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Conventional loans are one of the most popular types of mortgages: almost all lenders offer them. In August 2020, 82% of all closed mortgages were conventional loans, according to a report by Ellie Mae, making them far more popular than FHA, VA, or other home loans.
Conventional loans tend to have stricter requirements than government-backed mortgages. But with so many homeowners meeting these requirements, a conventional loan might be more accessible than you think.
Here’s what you should know about conventional loans before you apply:
What is a conventional loan?
A conventional mortgage is a home loan not backed by a government agency such as the FHA, VA, or USDA.
Lenders often sell conventional loans to Fannie Mae or Freddie Mac, which are government-sponsored enterprises (GSEs) that help make mortgage financing available.
While GSEs have financial qualifications that determine who can borrow money for a home and what type of property the loan can finance, they are typically less restrictive than government agencies.
Learn More: FHA Loan Requirements and Qualifications
Requirements for a conventional loan
Lenders view conventional loans as a higher risk because the government doesn’t guarantee them. As a result, lenders stand to lose all of the remaining principal and interest on a mortgage if the borrower ends up unable to make payments.
All conventional loans have to meet certain baseline requirements set by Fannie Mae and Freddie Mac. Each lender, however, is free to impose its own, higher standards, which are known in the business as “lender overlays.” What lenders cannot do is impose standards that would qualify as mortgage discrimination. As a borrower, these are the minimum conventional loan requirements you should be prepared to meet:
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Credit score of at least 620
Your credit score might be the most important conventional mortgage requirement. If your score is not at least 620, you can’t get approved. Your credit score also affects the mortgage rates lenders will offer you. The higher the score, the lower your rate.
While Fannie Mae and Freddie Mac’s minimum credit score requirement is 620, lenders might require your score to be higher.
Your debt-to-income, or DTI, is a percentage that tells lenders how much of your total monthly income goes toward debt payments each month, such as your credit cards and student loans. (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 Many people assume you have to put down 20% for a conventional loan. Fannie Mae and Freddie Mac, however, only require 3% down. 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: 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. 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: 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. 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. 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.Debt-to-income ratio of no more than 45%
Minimum down payment of 3%, or 20% with no PMI
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
Limits on conventional loans
Alternatives to 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.
