What Are the Qualifications for a Conventional Mortgage Loan?

When buying a home, there are many mortgage options you can choose from. A conventional loan is a popular mortgage. However, a conventional mortgage is quite difficult to get. We’ll explain to you what are the qualifications for a conventional mortgage loan.

What is a Conventional Mortgage Loan?

A conventional mortgage is a home loan that is issued by private lenders, such as banks and credit lenders. Although the government agency does not fund this mortgage, a conventional loan still follows the government guidelines. In addition, the lenders usually follow the rules made by Fannie Mae and Freddie Mac.

This home loan is ideal for:

• People who have a stable job and consistent pay stubs.
• A self-worker who has three or more experience and a reliable income.
• Family who have high incomes with a small debt.

In short, you can meet the qualifications for a conventional mortgage loan if you have good credit. You might also need some money for a down payment to satisfy the loan requirements. However, since the government doesn’t guarantee this home loan, the demands of a conventional loan tend to be more strict. 

The Requirements of Qualifications for a Conventional Mortgage Loan

To claim a conventional loan, you must accomplish several requirements. Let’s take a look at these minimum requirements you should prepared to meet below. 

1. Credit Score Requirement

Credit scores might be the most crucial requirement for conventional loans. Typically, your credit score must be at least 620. However, this score is a minimum set by Fannie May and Freddie Mac. Some private lenders might require your credit score to be higher than 620.

Furthermore, your credit also affects the mortgage rate you’ll get. The higher the credit score you have, the lower the rate you might get. Generally, if you want the lowest rate and the best deal, your credit score should be 720 or above. 

Be sure to check your credit score before applying for a conventional loan. Try to improve your credit score by these things:

• Pay your payment or debt regularly and on time;
• Be wise when using your credit card;
• Always evaluate your credit account and
• Consider wisely whenever you open a new credit card account.

2. Debt-to-income Requirement

Debt-to-income or DTI refers to how much you use your monthly income for paying your debts, like student loans and credit cards. DTI is also a crucial consideration for lenders to allow you to claim a conventional mortgage. 

Most lenders want the ratio to be 36% or less. However, a conventional mortgage may allow DTI to be as high as 45%. Keep in mind that the DTI ratio may also affect the interest rate the lenders might offer. If you have a higher DTI ratio, the lenders might offer an expensive interest rate or even reject your application.

3. Down Payment Requirement

A down payment is one of the qualifications for a conventional mortgage loan. The minimum down payment is 3%. However, the lenders won’t always approve the down payment of 3%. Typically, the higher down payment will give a higher chance for mortgage approval. 

Additionally, if you don’t pay the down payment of at least 20%, you must register with Private Mortgage Insurance (PMI). PMI will help to protect the assets in case you fail to pay the debt, meaning you need to pay extra costs to pay the PMI.  

Nevertheless, PMI can be temporary. Once you pay off 20% of your home value, you can request to remove it. 

4. Home Appraisal Process

A home appraisal is an evaluation to determine the value of your property. Lenders will approve the mortgage if the home has more value than the purchase price. If the value is lower than the purchase price, the mortgage process will be complicated. As a result, the lender may reject or offer you a smaller loan.

Here are some tips to navigate the home appraisal process:

• Get information about recent property value: This would help you to stay informed about your home value. Additionally, you can set baseline and realistic expectations about the appraisal.
• Be present at the appraisal: If you attend the appraisal process, you can ask and evaluate the influence of your home value.
• Check the appraisal report: Try to check your appraisal report. If you find something missing, you can negotiate with your lender.

5. Loan Limit

The qualifications for a conventional mortgage loan also include a loan limit. There are two types of conventional loans, which are conforming and non-conforming. A conforming loan is a conventional loan that meets the requirements of Fannie Mae and Freddie Mac.

The Federal Housing Finance Agency sets the loan limit for a conforming loan. The limit can vary based on where is the location of the property. In 2023, most areas in the U.S. have a loan limit of $726,200. Meanwhile, higher-priced locations like Hawaii and California have a limit of $1,089,300.

On the other hand, non-conforming loans or jumbo loans do not follow Fannie or Freddie’s lending standards. Instead, the lender can set their limit and standard. Hence, the limit can be higher than the conforming loans.

6. Documents Requirement

To apply for a conventional mortgage, you must prepare some documents. These are documents that the lender might ask you to submit:

• Your ID card, driver’s license, or other photo ID,
• Tax return for the past two years,
• Your credit report,
• A financial statement to show assets and liabilities,
• Documentation for showing you’ll pay the down payment, 
• Pay stubs for the past month for W2 workers and
• Appraisal of property.

The Benefits and Drawbacks of a Conventional Mortgage Loan

After knowing the qualifications for a conventional mortgage loan, you may wonder about the benefits you could get from this home loan. These are the advantages of a conventional mortgage:

1. Cancelable PMI: You can cancel the Private Mortgage Insurance after you pay off 20% of your debt.
2. Flexible payback periods: Although the common term for a conventional mortgage is 30 years, some lenders may provide flexible repayment timelines. They may also offer adjustable-rate mortgages. 
3. More property types: A conventional loan can be more convenient for you to have a second home or investment property. 

However, a conventional mortgage also has some drawbacks. Here are the disadvantages of a conventional loan:

1. Strict requirements: Conventional loans tend to have rigid requirements. You must meet all demands like credit score, DTI, and down payment. 
2. Not suitable for bad records: If you have a bankruptcy or foreclosure on your records, you need to wait longer to apply for a conventional mortgage. You must wait around seven years after the foreclosure to apply for a conventional loan.
3. PMI: Although you can remove it after you pay off 20% of your loan. You still need to pay extra for PMI’s monthly payment.

Qualify Yourself by Fulfilling the Qualifications for a Conventional Mortgage Loan 

Fulfilling the qualifications for a conventional mortgage loan can take a lot of time, especially if you have bad credit. You can focus on improving your credit score and DTI rate to raise the chance of applying for a conventional loan. The better credit you have, the lower interest rate the lender might offer to you.