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Conventional Loan Requirements

By Gretchen Wegrich Updated on 8/20/2014

Family Home purchaseWhat is a conventional loan? The term conventional loan simply means a loan not back by the government. A conventional conforming loan means a loan backed by Fannie Mae or Freddie Mac.

While conventional home loans differ greatly in their terms and available loan sizes, they share similar guidelines that borrowers must satisfy in order to qualify:

 

 

  • Credit: Most lenders follow Fannie Mae and Freddie Mac guidelines when extending credit. Borrowers are required to have a middle score of at least 620 in order to qualify for a fixed interest rate, and at least 640 to qualify for an adjustable-rate mortgage.
  • Loan-to-Value Ratio (LTV): The minimum down payment required by conventional loans is 5%, which can come from the borrower’s own funds, a gift from his family, or in the form of down payment assistance programs.
  • Debt-to-Income (DTI): Most borrowers must have a debt-to-income ratio of 45% or less to acquire a conventional loan. However, ratios of up to 50% can be allowed with strong compensating factors: great credit history, high amount of liquid savings, or an expected salary boost with documentation. 
  • Documentation: In order to secure a conforming loan, borrowers must present accurate documentation of employment history, income, and assets.
  • Total Debt: Borrowers with a high amount of debt may have some difficulties qualifying for a conforming loan.

Conventional Loan Credit Score Requirements

Conforming conventional loans comprise the majority of conventional loans, being more advantageous than non-conforming loans in many ways. While you can get a conventional loan with a 620 credit score, unless you have a 20% down payment you will be required to pay for private mortgage insurance (PMI). Having a higher credit score will lower your private mortgage insurance payment. 

Click here for more information on Conventional Loan Credit Requirements.

Documentation Required for a Conventional Home Loan

Borrowers applying for a conventional loan will need to fill out a 1003 Uniform Residential Loan Application, which will require personal identity verification such as past addresses and social security numbers. Copies of IDs and social security cards are not usually required. 

Additionally, borrowers must provide employment history and salary history proven by current pay stubs and 2 years of tax returns. Fluctuating income such as self-employment income, commissions, overtime and tips, as well as part-time income will need to be reflected on 2 years of tax returns before being considered. Profit and loss statements will be required for the self-employed. 

Down Payment and Loan-to-Value for a Conventional Home Mortgage

The loan-to-value ratio (LTV) represents the comparison of the loan amount to the total value of the property. As such, an 80% loan-to-value ratio means that the loan covers 80% of the cost of the property. Traditionally, conventional loans have an LTV of 80% and include a down payment of 20% of the property cost, although borrowers can circumvent this requirement several ways.

For instance, borrowers with mortgage insurance may qualify for a much lower down payment requirement. The PMI requirement will be waived automatically when LTV reaches 78%, or at 80% if the borrower requests it. Conventional loans can finance up to 95% of a mortgage, meaning that borrowers must put down a minimum of 5% for properties that are single-family residences.

Debt-to-Income Ratio to Qualify for a Conventional Loan

To qualify for a conventional loan, you must have an acceptable debt-to-income ratio (DTI). For instance, your monthly mortgage payments, including taxes, insurance, and other charges, must comprise less than 28% of your gross monthly income. Furthermore, your total debt payments per month, including student loans, car loans, and credit card debt, should not exceed 45% or more than your gross monthly income. With good credit and other strong compensating factors, many lenders will allow a maximum DTI of 50%

Conventional Mortgage Eligible Property Types

Conventional loans allow borrowers to apply the funds toward a variety of different property types, including condos, planned unit developments (townhouses), modular homes, manufactured homes, and up to 4 family residences. Additionally, conventional loans may finance primary residences, secondary homes, and investment properties.

Lender Overlays

While the guidelines for conforming conventional loans are written by Fannie Mae and Freddie Mac, these companies do not issue loans themselves. Fannie Mae and Freddie Mac purchase eligible conventional conforming loans from lenders on what is called the "secondary market," then bundle them into mortgage-backed securities (MBSs) that they guarantee.  You have to get your loan from an actual lender who may have additional rules, known as overlays, on top of the Fannie Mae and Freddie Mac guidelines. The most common overlay concerns credit scores. While Fannie Mae and Freddie Mac guidelines indicate they may buy loans from lenders with a credit score as loan as 620, some lenders will still require at least a 640 credit score for a conventional loan.

Where to get a Conventional Loan

Choosing the right loan program and lender can take some time to ensure that it’s the best fit for your unique situation. As such, always set aside an appropriate amount of time to compare lenders and rates; even fractional differences between interest rates could save or cost you hundreds if not thousands of dollars over the life of the loan. Remember, patience and persistence can make all the difference.
 

About The Author:
Gretchen Wegrich
Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.

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