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Conventional loan requirements and eligibility in 2024

By: Marcos Zambrano

Updated on: June 22, 2024

Conventional loans explained: Unlocking your homeownership journey

Conventional Loans are a powerful tool for prospective homeowners. These loans, offered by banks, mortgage lenders, and brokers through the two largest government-sponsored entities Fannie Mae and Freddie Mac, are popular for their flexibility and diverse range of terms, allowing for a tailored approach to home financing. Whether you’re a first-time buyer or a seasoned homeowner, Conventional Loans could be the key to unlocking your home ownership dreams.

In the following sections, we’ll delve deeper into the specifics of Conventional Loans – their benefits, how to qualify, and the application process. We’ll also explore how they compare to government-backed loans to help you make an informed decision.

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What Are Conventional Loans?

When it comes to home financing, Conventional Loans stand as a popular and versatile option. But what exactly does “conventional” mean in the realm of mortgages?

Conventional Loans are a type of mortgage loan provided by private lenders – these could be banks, credit unions, or mortgage companies – rather than government entities. What sets these loans apart is that they are not insured or guaranteed by the federal government. Instead, they adhere to the lending guidelines set forth by Fannie Mae and Freddie Mac, two government-sponsored enterprises.

Offered in diverse terms, such as 15, 20, or 30 years, Conventional Loans give potential homeowners the flexibility to choose a plan that aligns with their financial goals. 

They come in two types: conforming and non-conforming loans. Conforming loans adhere to the borrowing limits set by Fannie Mae and Freddie Mac, while non-conforming loans, often referred to as jumbo loans, exceed these limits.

Ideal for borrowers with a good credit score, steady income, and the capability to make a down payment, Conventional Loans offer a clear path to home ownership that can be customized to fit an individual’s specific needs. They can be used for a variety of purposes, including purchasing a primary residence, second home, or investment property, or for refinancing an existing mortgage.

Understanding The Different Types Of Conventional Loans

Different types of Conventional Loans are designed to meet different borrower needs. Let’s explore some of these variants:

Conventional 97 Loan

The Conventional 97 loan program allows down payments as low as 3%, and it’s available to both first-time homebuyers. This program is a great fit for borrowers with solid credit but little savings for a down payment.

HomeReady Loan

Fannie Mae’s HomeReady loan is designed for low-to-moderate income borrowers. It allows for a down payment of just 3%, and co-borrowers who don’t live in the home can be included on the loan.

HomePossible Loan

Freddie Mac’s HomePossible loan offers flexible terms to low- and moderate-income borrowers, including a low down payment requirement and the ability to consider income from other household members and renters.

HomeStyle Renovation Loan:

If you’re looking at a home that needs some work, Fannie Mae’s HomeStyle Renovation loan may be a great fit. It allows you to borrow based on the improved value of the property, which could include the cost of repairs or upgrades.

Adjustable-Rate Mortgage (ARM)

This loan has an interest rate that can change after an initial fixed-rate period, typically 5, 7, or 10 years. ARMs can be a good choice if you expect your income to rise or plan to live in the home for only a few years.

Fixed-Rate Mortgage

This is the most common type of Conventional Loan, with a fixed interest rate for the entire term of the loan, offering predictability in your monthly payments.

In our next section, we’ll take a closer look at the benefits of Conventional Loans, shedding more light on why they may be the right fit for your homeownership journey.

What Are The Benefits Of Conventional Loans?

When choosing a mortgage loan, understanding the benefits associated with each type can be instrumental in making an informed decision. With Conventional Loans, the advantages are vast and varied, often making them an appealing choice for borrowers. Here are some of the key benefits:

Flexible Terms and Loan Amounts

Conventional Loans are available in varying terms, typically 15, 20, or 30 years, and both fixed and adjustable-rate options.

Additionally, certain lenders may be able to offer “odd-year” mortgages. These are loans where you can basically choose the amount of years that you want such as 18 or 29 years for example. This means borrowers can select a loan term that aligns with their financial goals. 

Conventional loans may also provide with a higher loan amount than any of the government-backed loans such as FHA. 

For example, in high-cost areas such as California, New York, DC, Hawaii, Alaska and others, the maximum loan amount allowed for Conventional loans is $1.3 million. Meanwhile, for most the country, the maximum loan amount is $764,000 for a single family home.

Lower Interest Rates with Good Credit

For borrowers with strong credit scores, Conventional Loans often offer lower interest rates than their government-insured counterparts. Over the lifespan of a loan, this could result in substantial savings.

Low Down Payments Available

First-time homebuyers taking advantage of Conventional Loans only need a minimum 3% down regardless of income, while those who have purchased in the past, the minimum requirement increases to 5% down.

No Upfront Mortgage Insurance 

Unlike some government-backed loans, Conventional Loans don’t require an upfront mortgage insurance payment.

No Monthly Mortgage Insurance With 20% Down

If the borrower puts at least 20% down on a Conventional Loan, they won’t be required to carry monthly mortgage insurance. This can amount to considerable savings over time.

Option to Cancel Private Mortgage Insurance (PMI)

While PMI is required on Conventional Loans with down payments less than 20%, it can be cancelled once the borrower reaches 20% equity in their home. This is not the case with FHA loans, where mortgage insurance, in most cases, remains for the life of the loan.

Diverse Property Choices

Conventional Loans can be used to finance a wide variety of property types, including primary residences, second homes, and investment properties.

Property Appraisal Waivers

In certain cases, lenders may not require a full appraisal when processing a loan application for an existing home. This may be the case for properties who already have an existing Conventional Mortgage or if the buyer is putting a substantial down payment such as 20%, 25% or more.

Qualifying For A Conventional Loan in 2024: What You Need To Know

Securing a Conventional Loan requires meeting specific eligibility criteria. Though these requirements may vary slightly among lenders, the following are generally needed for approval:

Credit Score

A high credit score can increase your chances of approval for a Conventional Loan and may also secure you a lower interest rate. Typically, the minimum credit score requirement for a Conventional Loan is 620 but a score of 740 or above is often needed for the best rates. A high credit score will help you score low mortgage insurance premiums if you are putting less than 20% down and mortgage insurance is required.

Borrowers who have a lower credit score or negative items on their credit history, may want to consider applying for an FHA loan. This type of loan does not require borrowers with lower credit scores to pay additional fees or higher interest rates.

Debt-to-Income Ratio (DTI)

Your DTI ratio is a measure of your monthly debt payments relative to your gross monthly income. Most lenders prefer a DTI of 45% or lower, although in some cases, this can go up to 49.9% with compensating factors.

To calculate your debt-to-income ratio, add up your loan payments, including:

  • Student loans – Even if you do not have a monthly payment, assume your monthly payment is 1% of the balance.
  • Auto loans
  • Personal loans
  • Credit card minimum payments
  • Your projected mortgage payment

 

Other items that need to be included such as child support or alimony payments if you are required by the court. Then divide that sum by your gross monthly income.

Down Payment

While it’s possible to get a Conventional Loan with as little as 3% down if you are considered a first-time homebuyer, repeat buyers have a 5% down payment minimum. However, a down payment of at least 20% allows you to avoid private mortgage insurance (PMI) and thus, reducing your monthly payment.

Here is a quick chart of minimum down payment requirements that you need to consider with Conventional Loans:

 
  • 3% down payment for first-time homebuyers
  • 5% down for repeat buyers
  • 5% down when there is a “non-occupant” co-borrower in the loan
  • 10% down payment when buying a second/vacation home
  • 10% down when acquiring an adjustable-rate mortgage (ARM)
  • 15% down for multi-family homes (2-4 units)
  • 15% down for investment properties
  • 25% down for investment condominiums
  • 25% minimum down payment for non-occupant multifamily properties

Stable Income

Lenders will look for proof of a stable, reliable income from all sources if needed. Some documentation requirement that you may encounter when applying for a conventional loan are:

For salaried or hourly employees:

  • 2 years W2
  • 1 month of pay stubs

 

For self employed borrowers:

  • Most recent 2 years of tax returns for both personal and business
  • Year-to-date Profit & Loss statement
  • Letter from a CPA or tax professional affirming existence of the business and years that the borrower has been operating their business
  • Business License

 

For Retirees:

  • Social Security benefits letter
  • Pension awards letter
  • 401(k)/IRA or retirement account withdrawals

 

Other non-traditional types of income:

  • Child Support income – Court ordered child support agreements and proof of receipt
  • Alimony – Court ordered alimony agreement and divorce decrees as well as proof of receipt
  • Rental income – 2 years tax returns with Schedule L
  • Stock Income/Capital Gains – 2 years of tax returns

 

Loan-to-Value Ratio (LTV)

This is the percentage of the home’s value that you need to borrow. A lower LTV generally leads to more favorable loan terms. If your LTV is 80% or less, you can avoid PMI.

Property Appraisal

Lenders will require an appraisal of the property to ensure its value matches the loan amount. If the appraisal comes in lower than the sale price, you may need to renegotiate the contract or come up with the difference in cash.

There are certain occasions in which property appraisals may not needed . These include situations where the borrower is putting at least 20% down or when they are refinancing an existing Conventional Loan.

Closing Costs

Closing costs are an inevitable part of acquiring a conventional loan. The closing costs associated with a conventional loan depend on the size of the loan, as well as the type of loan and borrower’s specific situation. Generally, typical closing costs can range from 2% to 5% of the total loan amount.

Some of the common fees included in closing costs include:

  • Origination fees – charged by lenders for processing and underwriting your loan, typically ranging from $900 to 1% or more of the loan amount.
  • Appraisal fee – necessary to assess how much a property is worth; this fee ranges from $500 to $700.
  • Credit report fee – incurred when ordering credit reports on potential borrowers; this cost may be covered by lenders and is usually $75 per person.
  • Title search fee – which covers services such as researching public records to ensure there are no liens or other encumbrances against a property; this cost can range from $100 to $1,000 depending on the complexity of the title search and the state where the property is located.
  • Title insurance fee – insurance that covers both buyers and lenders against any losses related to unknown claims against a property; typically this cost ranges between 0.5%-2% of the home’s purchase price, split between buyer and lender (the buyer pays for their portion at closing).
  • Survey fee – covers services such as checking for accuracy in legal descriptions, verifying boundaries, finding out if there are encroachments or right-of way issues; this cost can be anywhere between $200-$700 depending on its complexity. Some states such as Florida require a Survey but other states do not have this requirement.
  • Recording fees – paid to local governments for registering documents such as deeds and mortgages; these fees vary from county to county but usually run around $100-$300 per document recorded.
  • Courier/wire transfer fees – these fees cover expenses associated with transferring funds electronically between banks or other financial institutions; they usually range from $20-$50 per wire transfer/courier service used at closing.

 

The above mentioned items are just some examples of what could be included in your Conventional Loan closing costs, however you may also encounter additional items depending on your specific situation such as mortgage tax, attorney’s fees, HOA dues or tax prorations which need to be taken into consideration when budgeting for a new home purchase.”

Meeting these criteria doesn’t guarantee approval, as lenders also consider other factors, such as the type of property and your overall financial health. It’s essential to discuss your situation with a qualified loan officer to understand your eligibility better.

Today's conventional loan rates - June 22, 2024

Product Interest rate APR
30-year fixed-rate 6.547% 6.622%
20-year fixed-rate 6.052% 6.136%
15-year fixed-rate 5.859% 5.984%
10-year fixed-rate 5.758% 5.961%
7-year ARM 6.375% 7.39%
5-year ARM 6.548% 7.644%

Applying For A Conventional Loan: A Step-By-Step Guide

Embarking on your home buying journey involves various steps, including navigating the application process for a Conventional Loan. Here, we break down the process into manageable steps to help you understand what to expect:

Evaluate Your Financial Situation: Start by taking a close look at your financial status, including your credit score, income, debts, and savings. Use our Mortgage Estimator to get an idea of what you might qualify for.

Pre-Qualification: Reach out to lenders to begin the pre-qualification process. This involves a basic review of your financial situation to provide an estimate of how much you might be eligible to borrow.

For a more in-depth look of your financials and qualifications, we encourage you to opt for a Pre-Approval instead of a Pre-Qualification.

Choose Your Lender: Compare several lenders considering their interest rates, loan terms, fees, and customer service. Once you’ve chosen a lender, get a pre-approval letter, which shows sellers that you’re a serious buyer with verified financing.

Select Your Loan Type: Choose between a fixed-rate or an adjustable-rate Conventional Loan, and decide on the loan term that best suits your financial goals.

Complete Your Loan Application: Fill out the loan application provided by your lender. This will require detailed information about your income, assets, employment, and debts.

Property Appraisal: Your lender will order an appraisal to confirm the property’s value. If the appraisal is satisfactory, the loan process can continue.

Underwriting: The lender’s underwriter will review your application, verifying your information and ensuring the loan fits the lender’s and regulatory guidelines.

Closing: The day is finally here and you are done!

Once approved, you’ll attend a closing meeting to sign all necessary paperwork, pay your down payment and closing costs, and finalize the loan.

In the next section, we’ll help you understand the potential scenarios in which a Conventional Loan may not be your best option, guiding you towards the right decision.

Comparing Conventional Loans And Government-Backed Loans

When exploring your mortgage options, it’s essential to understand the differences between Conventional Loans and government-backed loans.

Conventional Loans vs. FHA Loans:

Federal Housing Administration (FHA) Loans are designed to help low-to-moderate-income borrowers who may not qualify for a Conventional Loan.

Some highlights of FHA loans include:

  • Down Payment: FHA loans require a down payment as low as 3.5%, compared to a minimum of 3% for Conventional Loans.
  • Credit Requirements: FHA loans typically have more lenient credit score requirements, with loans available to borrowers with scores as low as 520.
  • Mortgage Insurance: FHA loans require both upfront and annual mortgage insurance premiums, regardless of the down payment amount. In contrast, Conventional Loans only require private mortgage insurance (PMI) if the down payment is less than 20%, and it can be removed once the borrower reaches 20% equity in their home. In most cases, the Mortgage Insurance for FHA loans is mandatory for the life of the loan.

Conventional Loans vs. VA Loans:

Veterans Affairs (VA) Loans offer significant benefits for eligible military service members, veterans, and their families.

  • Down Payment: VA loans don’t require a down payment, whereas Conventional Loans typically require at least 3% down for first-time homebuyers.
  • Credit Requirements: VA loans tend to have more flexible credit requirements than Conventional Loans. In fact, the VA does not have a minimum credit score guideline but rather, the lenders who offer VA loans may set a minimum themselves according to their risk tolerance. Some lenders may offer VA loans with credit scores as low as 500.
  • Mortgage Insurance: VA loans do not require mortgage insurance, regardless of the down payment amount. This can result in substantial savings compared to Conventional Loans, where PMI is required if the down payment is less than 20%. However, VA loans do require a “Funding Fee” for veteran borrowers who do not have at least a 10% service-related disability.

 

Conventional Loans vs. USDA Loans:

USDA Loans, backed by the United States Department of Agriculture, are designed to promote homeownership in rural areas.

  • Down Payment: Like VA loans, USDA loans can offer 0% down payment options, compared to the 3% minimum on Conventional Loans.
  • Location Requirements: USDA loans are restricted to rural areas as defined by the USDA, whereas Conventional Loans have no location restrictions.
  • Income Limits: USDA loans come with income limits based on the median incomes in the area where you’re buying. Conventional Loans do not have income limits.
  • Debt to Income Limits: USDA loans have a much stricter debt-to-income requirement than conventional loans. The maximum debt to income for USDA loans is 29% housing and 41% back-end ratio. This means that the housing payment cannot exceed more than 29% of the gross monthly income and the overall monthly liabilities may not exceed more than 41% of the gross income.

Frequently asked questions about conventional loans

What is a Conforming Loan?

A conforming loan is a type of Conventional Loan that adheres to the loan limit guidelines set by Fannie Mae and Freddie Mac. In most areas, the conforming loan limit is $548,250, but it can be higher in areas with high-cost housing.

Is it hard to qualify for a Conventional Loan?

While the qualification requirements for Conventional Loans can be stricter than government-backed loans, they are not impossible to meet. Borrowers need a decent credit score, a stable income, a reasonable debt-to-income ratio, and must be able to make at least a 3% down payment.

Can first-time homebuyers get a Conventional Loan?

Yes, first-time homebuyers can definitely get a Conventional Loan. In fact, some Conventional Loan programs are designed specifically to help first-time buyers purchase a home.

What’s the difference between a fixed-rate and an adjustable-rate Conventional Loan?

With a fixed-rate loan, your interest rate and monthly payments stay the same for the life of the loan. An adjustable-rate loan, on the other hand, has an interest rate that can change over time, typically after an initial fixed-rate period.

What costs are involved in a Conventional Loan?

Costs can include a down payment, closing costs, and monthly payments that may include principal, interest, property taxes, homeowners insurance, and possibly private mortgage insurance (if your down payment is less than 20% of the home price).

What is the downside of a conventional loan?

The main downside of a Conventional Loan is that your down payment may be higher than with government-backed loans. Additionally, you may need to pay for mortgage insurance if your down payment is less than 20%. Finally, qualifying requirements can be stricter and the interest rates and fees may be slightly higher.

What type of buyer should consider a conventional loan?

A Conventional Loan may be the right option for buyers who have a credit score above 700, a stable income, and can afford to make at least a 3% down payment.

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