When it comes to home loans, conventional loans are the most popular option for homebuyers. They offer benefits like:
- Low down payment options,
- Flexible loan terms, and
- The ability to remove PMI (private mortgage insurance) once you reach 20% equity,
Plus, unlike other mortgage types, conventional loans can be used to purchase investment properties and second homes. The main downside is that it can be harder to qualify for conventional loans than it is to qualify for other loan types. So we, at OVM Financial, have compiled this list of conventional loan qualifications to help you find out if a conventional loan is a good fit for you.
Here’s what you need to know about conventional loan qualifications.
Credit Score for a Conventional Loan
While the exact credit score required for a conventional loan varies by lender, you should generally expect to need a score of at least 620 to qualify for a conventional loan. If you want to get a better interest rate and lower down payment, look to have a score of 740 or higher.
Down Payment for a Conventional Loan
With great credit, the down payment for a conventional loan can be as little as three percent. When you put down less than 20 percent, you will need to purchase private mortgage insurance (PMI) to protect the lender, since they’re taking a greater risk by lending such a high percent of the purchase price. But as your home value rises and you pay down your debt, your equity in the property will grow. And once your equity reaches 20 percent, you can have your PMI removed.
Debt-to-Income Ratio for a Conventional Loan
To approve your conventional loan, lenders also consider how much debt you have, compared to the income you earn. This is called your debt-to-income (DTI) ratio. Lenders generally want to see your total debts stay below 45 percent of your gross income (that is, your income before taxes are taken out).
Jumbo Loan vs. Conventional Loan
Most conventional loans are “conforming loans,” which just means that they conform to the industry standard for being traded on the secondary mortgage market. But jumbo loans are part of a special type of conventional loan called “non-conforming loans.” These loans don’t conform to secondary market standards, so they might require higher credit scores and higher down payments.
Jumbo loans are any loan that exceeds the conforming loan limit, which is set by the Federal Housing Finance Agency (FHFA) each year. For 2022, the standard loan limit is $647,200, but in high-cost areas (like California and Hawaii) loans can go up to $970,800 before being considered a jumbo loan.
To learn more about jumbo loans, check out our jumbo loans vs. conventional loans comparison guide.
Do You Have Questions About Conventional Loan Qualifications?
If you have questions, we have answers! Whether you have general questions about home loans or specific questions about your ability to qualify for a loan, the mortgage experts here at OVM Financial are happy to answer all your loan qualification questions. Simply call us at 757-296-2148. And when you’re ready to apply for a mortgage, you can start your loan application online.