Conventional loans are the only mortgage type not backed by the government and one of the most popular loans for home buyers. Instead, they are insured by private lenders, e.g. banks, credit unions, and mortgage companies. Typically, the timeline for closing with a conventional loan is between 30-60 days.
Requirements for Qualifying for a Conventional Loan
Requirements for conventional loans vary by lender, but are typically as follows:
- Proof of Income: A stable income is required, often with a minimum threshold of around $50,000 per year.
- Personal identification: You’ll need a valid driver’s license or state ID card and Social Security number
- Credit scores for eligibility: A minimum score of 620 is needed to qualify. However, a score that is 740 or higher can help you get the best rates and allow for lower down payments.
- Debt to income (DTI) ratio: Your DTI should generally be below 43% to 45%, though you may be able to go up to 50% for conforming loans.
- Down payment: While a 20% down payment is typical, many fixed-rate conventional loans for a primary residence allow for a down payment as low as 3% or 5%.
- Private mortgage insurance (PMI): If your down payment is less than 20%, you’ll need to pay for PMI on your loan.
- Clean credit history: You should have no recent bankruptcy or foreclosure within the past 7 years.
Types of Conventional Loans
- Conforming loan: Loans that follow guidelines established by Fannie Mae and Freddie Mac, two government-backed entities.
- Jumbo loan: A type of nonconforming loan that lets you borrow beyond the maximum limits of conforming loans. As a result, jumbo loans usually require a higher credit score, a lower debt-to-income (DTI) ratio, and a larger down payment.
- Subprime loan: A non-conforming loan option for those who don’t have a DTI below 50% and a credit score of 620 or higher.
- Portfolio loan: A loan that is kept by the lender, rather than being sold on the secondary market. This allows for flexibility with eligibility requirements as it does not conform to Fannie Mae and Freddie Mac standards.
- Fixed-rate loan: A loan with a stable interest rate that doesn’t change during the loan’s duration. Monthly payments will always stay the same.
- Adjustable-rate loan: A loan with an interest rate that changes over the course of its duration. For a set period, usually the first 3-10 years, it remains fixed and then it will start to increase.
- Amortized conventional loans: A loan where the borrower first pays off the interest followed by the principal until the loan is fully paid off.
Pros & Cons of a Conventional Loan
Pros
- Lower down payments
- Higher debt-to-income (DTI) ratios
- Greater flexibility with property types, including second homes and investment properties
- Higher loan limits, often exceeding those for FHA or USDA loans
- Extended repayment periods, commonly 15-year and 30-year terms
- Lower mortgage insurance rates compared to FHA loans
- Ability to cancel mortgage insurance once you achieve 20% equity in the home
Cons
- Strict credit score and DTI requirements
- PMI premiums if your down payment is below 20%
- Additional costs for non-occupant borrowers, like those investing in Airbnb properties
- A 7-year waiting period if you have a previous foreclosure
Conditions for Qualifying Properties
Conventional loan home conditions are generally straightforward and do not require thorough inspections. Here are the main criteria:
- Located in the U.S., Guam, Puerto Rico, or the U.S. Virgin Islands
- A single-family or multifamily home (no more than four units)
- Classified as a residence (non-commercial)
- Structurally secure and safe
- Appraisal is required
