What Is a Conventional Loan?
- A conventional loan is used to finance the purchase of either your primary residence, secondary residence, or a rental property.
- Requires a 3% minimum down payment, which can be as high as 10-20%, depending on what your lender requires.
- Fixed interest rate or adjustable-rate (ARMs) terms.
- Various term lengths, ranging from 10-30 years.
What Are the Requirements?
Conventional loan requirements are pretty stringent—especially when compared to government-backed mortgages. Private lenders want to make sure that you can afford the property that you are buying and that you will repay the loan. To assess your credit risk, they’ll make sure that you meet these minimums:
Credit Score: Most conventional loans require a minimum score of 620-640 but are better suited for applicants with credit scores above 680. The better your credit score, the better your interest rates, terms, and overall costs will be as you are considered a lower credit risk.
For those below this threshold, other loan options may have less favorable terms to account for the increased credit risk. If a conventional loan is in your future, pay attention to your score.
Debt-to-income (DTI) ratio: This measures your monthly debt obligations against your income. Lenders like to see numbers around 36% (the lower, the better your chances of approval), but maybe willing to consider you with a higher DTI depending on the circumstances. A high down payment (over 20%), an excellent credit score (700+), unusually large cash reserves, very high income, or stable, long-term job position (5 years or more at the same job) can all influence what DTI ratio your lender will allow.
Down Payment: Your down payment can vary widely, but expect to put down anywhere from 5-20% of your mortgage value down. The Conventional 97 program, for example, lets you put down as little as 3%, but some lenders require 10-20% or more for larger loans.
Income and Asset Documentation: Your lender will thoroughly verify your income and assets. Prepare to hand over the following when you apply for a conventional loan:
- 60 days of bank statements
- 30 days of pay stubs
- Two years of tax returns if you’re self-employed, own rental properties, or receive non-salary income (like retirement or a pension)
- Two years of W2s
- Proof of social security, retirement, or pension awards and two years of 1099’s
- Rental agreements for any investment properties that you own
- Property Requirements: This year, the conventional loan limit is $510,400 for a single-family home. Higher-cost areas, like Seattle, Washington, or Los Angeles, California, are eligible for larger maximum loans. For 2020, Fannie Mae and Freddie Mac have set conventional loan limits for Seattle at $592,250 and LA at $636,150. If you’re planning to finance multi-unit properties, those limits increase to accommodate the cost of additional units.
CONVENTIONAL LOAN Conventional loans apply to many types of properties, including single-family homes, Planned Unit Developments (detached homes within a homeowner’s association), condos, multi-unit dwellings, co-op properties, and on occasion, manufactured homes.
You can also use conventional loans to finance the purchase of a second home or a rental property. In those cases, interest rates and down payments are usually higher since the property is not your primary dwelling and, as such, is deemed a higher risk by lenders.
