A conventional loan is a mortgage that is not insured or guaranteed by a government agency such as the Federal Housing Administration, the Department of Veterans Affairs or the Department of Agriculture. It is the most common way Americans finance a home, and it can be a strong option for buyers with solid credit and stable income. This guide explains the main conventional loan requirements, how private mortgage insurance works, and what you can do to strengthen your application before you apply.
Conforming vs Non-Conforming Loans
Most conventional loans are conforming loans, which means they meet the standards set by Fannie Mae and Freddie Mac, the two government-sponsored enterprises that buy mortgages from lenders. Conforming loans must fall within a maximum loan amount set each year by the Federal Housing Finance Agency. Limits are higher in designated high-cost areas.
Loans above the conforming limit are called jumbo loans and are non-conforming. They usually come with stricter credit, reserve and down payment requirements set by the individual lender.
Credit Score Requirements
Lenders generally look for a credit score of at least 620 for a conventional loan, although individual lenders may set higher minimums, called overlays. Your score also affects your interest rate and the cost of mortgage insurance. Borrowers with higher scores typically receive better pricing, because Fannie Mae and Freddie Mac apply loan-level price adjustments that vary by credit score and down payment.
Before applying, review your credit reports for errors. You can request free reports from each of the three major bureaus at AnnualCreditReport.com. If you discover accounts you do not recognize, follow our identity theft recovery steps before you apply.
Down Payment Requirements
A conventional loan does not require 20 percent down. Eligible first-time buyers can put down as little as 3 percent through programs such as Fannie Mae's HomeReady and standard 97 percent loan-to-value options and Freddie Mac's Home Possible and HomeOne programs, subject to income limits and other criteria for some programs. Other buyers typically need at least 5 percent.
The down payment can usually come from your savings, the sale of another home, or an eligible gift from a family member documented with a gift letter. Lenders will want to see where large deposits came from, so avoid moving money around without a paper trail.
Debt-to-Income Ratio
Your debt-to-income ratio, or DTI, compares your monthly debt payments, including the new mortgage payment, with your gross monthly income. Fannie Mae's automated underwriting can approve some borrowers with a DTI up to 50 percent, while manually underwritten loans usually have lower maximums. Lenders view lower ratios more favorably, and a lower DTI can help you qualify for better terms.
To lower your DTI before applying, pay down revolving balances, avoid new car loans or credit cards, and document all sources of income, such as bonuses or part-time work, if they are stable and likely to continue.
Employment and Income Documentation
Lenders verify that your income is stable and likely to continue. Typical documentation includes:
- Recent pay stubs and W-2 forms, often for the past two years.
- Federal tax returns, especially if you are self-employed or earn commission or rental income.
- Bank and investment statements covering recent months.
- Verification of employment directly from your employer.
Self-employed borrowers usually need two years of tax returns showing consistent income, along with business records.
Cash Reserves
Reserves are funds left over after closing, measured in months of mortgage payments. They are not always required for a primary residence with a single unit, but lenders may require them for investment properties, multi-unit homes, jumbo loans, or borrowers with higher DTI or lower credit scores. Retirement and investment accounts can sometimes count, often at a reduced value.
Private Mortgage Insurance
If you put down less than 20 percent, you will usually pay private mortgage insurance, or PMI. It protects the lender if you default and is typically added to your monthly payment.
The federal Homeowners Protection Act gives borrowers important rights. You can request cancellation of PMI when your loan balance is scheduled to reach 80 percent of the home's original value, provided you have a good payment history and meet other requirements. Lenders must automatically terminate PMI when the balance is scheduled to reach 78 percent of the original value if you are current on payments. Your lender may also allow cancellation based on a new appraisal if your home has increased in value.
Property Requirements
The home must meet the lender's appraisal and property standards. The appraisal confirms the value supports the loan amount. Conventional loans can finance primary residences, second homes and investment properties, though second homes and investment properties carry higher down payment and pricing requirements.
Conventional vs Government-Backed Loans
Conventional loans can be cheaper than FHA loans for borrowers with good credit because PMI can be removed, while FHA mortgage insurance often lasts for the life of the loan unless you put down at least 10 percent. Borrowers with lower credit scores or higher debt may find FHA terms easier. VA loans offer no down payment for eligible service members and veterans, and USDA loans serve eligible rural buyers.
How to Prepare Before Applying
- Check your credit and dispute any errors.
- Pay down credit card balances to lower your utilization and DTI.
- Save for the down payment, closing costs and an emergency cushion.
- Gather two years of income documents.
- Get preapproved by more than one lender and compare Loan Estimates.
Once you apply, the file moves into underwriting. Our guide to the mortgage underwriting process explains what happens next. After you close, you may later lower your payment through a mortgage recast if you come into a lump sum.
The Bottom Line
Conventional loan requirements center on credit score, down payment, debt-to-income ratio, stable income and the property's value. You do not need 20 percent down, and PMI can be removed as you build equity. Preparing your credit and paperwork in advance and comparing several lenders can save you real money over the life of the loan.
Frequently Asked Questions
What credit score do I need for a conventional loan?
Many lenders look for at least 620, but some set higher minimums. Higher scores usually lead to lower rates and cheaper mortgage insurance.
Can I get a conventional loan with 3 percent down?
Yes, eligible first-time buyers can use programs from Fannie Mae and Freddie Mac that allow 3 percent down, subject to program rules. Other buyers typically need at least 5 percent.
When can I remove PMI on a conventional loan?
You can request cancellation when your balance reaches 80 percent of the original home value, and it must end automatically at 78 percent if you are current. Lenders may also allow removal based on a new appraisal.
What is the difference between a conventional and conforming loan?
A conventional loan is any mortgage not backed by a government agency. A conforming loan is a conventional loan that meets Fannie Mae and Freddie Mac guidelines, including the loan limit.