Conventional mortgages, which are not insured by the government like FHA, VA, or USDA loans, have specific requirements set by the lender or the entity purchasing the loan (like Fannie Mae or Freddie Mac). These requirements are generally more stringent than government-backed loans. Here are the key requirements for conventional mortgages:
A higher credit score is typically required for conventional loans compared to government-backed loans. The minimum credit score varies by lender, but it's usually around 620. Borrowers with higher credit scores generally receive more favorable interest rates.
The standard down payment for a conventional loan is 20%, which allows the borrower to avoid paying Private Mortgage Insurance (PMI). However, some conventional loans allow for down payments as low as 3% for first-time homebuyers or lower-income borrowers.
Conventional loans typically require a DTI of 43% or lower, although some lenders may allow a higher DTI in certain circumstances, especially for borrowers with strong credit histories and financial reserves.
Borrowers must provide proof of stable income and employment, usually in the form of W-2 statements, tax returns, and recent pay stubs. Self-employed borrowers may need to provide additional documentation.
For loans with less than a 20% down payment, borrowers will typically need to pay PMI, which protects the lender in case of default.
Conventional loans have maximum loan limits set by the Federal Housing Finance Agency (FHFA). These limits vary by area and are higher in areas with higher home prices.
An appraisal is required to ensure that the property's value supports the purchase price and the amount of the mortgage.
The property must be a single-family home, a multi-unit property (up to four units), a condo, or a planned unit development, and it must be used as the borrower's primary residence, a second home, or an investment property.
Some conventional loans may require the borrower to have financial reserves (savings) equivalent to a few months of mortgage payments.
Conventional loans offer a variety of terms, typically ranging from 10 to 30 years, and can be either fixed-rate or adjustable-rate mortgages.
It's important to note that each lender may have its own additional requirements or overlays. Therefore, it's advisable for potential borrowers to shop around and speak with multiple lenders to find the best terms and rates available based on their specific financial situation.