foreclosure, or short sale, 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.

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.

Debt-to-Income Ratio (DTI)

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.

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.

  • Primary residences, second homes, and vacation properties
  • Fix and flip properties
  • Rental homes
  • Homes that are in of repair

 

The Bottom Line

Conventional loans offer a wealth of benefits and are the most used type of home loan used today.

Whether you plan to occupy the property, buy 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.

Rate Search: Search Lenders and Compare Rates