A conventional loan is a mortgage loan that is not insured or guaranteed by the government, such as those offered through the Federal Housing Administration, Department of Veterans Affairs, or Department of Agriculture loan programs.
Private lenders offer standard loans, but Fannie and Freddie keep an eye on them. Any bank, credit union, mortgage company, or mortgage broker can give you one. More than half of all mortgages in the U.S. are standard loans. This is likely the type of loan you’ll use if you want to buy a house. So, here’s what you need to know about getting a standard loan.
In general, any borrower with solid credit, stable income, and some money for a down payment will meet conventional loan qualification requirements. However, because conventional loans aren’t insured or guaranteed by a federal agency, their eligibility requirements for borrowers are generally tougher to meet than for government-backed mortgages.
Conventional loan needs vary by lender. But most conventional loans must meet the rules Fannie Mae and Freddie Mac set. These include:
- Minimum credit score requirement of 620
- Minimum down payment required of at least a 3%
- Maximum debt-to-income ratio of 43% (can be up to 49%, based on qualifying factors)
Also, remember that conventional lenders are free to apply stricter requirements than the guidelines set by Fannie and Freddie. If you’re looking for a conventional mortgage after foreclosure or bankruptcy, you might have more trouble qualifying.
Credit score:
The minimum credit score for most conventional loans is merely 620. But some lenders may have a greater credit score requirement than others. A somewhat lower credit score may be tolerated. But the lender often charges a higher interest rate to compensate for the extra risk. On the other hand, folks with stronger credit ratings will likely qualify for reduced rates.
We want to know that people pay their bills on time, and are financially disciplined and good at money management,” says Staci Titsworth, regional vice president sales manager at PNC Mortgage in Pittsburgh, PA.
Applicants with lesser scores or a blemished credit history may opt to seek an FHA loan. This lending option does not impose extra fees or higher rates for individuals with lower credit ratings.Be careful to check your credit report before applying for a mortgage loan, so you’ll know where you stand.
Down payment:
Repeat and first-time home buyers usually get a standard mortgage loan with a down payment as low as 3%. But this conventional loan condition is not set in stone. That’s because lenders can have different down payment rules based on your mortgage needs. Here’s what to expect.
- 5% down payment for return home buyers and those who earn less than 80% of the area median income (AMI).
- 5% down if you’re financing with an adjustable-rate mortgage.
- 10% down payment if you’re buying a second home.
- 15% down payment for those purchasing a multi-unit property, as compared to a single-family home.
Experimenting with a mortgage calculator will help you determine how much your future monthly payments could cost, based on the size of your down payment and interest rate.
Private mortgage insurance:
When you put less than 20% down on a standard loan, your lender will require private mortgage insurance (PMI). This coverage helps protect the lender if you fail on the loan.
PMI does increase monthly mortgage payments. But that’s OK if it allows you to get a standard loan with a down payment you can afford. Also, remember that conventional PMI can be canceled later, once your home reaches at least 20% equity. So you’re not stuck with it forever.
Debt-to-income relationship:
The buyer’s debt-to-income ratio (DTI) also affects conventional loan qualifying. DTI measures your total monthly debts (including mortgage costs) to your gross monthly income. Your lender uses DTI to determine how much a mortgage fits within your monthly budget.
Many lenders want this number to be less or equal to 36% of the borrower’s income. However, conventional loans may accept a DTI as high as 49%.
To find your debt-to-income ratio, add up your loan payments, including:
- Student loans
- Personal loans
- Car loans
Property requirements:
A lender won’t accept a mortgage for an amount greater than the home’s value. Before closing on the loan, the lender will evaluate the property to determine its fair market value.As an example, let’s say a buyer has decided to pay $200,000 for a home, but the appraisal comes in at $190,000.
In this case, the home buyer should use this appraisal as a bargaining chip to get the seller to lower the price to a level the lender will fund.Or, the buyer could pay the extra $10,000 out of pocket to compensate for the lower borrowing limit. This $10,000 would be added to the down payment you’d already agreed to pay.
Property value isn’t the only thing to watch for when getting a traditional loan appraisal. Sometimes during a home inspection, the appraiser may require another professional’s view.If the appraiser sees water stains or a lot of leaky faucets, he may request a plumbing inspection. The seller may need to make changes, which could delay a closing,” Titsworth says.
However, conventional loans have less strict assessment and property requirements than FHA, VA, or USDA loans. This is another advantage to conventional: You can qualify for a home in slightly worse shape, and plan to make the repairs after your loan is approved and you move in.
Closing costs:
Closing costs include application fees, such as a lender’s origination fee. Plus, expect seller fees for an appraisal, title insurance, and credit reporting fees.
Sometimes, a lender or seller will pay all or some of these expenses, based on the strength of the market and desire to close the transaction. Check whether your chosen loan offers lender credits. Also ensure that any seller contributions are within Fannie Mae and Freddie Mac’s standard loan requirements.
Typically, sellers and other interested parties can give the following amounts, based on the home price and down payment amount.
- Less than 10% down: 3% of the purchase price
- 10 to 25% down: 6% of the selling price
- More than 25%: 9% of the purchase price
Conventional loan limits 2024:
The amount of money you borrow with a traditional loan must also fall within conforming loan limits. In 2024, that’s $766,550 in most areas, but more in some high-cost places. The Federal Housing Finance Agency (FHFA) reviews these limits every year.
Check your conventional loan qualifications:
For instance, Fannie Mae and Freddie Mac accept a loan amount of up to $1,149,825 in certain high-priced ZIP codes.
Home buyers who need a loan amount above the standard limit should check for the unique limit for their area. Loans exceeding an area’s conventional loan limits are called non-conforming loans. These require a jumbo loan, not a standard loan.
Conventional loan rates:
- Today’s average rate for a standard loan starts at 6.555% (6.604% APR) for a 30-year, fixed-rate mortgage, according to our lender network.
- For a 15-year standard loan, the average rate drops to 5.899% (5.978% APR).
Benefits of a traditional home loan:
Conventional loans are probably the most popular type of mortgage. However, government-backed mortgages have some unique benefits, including small down payments and flexible credit standards. First-time home buyers often need this kind of freedom.
Conventional loan criteria FAQ:
Conventional loans typically demand private mortgage insurance (PMI) if the borrower contributes less than 20% of the home’s purchase price. PMI typically costs between 0.3 and 1.5 percent of the loan amount per year and is added to the borrower’s monthly mortgage payment until they have 20% equity in the home.
Is a home inspection required for a conventional loan?
A home inspection is not technically required for a conventional loan, but it is strongly recommended.
Do conventional loans require an appraisal?
Yes, most conventional loans require a house assessment to determine the worth of the property being purchased or refinanced. The appraisal is an independent assessment of the property’s value conducted by a professional appraiser who considers criteria such as the property’s location, size, condition, and comparable transactions in the region. The appraisal assists the lender in determining whether the property is worth the amount borrowed. It also prevents the borrower from overpaying for the property.
What are the prerequisites for obtaining a conventional loan?
Conventional loan requirements vary by lender, but often include a credit score minimum, a down payment, income and employment requirements, and a debt-to-income ratio of no more than 43 or 45 percent.
Can I get down payment help with a conventional loan?:
Yes, you may be able to get down payment assistance with a conventional loan, based on the lender, the location of the property, and your finances.
Find out if you meet the standard loan requirements:
Conventional home loans have low down payment requirements, which makes them a great choice for many first-time home buyers. Check your conventional loan status with a lender. If you don’t qualify, apply with another. It’s best to get preapproval with several lenders and compare their quotes. Get started today with the link below.
