Conventional Loan are a great choice for many homeowners because they offer lower costs than some other popular loan types
What Is A Conventional Mortgage?
A Conventional Mortgage is one that’s not guaranteed or insured by the federal government.
Most conventional mortgages are “conforming,” which simply means that they meet the requirements to be sold to Fannie Mae or Freddie Mac. Fannie Mae and Freddie Mac are government-sponsored enterprises that purchase mortgages from lenders and sell them to investors. This frees up lenders’ funds so they can get more qualified buyers into homes.
Conventional mortgages can also be non-conforming, which means that they don’t meet Fannie Mae’s or Freddie Mac’s guidelines. One type of non-conforming conventional mortgage is a jumbo loan, which is a mortgage that exceeds conforming loan limits.
Because there are several different sets of guidelines that fall under the umbrella of “conventional loans,” there’s no single set of requirements for borrowers. However, in general, conventional loans have stricter credit requirements than government-backed loans like FHA loans. In most cases, you’ll need a credit score of at least 620 and a debt-to-income ratio of 50% or less.
Conventional Mortgage Requirements
It’s possible for first-time home buyers to get a conventional mortgage with a down payment as low as 3%; however, the down payment requirement can vary based on your personal situation and the type of loan or property you’re getting:
- If you’re not a first-time home buyer or making not more than 80% of the median income in your area, the down payment requirement is 5%.
- If the home you’re buying is not a single-family home (i.e., it has more than one unit), you may need to put down 15%.
- If you’re buying a second home, you’ll need to put at least 10% down.
- If you’re getting a jumbo loan, the down payment requirement ranges from 20% to 40%. If you’re getting an adjustable-rate mortgage, the down payment requirement is 5%.
- If you’re refinancing, you’ll need more than 3% equity to refinance. In all cases, you’ll need at least 5% equity. If you’re doing a cash-out refinance, you’ll need to leave at least 20% equity in the home. When refinancing a jumbo loan, you’ll need 10.01% – 25% equity, depending on the loan amount.
A mortgage calculator can help you figure out how your down payment amount will affect your future monthly payments.
- Credit score: In most cases, you’ll need a credit score of at least 620 to qualify for a conventional loan.
- Debt-to-income ratio: Your debt-to-income ratio (DTI) is a percentage that represents how much of your monthly income goes to pay off debts. You can calculate your DTI by adding up the minimum monthly payments on all your debts (like student loans, auto loans, and credit cards) and dividing it by your gross monthly income. For most conventional loans, your DTI must be 50% or lower.
- Loan size: For a conforming conventional loan, your loan must fall within the loan limits set by Fannie Mae and Freddie Mac. The loan limit changes annually. In 2020, the limit is $510,400. In 2021, it’s $548,250.