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Conventional Loan Requirements

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Photo by Tom Rumble on Unsplash
Josh Rapaport
February 6, 2023

If you have plans to buy a home this year or in the coming year, this is the time for you to start looking at the available types of mortgages. While at it, make sure to understand the requirements attached to conventional home loans, including those who qualify for them.

Conventional home loans are often thought of as “regular mortgages.” These loans aren’t backed by the government, even though you might find a government-sponsored company selling or helping to service them.

As you begin shopping for a home loan, it’s important to understand what to expect from them. In this guide, you’ll learn everything there’s to learn about conventional home loans, including their requirements and potential alternatives. Read on to learn more!

Requirements for Conventional Loans In 2022

As you continue to learn the benefits of a conventional home loan, the following are its basic requirements:

Property Requirements

All conventional loans have preset property requirements. The home you want to buy should satisfy the criteria below:

  • Appraisal required
  • Single-family homes and no more than four units for multi-unit homes
  • If buying a condo, 51% of the available units must be second homes or owner-occupied
  • A residence, not a commercial investment
  • No existing claims against the home
  • Structurally sound

Additionally, you should note that lenders won’t lend you more than what the home is worth. The lender will normally order an appraisal after you have signed a purchase agreement. They need the appraisal to confirm that the asking price doesn’t exceed its value.

Credit score

The general rule of thumb is that an applicant must have a credit score of at least 620. Nevertheless, a better credit score will guarantee lower PMI costs and reduced interest rates. Applicants with a score of at least 720 typically get the lowest mortgage rates.

A lender will pull your credit report and credit score immediately after you have applied for a mortgage. Your history will determine how much you can borrow. This means that it can prove challenging to get financing when you have a history of late payments and missed payments.

Loan limits

To qualify for the conventional conforming mortgage, the amount applied should fall within the limits set by the FHA. Please note that these limits change yearly and are generally higher in areas experiencing exceptionally high property values.

For example, the conforming loan limit for a single-family home in 2022 is $647,200.

Down payment

A common misconception among first-time home buyers is that they need to put in a 20% down payment for every purchase. The reality is that a standard conventional mortgage only requires a 5% down payment. Others may allow you to borrow with a 3% down payment.

Remember that any conventional loan with a less than 20% down payment will need you to have private mortgage insurance. You can request the lender to remove the insurance premium after you have built 20% home equity.

Debt-to-income ratio

The mortgage lender will look at your existing debt in comparison to your monthly income before approving the home loan. Debt-to-income ratio is the amount of your gross monthly income that goes toward servicing your debts.

When it comes to conventional loans, lenders prefer borrowers having a DTI ratio of 36% or less. Nevertheless, they sometimes approve applications of DTIs of up to 43%. A DTI of between 45-50% may also get approved if you have compensating factors.

Examples of notable compensating factors are large cash reserves and a high credit score.

Income and employment

Approval for a conventional home loan also requires a minimum of two years of stable and consistent income in the same field or with the same employer. There are different types of incomes that can assist you in qualifying for this loan, including the following:

  • Contract or gig work
  • Hourly or salary income
  • Self-employment
  • Bonuses
  • Part-time income
  • Commission
  • Overtime

Lenders also have the discretion to include other sources of income for eligibility purposes, e.g., Social Security payments, retirement income, child support, and alimony. For child support and alimony, the lender will expect these payments to continue for at least three years.

You’ll need to document all income sources using your most recent pay stubs, W-2s, bank statements, and tax returns. If you’re a self-employed borrower, the lender will require you to furnish at least two years of personal and business tax returns.

At a Glance: Qualifications for a Conventional Loan

It’s often confusing trying to determine whether you qualify for a conventional home loan. The one thing you should note is that a higher credit score is mandatory. Below is a quick look at the qualifications for a conventional loan.

  • Co-borrowers and co-signers: Yes, but it’s a little bit complex
  • Minimum down payment: Typically, 3% or 5% for low-income and some first-time buyers
  • Gift funds: A down payment and up to 100% closing costs
  • Minimum credit score: 620 if applying for a fixed-rate loan and 640 for adjustable-rate applicants
  • Seller-paid closing costs: They are allowed, but they do have some limits
  • Debt-to-income ratio: Ranges between 45-50% of your gross monthly income
  • Occupancy requirements: investment, second home, and owner-occupied homes
  • Private mortgage insurance: Required for applicants making a down payment of less than 20%
  • Conforming loan limits: $647,200 for a single-family home

In the end, the actual requirements for this type of mortgage will depend on the circumstances surrounding your purchase and the lender you have approached. However, most lenders tend to conform to the approval standards put in place by quasi-government agencies such as Freddie Mac and Fannie Mae.

Who Can Qualify for A Conventional Home Loan?

One of the benefits of a conventional loan is that any borrower having a solid credit score and money for a down payment can qualify for it. However, the fact that they aren’t backed or insured by the government means their eligibility requirements are tougher.

Borrowers applying for government-backed loans tend to have softer eligibility requirements. Examples of these types of loans include the following:

  • FHA loans – Insured by the Federal Housing Administration
  • USDA Loans – It’s a housing program that falls under the Department of Agriculture
  • VA Loans – They are partially guaranteed by the Department of Veterans Affairs

Also, remember that conventional home lenders are at liberty to enforce eligibility requirements that are stricter than those set by quasi-government agencies. For example, you may find it challenging to qualify when applying for this loan after a bankruptcy or foreclosure.

It may also be a good idea to consider looking at government-backed mortgages if you have limited savings for the down payment, a lower income, or a poor credit score. Such mortgages have a relaxed eligibility criterion and often offer more flexibility to borrowers.

Here Are Some Conventional Loan Alternatives

Although statistics indicate that up to 80% of all U.S. mortgages are conventional loans, this doesn’t mean that its alternatives don’t exist. Examples include the following:

Conventional loans vs. USDA loans

USDA offers loans to applicants living in certain designated areas. These loans don’t require the applicants to meet certain eligibility requirements, e.g., making a down payment. Furthermore, a low-income earner can get an interest rate as low as 1%.

On the other hand, these loans are only valid for properties located in designated areas. They also come with maximum income limits for the applicants and require you to have a credit score of at least 640.

Conventional loans vs. VA loans

The Department of Veterans Affairs partially backs the VA loans. Their target market is veterans, surviving spouses, and active-duty personnel. These loans have two major benefits:

  • No mortgage insurance: It helps lower long-term costs and monthly payments.
  • No minimum down payment: If you’re eligible, you can qualify for the loan with a $0 down payment.

But unlike conventional home loans, you can’t use a VA home loan to buy a second home. Moreover, the lender expects you to pay an upfront funding fee at closing. Often, this amount can range between 1.25% and 3.3% of the loan taken.

Conventional loans vs. FHA loans

FHA loans have more flexible eligibility requirements than conventional loans, especially when it comes to the down payment and credit scores. It’s possible to qualify for an FHA loan with a credit score of 500 and a 10% down payment.

If you have a score of 580+, you can get approved for a down payment of as low as 3.5%.

The downside with an FHA loan is that putting a down payment of less than 10% will attract additional mortgage insurance premiums for its entirety. Conventional loans require you to pay private mortgage insurance, which you can remove after attaining an equity stake of 20%.

Conventional Conforming Loan Limits

Most mortgage loans available today are both conforming and conventional – they meet the guidelines Freddie Mac and Fannie Mae have set. These two quasi-government agencies buy mortgages and package them into suitable packages for borrowers.

Conventional conforming loans refer to mortgages that fall below the limits set by the FHA. Using a conforming loan equates to using a low-cost mortgage, as Fannie and Freddie can always acquire it.

The conforming loan limits for 2022 in most counties have increased with the rising market prices. For example, the limits for counties such as Puerto Rico, D.C., and Washington range from $647,200 for a one-unit home to $1,244,850 for a four-unit home.

Nonconforming loans

Nonconforming loans refer to mortgages that don’t meet the purchase criteria set by Fannie and Freddie. These loans normally take the form of government-backed or jumbo loans. Jumbo loans are for homebuyers who want a mortgage that surpasses the limits set by the FHFA.

USDA, VA, and FHA loans are nonconforming loans. The mortgage rates for such loans tend to be higher as they attract a significant risk for the lender. However, there are instances when these rates may skew lower than those offered by conventional conforming rates.

Steps to Qualify for a Conventional Home Loan

Beyond finding an answer to the question, ‘what are the benefits of a conventional home loan?’, you need to look at the steps you’ll have to take to qualify for this loan. Learning these steps beforehand allows you to get your ducks in a row and avoid unnecessary surprises.

The seven steps to qualify for a conventional mortgage loan are:

  • Go through your credit history
  • Boost your credit score
  • Save up for your down payment
  • Reduce your debt-to-income ratio
  • Document your available assets
  • Prove your income
  • Consider avoiding private mortgage insurance

Finding the Best Conventional Loan Lender

Now that you know the benefits of a conventional loan, it’s time to learn how to find a good lender. When comparing lenders, you should approach this process, in the same manner, you would when comparing apples to apples.

Where possible, consider approaching a financial company such as District Lending that’s better placed to work with you in meeting the eligibility requirements. It will shop your loan with tens of mortgage lenders around the country to guarantee you the best rate possible.

District Lending prides itself on providing a wide range of options, low overhead costs, and specialty experience. With it, you’re assured of better rates and better service every time. Click here to learn more about the services on offer.


What are the benefits of a conventional home loan?

Conventional home loans stand out from government-backed loans in that they offer higher loan amounts, no PMI for loans having 80% or less, and no upfront PMI.

What are the steps to qualify for a conventional home loan?

You’ll need to go through seven steps to qualify. Make sure to work on your credit score, prove your income, document available assets, and reduce your debt-to-income ratio.

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