What is a conventional loan?
A conventional mortgage is a type of home loan that isn’t guaranteed by the USDA, VA, or FHA.
Conventional loans are frequently sold by lenders to Freddie Mac and Fannie Mae, two government-sponsored enterprises (GSEs) that assist in facilitating the availability of mortgage financing.
GSEs are usually less restrictive than government agencies, even though their financial requirements dictate who can borrow money for a home and what kind of property the loan can finance.
Requirements for a conventional loan
Because the government does not guarantee conventional loans, lenders see them as carrying a greater risk. Therefore, if the borrower is unable to make payments, lenders risk losing all of the remaining principal and interest on a mortgage.
Credit score of at least 620
Perhaps the most significant requirement for a conventional mortgage is your credit score. Your application will not be approved if your score is lower than 620. Lenders will offer you different mortgage rates based on your credit score. The higher the score, the lower your rate.
Although 620 is the minimum credit score required by Fannie Mae and Freddie Mac, lenders may demand a higher score.
Tip: Even if you don’t have any credit built up, you still might be able to qualify. A 12-month history of on-time rental payments can be used to help you qualify.
Debt-to-income ratio of no more than 45%
The percentage known as your debt-to-income, or DTI, indicates to lenders how much of your monthly income is allocated to repaying debts like credit card and school loan balances.
Here’s how DTI is calculated:
(Total monthly debt) / (Gross monthly income) x 100 = DTI
For example, say you’re considering a mortgage payment of $1,200. You have a $300 student loan payment and a $250 car payment, and your gross income is $5,000. Here’s how you would calculate your DTI:
($1,200 + $300 + $250) / $5,000 = 0.35 or 35%
In some cases, you’ll need a DTI of 36% or less in order to borrow from certain mortgage lenders, especially if your credit score is below 700. If you can’t reduce your monthly debt to get below this level, you might want to apply for a smaller mortgage.
Learn More: How to Get a Small Mortgage Loan
Minimum down payment of 3%, or 20% with no PMI
Many people assume you have to put down 20% for a conventional loan. Fannie Mae and Freddie Mac, however, only require 3% down.
Good to know: When you put down less than 20%, many lenders will require you to carry private mortgage insurance (PMI) until you’ve accumulated 20% equity through home price appreciation, paying down your mortgage, or a little of each.
A piggyback loan — also known as an 80/10/10 loan — can get you out of this requirement. With a piggyback loan, you put 10% down, but the other 90% of the home’s purchase price is split into two mortgage loans: a main mortgage of 80% and a second “piggyback” mortgage of 10%. The combination of your down payment and the secondary mortgage allows you to avoid PMI.
Not everyone will get approved for a loan with a down payment as low as 3%. For example, Fannie Mae’s 97% LTV Standard mortgage — also known as a Conventional 97 loan — allows 3% down but requires at least one borrower to be a first-time buyer, and Freddie Mac’s Home Possible program requires a credit score of at least 660.
Here are some popular low-down-payment conventional mortgage programs to consider:
| Loan type | Down payment | Description |
|---|---|---|
| Fannie Mae 97% LTV Standard | 3% | At least one borrower must be a first-time homebuyer; requires mortgage insurance |
| Fannie Mae HomeReady | 3% | For credit-worthy low-income borrowers. Income cannot exceed 80% of the area median. |
| Freddie Mac Home Possible | 3% | For very-low-, low-, and moderate-income borrowers |
| Piggyback loan (80/10/10 loan) | 10% | Allows borrowers to take out a second mortgage at the same time as the first mortgage to cover 10% of the purchase price and avoid PMI |
Property appraisal verifying the home’s value and condition
Lenders commonly require a home appraisal before they’ll approve a mortgage. The appraisal reveals whether the home’s value is at, above, or below the price you’ve agreed to in your purchase contract. The lender will only be willing to approve the mortgage if the home is valued at or above the purchase price.
Remember: The home is collateral for the mortgage, so the lender wants to make sure the collateral is acceptable. It has to be a property it can sell to recoup its losses if you fall into foreclosure.
What happens if the appraisal says the home is worth less than the contract price? Suppose you have agreed to buy a house for $300,000 and the appraisal says it is only worth $280,000. Here are several options to keep the deal from falling through:
- Make up the difference by putting an additional 20% down.
- Convince the seller to lower the purchase price to $280,000.
- Meet in the middle at $290,000. This way you only have to bring an extra $10,000 to the table, and the seller doesn’t lose as much.
- Appeal the appraisal if it makes sense to do so.
Limits on conventional loans
A conventional loan can be either conforming or non-conforming. A conforming loan is any mortgage that meets Fannie Mae or Freddie Mac’s requirements.
For conforming loans, the Federal Housing Finance Agency sets a maximum each year for the amount people can borrow. The limit varies by county. For most counties, the limit is $510,400 in 2020. In expensive areas, the limit can be as high as $765,600.
Non-conforming loans, including jumbo loans, aren’t subject to these limits — lenders can set their own limits, which can be in the millions of dollars.
Alternatives to conventional loans
If you have a credit score below 660, you might need to find a conventional loan alternative with more forgiving standards — though as we noted above, borrowers with a score of 620 might qualify for certain conventional mortgage programs.
If you’re having trouble qualifying for a conventional loan and you’ve talked to lenders who offer programs such as HomeReady or Home Possible, you might want to try one of the following non-conventional loans.
| Loan type | Credit score | Other restrictions |
|---|---|---|
| FHA | 500 | Must have 10% down if your score is below 580 |
| VA | None | Borrower must be an active-duty military member, veteran, reservist, or surviving unremarried spouse |
| USDA | None | Borrower’s income must not exceed area median; must be buying a home in a USDA-eligible area |
| Note: Lenders might require a higher credit score than the program’s required minimums. | ||
No matter what type of mortgage you’re looking for, you should shop around to find the best interest rate and the lowest closing costs. If you’re looking for a conventional loan, Credible can help — check out the table below to get started.
Loading widget – purchase-rate-table About the author 
Amy Fontinelle
Amy Fontinelle has been a personal finance writer since 2006. Her work has been published by Forbes Advisor, Capital One, MassMutual, Prudential, Reader’s Digest, The Motley Fool, Investopedia, International Business Times, Business Insider, Bankrate, and other outlets.
Read More
Qualify for a Mortgage
Requirements by Mortgage Type
Tools and Resources
Affiliated Business Arrangement Disclosure
Credible Operations, Inc. , (“Credible”) has a business relationship with Young Alfred, Inc. , (“Young Alfred”), an insurance broker. To view the complete Affiliated Business Arrangement disclosure form, please click this link. Young Alfred is not necessary for you to use in order for your loan to be settled.
In a similar vein, Young Alfred does business with a mortgage broker named Credible. To view the complete Affiliated Business Arrangement disclosure form, please click this link. To gain access to any settlement services, including homeowners or other insurance products, you are not obliged to use Credible.
By selecting “Accept” below, I/we confirm that we have read the relevant full disclosure form and that we are aware that Credible, Young Alfred, its parent company, and/or its affiliates may get paid or receive another benefit in exchange for any referrals they make for insurance settlement services or mortgage settlement services.
Credible Insurance, Inc. , a Delaware Corporation, d/b/a Credible Insurance Agency (CA Lic. # 0M90597), a/k/a VA: Credible Insurance Agency, Inc. , MN SOS: Credible Cover, Inc.
FAQ
Is it harder to qualify for a conventional loan?
Generally speaking, conventional loans have stricter credit score requirements than non-conventional loans. Lenders typically require a credit score of at least 620, which is the minimum required by Freddie Mac and Fannie Mae. Unlike non-conventional loans, there’s no flexibility.
Why would I be denied a conventional loan?
In 2022, 9. 1 percent of applications for homes were turned down, up from 8 3 percent in the previous year, the Consumer Financial Protection Bureau reports. High debt-to-income ratios, credit problems, and job changes are the top three reasons applicants are turned down.
How much money down do you need for a conventional loan?
The required minimum down payment for a conventional mortgage is 3%, but borrowers with lower credit scores or higher debt-to-income ratios might need to contribute more. A bigger down payment will probably be required for jumbo loans, loans for second homes or investment properties, and other loans.
Read More :
https://www.credible.com/blog/mortgages/conventional-loan-requirements/
https://www.rocketmortgage.com/learn/conventional-mortgage