Updated: November 4, 2024
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Knowing how to effectively navigate the requirements for a conventional loan can significantly impact your borrowing experience. From credit scores to down payments, understanding the core criteria will help you make informed choices as you shop for a lender. We'll explain what you need to know about conventional loans, how they differ from other mortgage options and why meeting their requirements can make the application process smooth, efficient and free from surprises.
Conventional loans often require a credit score of at least 620, a down payment of 3-20% and a DTI ratio under 50%.
Conventional loan requirements like down payment and credit score can affect the interest rates available to you.
While popular, conventional loans may not suit every homebuyer's needs — it's best to explore all your options before making a decision.
Conventional loans are popular for their flexibility and wide availability. Unlike FHA, VA and USDA loans, they're not insured by the federal government. Although conventional loan requirements often include stricter credit scores and down payment criteria, they allow for more flexibility in terms of loan terms and property types. Conventional loans come in two categories:
Conforming Loans: These loans conform to the standards and loan limit set by Fannie Mae and Freddie Mac, which for 2024 is $766,550 for one-unit properties for most states. They usually offer low interest rates because lenders perceive them as posing less risk.
Non-Conforming Loans: These loans do not meet the criteria set by Fannie Mae and Freddie Mac. Often called jumbo loans, they exceed the loan limits set for conforming loans and help finance higher-priced properties.
You can increase your chances of loan approval by studying what lenders care about most when it comes to conventional loans. Here’s what you need to consider:
Credit Score
A credit score of at least 620 is typically required for approval on a conventional loan. Having a higher score, particularly in the mid to upper-700s, improves your chances of securing better terms. To improve a lower score, pay down debts or dispute credit report errors.
Debt-to-Income Ratio
Your ratio tells lenders if you can comfortably manage a new loan payment alongside existing debts. For conventional loans, a DTI ratio of 36% is ideal, though some may accept up to 50% per Fannie Mae and Freddie Mac standards. Boosting your income or reducing debt can improve your DTI.
Down Payment
A minimum down payment of 3% is generally required for a conventional loan. A larger down payment can reduce your borrowed amount and help you secure better loan terms, showing lenders your financial commitment and stability.
Private Mortgage Insurance
Required when you put down less than 20%, PMI protects the lender — not you — in case of default. Costs vary from 0.46% to 1.5% of your loan amount annually. You can avoid PMI with a down payment of 20% or more.
Loan Limits
Most conventional loans are also conforming loans, which means they follow the loan limits set by the Federal Housing Finance Agency (FHFA). Exceeding them means entering jumbo loan territory, which usually requires stricter qualifications and higher costs.
The extent to which you meet conventional loan requirements, like credit score and down payment, influences mortgage rates available to you. Use the table below to see how different factors affect the average rates available in your state.
| 3-year ARM | 0.00% |
| 5-year ARM | 8.09% |
| 7-year ARM | 8.31% |
| 10-year Fixed | 6.29% |
| 15-year Fixed | 6.65% |
| 20-year Fixed | 6.78% |
| 30-year Fixed | 7.58% |
You can use MoneyGeek's calculator to estimate your monthly mortgage payment based on your down payment and estimated interest rate.
Conventional loans are a popular choice for financing a home, yet they aren't always the best fit for every buyer. Understanding when to choose or pass on a conventional loan ensures you select the financing option that saves you the most money in the long run. Let's explore four scenarios.
Meet Elena, a seasoned marketing executive living in bustling San Francisco. She has a steady, high-paying job and has saved diligently, with a solid 20% down payment in her bank account. Elena is eyeing a charming, mid-priced home priced at $750,000. Her credit score is excellent, hovering in the upper 700s.
In Elena's case, a conventional loan works best because her significant down payment eliminates the need for private mortgage insurance (PMI), reducing her monthly expenses. Her high credit score positions her to secure lower interest rates, optimizing her financial investment and minimizing costs over the loan's term.
Jamal is a school teacher in Utah and a first-time homebuyer. He's eager to enter the real estate market but finds saving a large down payment challenging due to his modest income. Jamal has found a cozy starter home priced at $220,000. His credit score is decent but not high, hovering around 640.
Given Jamal's status as a first-time homebuyer and his specific financial situation, including his credit score and income as a teacher, opting for a conventional loan might be more advantageous. With a down payment requirement as low as 3%, which is lower than that of an FHA loan, and considering his credit score is within range, Jamal may not face penalties. Additionally, his teacher salary suggests he may prefer a loan with lower costs over time, making a conventional loan more suitable, especially with the ability to eventually eliminate mortgage insurance.
Lisa recently moved to a rural area near Knoxville, Tennessee. She’s interested in purchasing her first home and has her eyes set on a lovely three-bedroom house in a qualifying suburban area. The house is priced at $235,000. While Lisa has a steady income, she has not been able to save much for a down payment.
In Lisa’s case, a USDA loan works best since it offers 100% financing, meaning she won’t need to put down any initial payment. It also typically offers lower interest rates and reduced mortgage insurance costs, making homeownership more accessible and affordable.
Carlos is an entrepreneur in Silicon Valley looking to purchase a luxury property in an upscale neighborhood. He has his eye on a modern architectural gem priced at $1.2 million. Carlos has a solid financial background, including a high credit score of 780, and he has saved enough to make a 30% down payment.
A non-conforming conventional loan, also known as a jumbo loan, is the best option for Carlos because it will enable him to finance a property that exceeds the standard conforming loan limit. His substantial down payment and excellent credit score put him in a solid position to handle the typically higher interest rates and stricter underwriting standards associated with these jumbo loans.
Instead of just exploring various scenarios to determine when different types of loans might be appropriate, it's beneficial to compare the specific requirements of each loan option directly. Here's a table that breaks that down:
Comparison Area | Conventional | FHA | VA | USDA |
|---|---|---|---|---|
Credit Score | Typically 620+ | 580+ (500 with 10% down) | No set minimum, lender specific | Typically 640+ |
DTI Ratio | Up to 50% (Preferred ≤ 36%) | Front-end: ≤ 31% | ≤ 41% | Up to 41% (Higher with exceptions) |
Down Payment | Minimum 3%, often 5-20% | Back-end: ≤ 43% | None required | None required |
Mortgage Insurance | Required if down payment is < 20% | Minimum 3.5% | None, but a funding fee is charged | Upfront and annual fee required |
Required, regardless of down payment |
"Conventional loan" is a general term that spans multiple types of loans with large variations in requirements. For example, a conventional loan that conforms to Fannie Mae and Freddie Mac's standards only requires 3% down for first-time buyers, but a jumbo loan, a mortgage with a large loan amount that doesn't adhere to Fannie and Freddie standards, could require you to put as much as 20% down. Either way, conventional loans serve a wide and diverse audience of home buyers and should definitely be considered when deciding how to finance any home purchase. — Timothy Manni, Mortgage and Real Estate Consultant
We gathered the most commonly asked questions to provide details about conventional loan requirements. Whether you're curious about what they are, their advantages or loan limits, you'll find the information you need.
Unlike FHA, USDA or VA loans, a conventional loan is a mortgage that the federal government doesn't guarantee. Instead, they follow the guidelines set by Fannie Mae and Freddie Mac. It's worth noting that jumbo loans, while considered conventional, do not conform to Fannie Mae and Freddie Mac standards.
There is no limit to the number of conventional loans you can have simultaneously as long as you qualify financially for each mortgage and meet the lender's requirements. However, it's important to note that each conventional loan typically corresponds to a specific property, whether it's a first mortgage, a second mortgage or a refinanced loan.
Conventional loans provide greater flexibility in terms of loan amounts, often require less paperwork and can be more cost-effective in the long term, especially if you have a strong credit score and can make a substantial down payment to avoid private mortgage insurance (PMI).
You need to pay for private mortgage insurance (PMI) on a conventional loan until your home equity reaches at least 20% of the property value, typically achieved through payments, home value appreciation or a combination of both. Once you reach this threshold, you can request to cancel the PMI.
About Zachary Romeo, CBCA
Zachary Romeo is a certified Commercial Banking and Credit Analyst (CBCA), and the Head of Loans and Banking at MoneyGeek. Previously, he led production teams for some of the largest online informational resources in higher education, with over 13 years of experience in editorial production.
Romeo has a bachelor's degree in biological engineering from Cornell University. He geeks out on minimizing personal debt and helping others do the same through people-first content.
