How Do You Qualify for a Conventional Mortgage?
Learn the credit score, income, debt-to-income, and down payment requirements typically needed to qualify for a conventional home loan.
Millions of people dream of buying a home, but few know how to qualify for a mortgage.
This article outlines the basic steps you need to take to be eligible for a conventional home loan.
Keep in mind that this is just a general overview and that each individual's situation may differ slightly. So if you have any specific questions, be sure to consult with a qualified mortgage broker or lender.
What Is a Conventional Mortgage Loan
A conventional mortgage loan is a type of home financing that is not backed by a government agency. Conventional loans are typically available through banks, credit unions, and private lenders.
These loans generally have longer terms and lower interest rates than government-backed loans, making them a popular choice for many homebuyers.
Whether a conventional loan requires private mortgage insurance (PMI) depends on the size of the down payment, not on the loan type itself. Borrowers who put down less than 20% are generally required to pay PMI until they build enough equity to have it removed.
Another benefit of conventional loans is that they can be used to purchase investment properties and vacation homes, unlike some government-backed loan programs that are limited to primary residences.
Who Can Qualify for a Conventional Home Loan?
In order to qualify for a conventional home loan, borrowers must meet certain requirements set by lenders. Most importantly, borrowers must have a good credit score and a steady income. They must also have enough money saved for a down payment and closing costs.
Additionally, borrowers must be able to prove that they can afford the monthly mortgage payments.
Lenders typically require borrowers to provide documentation of their income and assets, as well as their debts and expenses.
If everything looks good, borrowers should be able to move forward with a conventional home loan. However, it is always important to speak with a lender to get the most accurate information for your situation.
Conventional Loan Credit Score Requirements
If you're planning to apply for a conventional loan, you'll need to meet the credit score requirements set by the lender. Generally, you'll need a credit score of 620 or higher to qualify for a conventional loan, based on guidelines from Fannie Mae's underwriting standards.
However, some lenders may have higher or lower credit score requirements of their own, known as lender overlays. It's important to check with your lender to see what their specific requirements are.
In addition to meeting the credit score requirements, you'll also need to have a good credit history. Lenders will want to see that you've made on-time payments in the past and that you don't have any major blemishes on your credit report.
If you can show that you're a responsible borrower, that can improve your chances of approval, though approval is never guaranteed and depends on your full financial picture.
Conventional Mortgage Debt-to-income Requirements
Anyone applying for a conventional mortgage must meet certain debt-to-income (DTI) requirements. The DTI ratio is a measure of an applicant's monthly debt payments versus their monthly income. For conventional loans, Fannie Mae's selling guide generally sets a maximum DTI ratio of 45%, though some borrowers with strong compensating factors, such as significant cash reserves, may qualify with a higher ratio.
This means that your total monthly debt payments (including your mortgage payment, property taxes, and any other recurring debts) generally should not exceed 45% of your monthly income.
If you're self-employed or have a variable income, lenders will typically use the average of your incomes over the past two years to calculate your DTI ratio.
Conventional Loan Down Payment Requirements
When you're ready to buy a home, one of the first things you'll need to do is apply for a mortgage. Conventional loans are a popular choice, and they come with a few different down payment options.
One of the most important things to consider is the down payment. Down payments on conventional loans can range from as little as 3% for certain first-time homebuyer programs up to 20% or more. If you're looking to put less than 20% down, you'll likely need to pay private mortgage insurance (PMI).
This insurance protects the lender if you default on your loan, and it can be an added expense each month until you reach enough equity to request its removal.
Closing Thoughts
When you're ready to buy a home, one of the first things you'll need to do is apply for a mortgage. Conventional loans are a popular choice, and they come with a few different options.
No matter how much you put down, make sure you're comfortable with your monthly payments and have room in your budget for other expenses like homeowners insurance and repairs.
With a little planning and research, you can find the right mortgage for your needs. If you're ready to explore your options, reach out to our loan officers to review what conventional financing might look like for you.
