What You Should Know about Conventional Home Loan Requirements
If you've been looking for a mortgage, you're probably aware of conventional loans. They are common in the mortgage world, largely because of their applicability to a wide range of consumers.
The requirements of a mortgage can make or break the deal. So keeping these requirements in mind is one of the first steps in figuring out whether a conventional loan may be right for you.
What Is a Conventional Loan?
A conventional mortgage is a home loan that is sold by private lenders. It is usually purchased from lenders by two government-sponsored entities (GSEs), Fannie Mae or Freddie Mac, and sold to investors or kept by the GSEs as investments. Unlike government-backed loans—including VA loans, FHA loans, USDA loans, and more—conventional home loans are not insured by the government.
The two types of conventional loans are conforming and non-conforming. Conforming home loans follow the guidelines Fannie Mae and Freddie Mac require if they are to purchase a loan, while non-conforming mortgages do not. Often, conforming conventional loans are simply called "conventional loans," which is how we'll use the term in this post.
2019 Conventional Loan Requirements
Requirements generally include the following:
- Credit Score – Most lenders will require that you have a minimum credit score of at least 640, depending on the lender. If your credit is suffering, there are other types of loans, like FHA loans, with requirements that accommodate borrowers with lower qualifications (though this can mean higher rates or other tradeoffs).
Keep in mind that there are different ways to work on your credit to bring it up to the required score to qualify. Check out our blog post on Medium for more information on credit score requirements for a conventional home loan. Additionally, though some lenders will refuse you based just on credit score, at Elevate Mortgage Group, we believe in looking at the whole picture and working with our clients.
Down Payment – Though down payment requirements can vary between lenders, the minimum required is typically between 5% and 20%. But, if you make a down payment of 20% or more, you'll often avoid the requirement of private mortgage insurance (PMI).
Income – You'll need to have a dependable income to qualify for a conventional mortgage. Often, two years of good employment history is required.
Documentation – Documentation you'll need to get together for an application typically includes 60 days of bank statements, 30 days of pay stubs, two years of W2s, and two years of tax returns.
Private Mortgage Insurance (PMI) – PMI is insurance you pay that protects your lender in the event that you can't make payments. The percentage required varies depending on your credit score and is required on most conventional loans with a down payment of under 20%.
You may be able to cancel your PMI once your loan-to-value rate (LTV), the percentage of your home you have not yet paid off, falls below 80%. In other words, you need to have at least 20% equity in your home in order for PMI to be removed.
Debt-to Income Ratio Limit – To qualify for a conventional mortgage, you'll have to have a debt to income ratio (DTI) under 36%. DTI is essentially how much debt you have compared to your gross income. However, even if your DTI is higher than 36%, talk to your lenders to see what kinds of options may exist. You may still be able to qualify, depending on your cash reserves, credit score, down payment, or other qualifications.
Interest – Interest rates for this type of loan vary depending on your credit, length of loan, and lender. If you have a credit score above 760, you'll generally be able to get great rates. And since many people who go for conventional home loans have pretty good credit, rates are often pretty reasonable. Additionally, shorter-term loans usually mean lower rates.
Loan Limits (2019) – The current loan limit, or how much you can borrow for a mortgage, is $4584,350 in the majority of the U.S. The limit changes from county to county, so check your county with the FHA's interactive map.
Reserves – You'll need to have reserves that equal around two or three months of mortgage payments. This helps ensure that if an emergency comes up, like job loss or unexpected medical bills, you'll have money to cover your mortgage while you get back on your feet.
Common Questions on Additional Conventional Mortgage Requirements
Are Home Inspections Required for Conventional Loans?
In short, no, a home inspection is not required for this type of loan.
However, it is a very good idea to get one. A home inspection will tell you whether the installed systems in the home you're considering are functioning properly. It will also help you understand more about potential health hazards in the home. An inspection can be the difference between happiness and a lot of frustration.
For instance, say you buy a home without getting an inspection and a few months later, you find out that there's something wrong with the plumbing or the roof. It might be costly and will likely be frustrating to have to get these fixed.
If you would have gotten the home inspected first, the problems could have been addressed with the previous homeowner. But, without you knowing about the issues beforehand, it usually leaves you responsible (and frustrated).
Do Conventional Loans Require an Appraisal?
Most conventional mortgage lenders will require that you get an appraisal on the home before they'll lend to you.
An appraisal is different from an inspection. Instead of a look at the safety of the home, the home's market value is assessed.
This is important to lenders because if you aren't able to pay on your mortgage, the lender holds the home as collateral. So lenders want to make sure that your home is worth at least as much as you pay for it. That way, if they have to resell it, they won't be losing money.
Can I Still Get a Conventional Loan If I've Gone Bankrupt?
Although bankruptcy can make getting a mortgage a longer process, it doesn't make it impossible. You may still be able to get a loan, even if you have gone bankrupt.
Additional requirements that may help you be able to get a conventional home loan despite past bankruptcy include a waiting period and a review to determine whether you have re-established your credit.
Talk with a mortgage professional here at Elevate to see how we can work with your situation.
Why Are Conventional Loan Requirements the Way They Are?
When a lender gives a loan to a borrower, they are taking on significant risk. A loan for a mortgage is not a small amount of money, and defaults and bankruptcies happen every day.
This risk makes it necessary for a lender to look into people to whom they are considering offering a loan. They want to know whether it's likely that you'll be able to repay the loan. Things that suggest that you're a good investment are a solid employment history, responsible handling of credit, how you handle your debt, and other indicators. These are factored into the requirements to try to minimize the risk of taking on borrowers who might end up defaulting.
Sometimes, if something indicates that a borrower is more of a risk, a lender will allow its occurrence as long as the borrower shows extra promise in another area. For example, a lender may allow a low down payment but require private mortgage insurance. Or, a lender may be lenient on your credit score but require higher interest rates.
Additionally, having requirements in place can help protect borrowers. You definitely do not want to take on a loan that is more than what you can afford, and certain limitations in place can help you avoid that.
Say you found your dream home and are looking for a mortgage. You don't have solid employment and have had fluctuations in your income in the last few years, but you're in love with the home and are hopeful that your job will stabilize sometime soon.
If you are permitted to take on a large mortgage, you might find yourself struggling to make payments in the future because your income is still unpredictable. You could even end up defaulting on the loan because it was something you couldn't afford. Requirements help protect you and the lender from those kinds of situations.
Ultimately, requirements are all about gauging how safe you are as a borrower.
Alternatives to a Conventional Mortgage
As mentioned earlier, it may be useful for you to compare the requirements of conventional conforming loans to those of non-conforming loans, like jumbo loans or portfolio loans. You can also look at government-backed loans, like FHA loans.
FHA loans are a very common type of loan and may be useful to look at, particularly if you have a lower credit score or feel like the down payment for a conventional home loan is a little too hefty.
Requirements Can Vary Between Lenders
When looking for a lender, it is important not to just take the first one to come your way. As with most purchases, a mortgage is something you should shop around for before making a decision. Compare bids from multiple lenders, since their requirements, rates, and fees can vary widely.
Who We Are
At Elevate, we know that buying a mortgage is not a small decision. Our team of professionals works hard to get our clients into the right home with the right mortgage.
If you have any questions about requirements, want to explore your options, or are ready to get started with the loan process, call us today at 801-895-7230.