Conventional loans are one of the most popular types of mortgages. They are far more popular than FHA, VA, or other home loans and almost all lenders offer them.
Conventional loans tend to have stricter requirements than government-backed mortgages. But with so many homeowners meeting these requirements, a conventional loan might be more accessible than you think.
What is a conventional loan?
A conventional mortgage is a home loan not backed by a government agency such as the FHA, VA, or USDA.
Lenders often sell conventional loans to Fannie Mae or Freddie Mac, which are government-sponsored enterprises (GSEs) that help make mortgage financing available.
While GSEs have financial qualifications that determine who can borrow money for a home and what type of property the loan can finance, they are typically less restrictive than government agencies.
For example: You can use a conventional loan through a GSE to finance a single-family home that you’ll live in year-round, a multi-family investment property, or a second home. FHA loans, on the other hand, can typically only be used to purchase a home that will serve as your primary residence.
Learn More: FHA Loan Requirements and Qualifications
Requirements for a conventional loan
Lenders view conventional loans as a higher risk because the government doesn’t guarantee them. As a result, lenders stand to lose all of the remaining principal and interest on a mortgage if the borrower ends up unable to make payments.
Important!
Because the government doesn’t cover their potential losses, conventional lenders impose higher financial standards on borrowers who want to take out a conventional loan than they do on borrowers who want to take out a government-backed loan.
All conventional loans have to meet certain baseline requirements set by Fannie Mae and Freddie Mac. Each lender, however, is free to impose its own, higher standards, which are known in the business as “lender overlays.” What lenders cannot do is impose standards that would qualify as mortgage discrimination.
1. A credit score of at least 620
Your credit score might be the most important conventional mortgage requirement. If your score is not at least 620, you can’t get approved. Your credit score also affects the mortgage rates lenders will offer you. The higher the score, the lower your rate.
While Fannie Mae and Freddie Mac’s minimum credit score requirement is 620, lenders might require your score to be higher.
Tip:
Even if you don’t have any credit built up, you still might be able to qualify. A 12-month history of on-time rental payments can be used to help you qualify.
2. A debt-to-income ratio of no more than 45%
Your debt-to-income, or DTI, is a percentage that tells lenders how much of your total monthly income goes toward debt payments each month, such as your credit cards and student loans.
Here’s how DTI is calculated:
(Total monthly debt) / (Gross monthly income) x 100 = DTI
For example, say you’re considering a mortgage payment of $1,200. You have a $300 student loan payment and a $250 car payment, and your gross income is $5,000. Here’s how you would calculate your DTI:
($1,200 + $300 + $250) / $5,000 = 0.35 or 35%
In some cases, you’ll need a DTI of 36% or less to borrow from certain mortgage lenders, especially if your credit score is below 700. If you can’t reduce your monthly debt to get below this level, you might want to apply for a smaller mortgage.
Learn More: How to Get a Small Mortgage Loan
3. A minimum down payment of 3%, or 20% with no PMI
Many people assume you have to put down 20% for a conventional loan. Fannie Mae and Freddie Mac, however, only require 3% down.
Good to know: When you put down less than 20%, many lenders will require you to carry private mortgage insurance (PMI) until you’ve accumulated 20% equity through home price appreciation, paying down your mortgage, or a little of each.
A piggyback loan — also known as an 80/10/10 loan — can get you out of this requirement. With a piggyback loan, you put 10% down, but the other 90% of the home’s purchase price is split into two mortgage loans: a main mortgage of 80% and a second “piggyback” mortgage of 10%. The combination of your down payment and the secondary mortgage allows you to avoid PMI.
Not everyone will get approved for a loan with a down payment as low as 3%. For example, Fannie Mae’s 97% LTV Standard mortgage — also known as a Conventional 97 loan — allows 3% down but requires at least one borrower to be a first-time buyer, and Freddie Mac’s Home Possible program requires a credit score of at least 660.
Use our mortgage calculator to determine your monthly payment and what home loan is right for you.
Here are some popular low-down-payment conventional mortgage programs to consider:
4. A property appraisal verifying the home’s value and condition
Lenders commonly require a home appraisal before they approve a mortgage. The appraisal reveals whether the home’s value is at, above, or below the price you’ve agreed to in your purchase contract. The lender will only be willing to approve the mortgage if the home is valued at or above the purchase price.
Remember:
The home is collateral for the mortgage, so the lender wants to make sure the collateral is acceptable. It has to be a property it can sell to recoup its losses if you fall into foreclosure.
What happens if the appraisal says the home is worth less than the contract price? Suppose you have agreed to buy a house for $300,000 and the appraisal says it is only worth $280,000. Here are several options to keep the deal from falling through:
- Make up the difference by putting an additional 20% down.
- Convince the seller to lower the purchase price to $280,000.
- Meet in the middle at $290,000. This way you only have to bring an extra $10,000 to the table, and the seller doesn’t lose as much.
- Appeal the appraisal if it makes sense to do so.
Limits on conventional loans
A conventional loan can be either conforming or non-conforming. A conforming loan is any mortgage that meets Fannie Mae or Freddie Mac’s requirements.
For conforming loans, the Federal Housing Finance Agency sets a maximum each year for the amount people can borrow. The limit is $766,550 in 2024.
Non-conforming loans, including jumbo loans, aren’t subject to these limits — lenders can set their own limits, which can be in the millions of dollars.
Alternatives to conventional loans
If you have a credit score below 660, you might need to find a conventional loan alternative with more forgiving standards — though as we noted above, borrowers with a score of 620 might qualify for certain conventional mortgage programs.
If you’re having trouble qualifying for a conventional loan and you’ve talked to lenders who offer programs such as HomeReady or Home Possible, you might want to try one of the following non-conventional loans.
No matter what type of mortgage you’re looking for, you should shop around to find the best interest rate and the lowest closing costs. If you’re looking for a conventional loan, Credible can help — check out the table below to get started.
