February 9, 2024

Conventional Loan Requirements for Mortgages: Do You Qualify?

When purchasing a home, choosing the right type of mortgage makes all the difference.

The conventional home loan stands out as a popular choice for many homebuyers. Although it has strict requirements for who’s eligible, it’s more versatile than other mortgage types like Federal Housing Administration (FHA) loans or United States Department of Agriculture (USDA) loans. And you might be more eligible than you think.

Here’s everything you need to know about conventional loan requirements, benefits, and how they pave the road to homeownership.

What is a conventional loan?

A conventional loan is any home loan from a private lender, meaning it’s not guaranteed or insured by any government agency. The lender — typically a bank or creditor — takes on the risk if the borrower defaults, meaning that if you can’t pay your money back, the government won’t, either. It’s a big commitment, but it’s versatile and can cover a few different property types, including single-family homes and investment properties.

Conventional loans come with competitive interest rates and flexible terms that are often better than FHA, USDA, or Department of Veterans Affairs (VA) home loans. And if you have a strong credit score when you apply, you might qualify for lower mortgage rates, which means you’ll pay less interest. These loans also don't require you to pay for private mortgage insurance (PMI) — a type of insurance that protects the lender in case you can’t pay back your loan — if you can make a down payment of 20% or more, potentially saving you money in the long run.

While conventional loans offer quite a few benefits, they also come with stricter requirements that not everyone can meet. For example, they typically require a higher credit score than FHA loans, so you have to be in solid financial standing. But don't let this turn you off from conventional loans. They’re within your reach with the right know-how and preparation.

Conventional loans versus conforming loans

A conforming loan is a type of conventional loan backed by Fannie Mae and Freddie Mac, two government-owned mortgage lenders. Both of these mortgage companies work like messengers. They buy mortgages from lenders, like banks, and then offer them to home buyers with better terms than the original lenders would offer. The goal is to make owning a home more accessible with lower interest rates and lower down payments.

The only catch is that the Federal Housing Finance Agency (FHFA) sets a limit on how much these conforming loans can be. In 2023, this cap was $726,200, and anything more than that isn’t eligible — so you’d have to go for a different conventional loan or another type that lets you borrow more.

Who qualifies for a conventional home loan?

This type of loan caters to a diverse range of homebuyers, which makes owning a home more accessible for more people. Let's break down who might want to take on a conventional loan:

- First-time homebuyers. Conventional loans are a viable option for first-time homebuyers if the buyer has a solid credit score and down payment when applying. On top of that, most lenders offer some educational resources and guidance to help first-timers navigate the journey.

- Seasoned homeowners. Conventional loans offer flexible terms and conditions for those looking to upgrade or downsize their homes. The competitive interest rates and varied loan options also cater to many needs and preferences — regardless of experience level.

- Real estate investors. These versatile loans are great for investment properties, offering competitive rates and terms that can make real estate investments more profitable.

- Borrowers with strong credit. People with long credit histories and high scores are prime candidates for conventional loans. There are tons of benefits for people with good credit, including potentially lower interest rates and better terms.

- Self-employed individuals. Some loans are hard for entrepreneurs and self-employed professionals to get because they require proof of employment. But as long as you have proof of income, you can secure a conventional loan.

3 conventional loan requirements

Although conventional loans are versatile and flexible, they do have specific requirements — so not everyone will get approved. This is just to make sure that you, the borrower, can manage the loan before the lender takes the risk to work with you. Let's explore these requirements in more detail:

1. Credit score

First and foremost, your credit score can make or break your approval. Lenders view your credit score as an indicator of your ability to repay the loan, so if it’s too low, they might not approve you.

Generally, the credit score needed for a conventional loan is 620 or higher. But the higher your score, the better the terms you might receive, like a lower mortgage rate. This saves you money over the life of the loan, which is why working on your score is good practice — even if you’re not applying anytime soon.

2. Down payment

Most home loans will require you to pay a down payment at the beginning of the loan period. This gives the lender more equity upfront and means you don’t have to pay as much as the loan continues — the down payment contributes to the loan amount.

While many believe 20% is the minimum down payment needed for a conventional loan, it could vary. You can begin your homebuying journey with as little as 3% down. But a higher down payment can eliminate the need for PMI, reducing your monthly mortgage payment.

3. Debt-to-income ratio

Like your credit score, your debt-to-income ratio (DTI) indicates your creditworthiness and reliability. Lenders evaluate DTI by considering all your monthly debt payments — like credit card debts, student loans, and auto loans — against your gross monthly income.

A lower DTI shows that you’ve managed your debt well, which can enhance your loan approval chances. Typically, a DTI of 43% or lower is what lenders are looking for, but this varies.

3 types of conventional loans

Within the category of conventional loans, there are a few different types to choose from, each with pros and cons. Understanding these can help you select the best option for you:

1. Fixed-rate mortgage

A fixed-rate mortgage offers a constant interest rate throughout the loan's life, leading to predictable monthly payments. It's a good choice if you’re looking for stability, but it could lead to a higher overall rate.

2. Adjustable rate mortgage

Adjustable rate mortgages (ARMs) come with interest rates that adjust over time. They often start lower than fixed-rate mortgages, but they vary based on market changes, which could mean you might pay more than you expected.

Usually, ARMs start with a short period of fixed interest — typically five, seven, or 10 years — before they fluctuate. This means it’s best for borrowers who plan to refinance or sell before the initial fixed period ends.

3. Jumbo loan

Jumbo loans exceed the Fannie Mae and Freddie Mac loan limit, which was $726,200 in 2023. They usually cater to homebuyers in the luxury housing market. Because the loan amount is so high, these require a higher credit score and a larger down payment.

Access your money when you need it with EarnIn

Conventional loans are a great choice if you want to buy a home. But to make sure you’re eligible, you’ll need to stay on top of your credit — that’s where EarnIn comes in.

The EarnIn app lets you keep an eye on your credit score every day, for free, with Credit Monitoring. You can check the score itself along with all the factors that affect it, like your credit use, payment history, and credit age. So when you apply for a mortgage, you’ll go in with confidence.

Download EarnIn for the tools you need to keep moving toward your goals.

Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.

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