If you’re ready to purchase a home and have a solid credit history or a larger down payment saved, a conventional loan might be the right option for you. Conventional loans are among the most popular types of mortgages, offering flexibility in terms of loan amounts, repayment periods, and overall costs.

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In this article, we’ll break down what conventional loans are, their key requirements, and how they compare to other mortgage options.

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What is a Conventional Loan?

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A conventional loan is a type of mortgage that is not insured or guaranteed by the federal government, unlike FHA or VA loans. These loans are offered by private lenders, such as banks, credit unions, and mortgage companies, and are generally available to borrowers with strong credit profiles and stable financial histories.

Conventional loans are available in two primary types:

• Conforming loans, which adhere to the loan limits set by the Federal Housing Finance Agency (FHFA) and can be sold to Fannie Mae or Freddie Mac.

• Non-conforming loans, also known as jumbo loans, which exceed FHFA limits and have different qualification requirements.

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Conventional loans typically offer competitive interest rates and more loan term options, but they may also require higher down payments and stricter credit qualifications than government-backed loans.

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Conventional Loan Requirements

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Conventional loans are best suited for borrowers with strong credit scores, stable income, and the ability to make a larger down payment. Here are some general requirements:

• Credit Score: While requirements can vary by lender, most conventional loans require a minimum credit score of 620. However, a score of 700 or higher is generally preferred to secure the best interest rates.

• Down Payment: Conventional loans typically require a down payment of at least 5% of the home’s purchase price. However, borrowers who put down 20% or more can avoid paying private mortgage insurance (PMI). First-time homebuyers or those with lower down payments may still qualify for conventional loans, but PMI will be required if the down payment is less than 20%.

• Debt-to-Income (DTI) Ratio: Lenders prefer a DTI ratio of 43% or less, though some may allow up to 50% for highly qualified borrowers.

• Income and Employment History: Lenders typically require a steady employment history of at least two years and consistent income to qualify.

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Conventional Loan Down Payments

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One of the most appealing aspects of conventional loans is their flexibility in down payment amounts. While a 20% down payment is ideal to avoid PMI, some lenders offer conventional loans with down payments as low as 3% for qualifying first-time homebuyers.

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Private Mortgage Insurance (PMI)

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Borrowers who put down less than 20% of the home’s purchase price on a conventional loan will be required to pay Private Mortgage Insurance (PMI). PMI is designed to protect the lender in case the borrower defaults on the loan. PMI costs typically range between 0.3% to 1.5% of the loan amount per year, depending on the loan size and the borrower’s credit score.

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Unlike FHA loans, where mortgage insurance is required for the life of the loan (unless certain conditions are met), PMI on a conventional loan can be removed once the borrower has 20% equity in the home.

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Conventional Loan Limits

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Conventional loans must adhere to loan limits set by the Federal Housing Finance Agency (FHFA). For 2024, the conforming loan limit for a single-family home is $726,200 in most areas, while in high-cost areas, the limit can go up to $1,089,300.

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For homes priced above these limits, borrowers would need to apply for a jumbo loan, which typically requires higher credit scores, larger down payments, and more stringent approval processes.

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Interest Rates on Conventional Loans

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Interest rates on conventional loans are typically determined by the borrower’s credit score, down payment, and overall financial profile. Borrowers with strong credit and larger down payments tend to qualify for the lowest rates. Conventional loan rates are generally lower than those of government-backed loans for well-qualified borrowers.

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Benefits of a Conventional Loan

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Conventional loans come with several benefits that make them attractive to homebuyers:

• Lower Overall Costs: While FHA and VA loans require upfront and ongoing mortgage insurance premiums, conventional loans only require PMI if the down payment is below 20%, and it can be removed once you reach 20% equity.

• More Flexibility: Conventional loans offer more loan options, including different term lengths (e.g., 15, 20, or 30 years), and the ability to finance a wider variety of property types.

• No Upfront Mortgage Insurance: Unlike FHA loans, conventional loans do not require an upfront mortgage insurance premium, which can lower the overall cost of the loan.

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Conventional Loan Credit Score Requirements

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Credit score plays a significant role in qualifying for a conventional loan. Borrowers with credit scores of 740 or higher will generally receive the best interest rates and terms. However, lenders will often approve borrowers with scores as low as 620, though this may result in higher interest rates and PMI requirements.

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Debt-to-Income (DTI) Ratio for Conventional Loans

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Conventional loan lenders generally prefer a DTI ratio of 43% or less, meaning that no more than 43% of your gross monthly income should be spent on debt payments, including your mortgage. However, highly qualified borrowers may still be approved with a DTI ratio up to 50%.

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Conventional Loan Income Requirements

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While conventional loans don’t have specific income limits, borrowers must demonstrate that they have a stable and sufficient income to cover the mortgage and other debts. Lenders will typically require documentation such as W-2s, tax returns, and bank statements to verify employment and income history.

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The Bottom Line on Conventional Loans

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Conventional loans are:

• A great option for borrowers with strong credit and stable finances who can afford at least a 5% down payment.

• Available with a variety of term lengths and interest rate options, allowing flexibility in repayment.

• Typically less expensive over time for borrowers who can avoid or remove PMI by putting down 20%.

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If you’re looking for a loan with more flexibility and lower long-term costs, a conventional loan might be the best choice for your home financing needs. Reach out to us today to explore your options and take the next step toward homeownership.