Conventional Loan Requirements

What you need to know about Conventional loan requirements

Conventional loans are one of the most popular home loan types and may be the right choice for many homebuyers. A borrower may have greater difficulty qualifying for a Conventional loan if their credit score is well under 620*, if their DTI is more than 43%, or if they have much less than 20% to put down on a home. They may also have trouble qualifying if they have declared bankruptcy or been foreclosed upon in the last seven years.

Understanding the requirements of a Conventional loan when you’re considering using it to buy a home is important. These loans, which are not insured by the government, have specific criteria borrowers have to meet in order to qualify for them. Each situation is different though, and requirements will vary based on the specific loan program and the borrower’s financial profile.

Conventional loan credit score

Conventional loans have less flexible credit standards than government-backed loans like FHA loan. Lenders typically require a minimum credit score of 620*, but a score of 680 or higher is preferable for certain types of Conventional loans like a Jumbo loan.

A higher score may also secure a lower mortgage interest rate, saving you money over the loan’s life. Check your credit report for errors and work on improving your score if necessary.

Conventional loan down payment 

Conventional Loans usually require a down payment of 3% to 20% of the home’s purchase price. A down payment of 20% or more can help you avoid private mortgage insurance (PMI). PMI is a type of insurance that the borrower pays in order to secure a mortgage if they don’t have a high enough down payment.  

Putting down more money up front for a down payment may eliminate PMI as well as get you more favorable terms and conditions on your loan.

Conventional loan debt-to-income ratio

Your debt-to-income ratio (DTI) should be 43% or lower for a Conventional loan, though it may be up to 50% in some cases. Calculate your DTI by dividing your total monthly debt payments by your gross monthly income. A lower DTI shows better financial stability and increases your chances of approval.

Stable employment and income

Lenders prefer a stable employment history when you apply for a Conventional loan, typically two years in the same field or a related one. Self-employed individuals may need to provide additional documentation, such as tax returns and bank statements, to prove a steady income. Stable employment and consistent income are key to approval.

Conventional loan loan-to-value ratio 

The loan-to-value ratio (LTV) is the loan amount compared to the property’s value. Lenders generally prefer to see a lower LTV. However, for Conventional loans, the max LTV is 97% with a 3% down payment.

Your LTV is directly tied in with your down payment amount. Putting down a larger down payment lowers your LTV because it lowers the loan amount you’ll need to borrow. An LTV of 80% or lower can let borrowers avoid PMI and a lower LTV can also secure you a lower interest rate.

Mortgage reserves for Conventional loans

Lenders may require mortgage reserves depending on your loan type and individual financial profile. If they are required, your mortgage reserve is typically two to six months of mortgage payments in savings, to cover potential financial hardships. Having enough money reserved shows that you are financially stable and it may improve your chances of getting approved for a loan.  

Conventional loan appraisal requirements

A property appraisal is required to determine the home’s value and to make sure the home matches the property standards to qualify for the loan.  Lenders require home appraisals in order to verify that they the home is worth the investment of lending the money and that the value matches the amount of the loan.

Documentation for Conventional loans

You’ll need to provide various proof of income documents to verify your financial situation, including:

• Pay stubs: Current income.
• W-2 forms: Annual income.
• Tax returns: Income over the past two years.
• Bank statements: Financial stability and available funds.
• Credit report: Creditworthiness.