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2020 Conventional Loan Requirements & Guidelines

Conventional mortgage loans are the most common type of mortgage loan used today.

There are different types of conventional loans requiring between  3%-20% down.

This is a complete list of all conventional loan requirements, guidelines, eligibility, and what you need to qualify.

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Conventional Loan Borrower Requirements

Conventional loans require a 620 credit score, 3%-20% down, and a maximum debt-to-income ratio between 43%-50% depending on the type of conventional loan program you qualify for.

2020 Conventional Loan Requirements

  • 620 minimum credit score

  • 36 months waiting period after a bankruptcy or foreclosure

  • Maximum 43% debt-to-income ratio

  • Two years of stable employment history

Conventional Loan Credit Requirements

Mortgage lenders don’t just look at your credit score, they look at your entire credit report to determine eligibility and loan terms.

Derogatory credit history such as late payments, collection accounts, and excessive debt will affect your ability to qualify regardless of your credit rating.

Conventional Loan Credit Requirements

  • Minimum 620 credit score

  • No more than one mortgage late payment in the last 12 months

  • No mortgage late payments in the last 6 months

  • 48 month waiting period after a bankruptcy or foreclosure

  • No judgments or liens

  • Student loans included in DTI ratio unless on deferred payments

Bankruptcy/Foreclosure Waiting Period

If you have had a bankruptcy, foreclosure, or short-shale there is a waiting period before becoming eligible.

If you have extenuating circumstances that resulted in a loss of income such as a job loss, reduction of income, or medical emergency. Underwriters are looking for borrowers to recover from the economic hardship with an improved credit score and multiple open accounts in good standing.

Derogatory Event

Waiting Period

Waiting Period with Extenuating Circumstances

Bankruptcy – Chapter 7 or 11

Bankruptcy – Chapter 13

  • 2 years from discharge date

  • 4 years from dismissal date

  • 2 years from discharge date

  • 4 years from dismissal date

Multiple Bankruptcies

Five years from the most recent discharge or dismissal date

3 years from the most recent discharge or dismissal date

Foreclosure

  • 90% maximum LTV ratios

  • Purchase, primary residence

  • Limited cash-out refinance

Deed-in-Lieu of Foreclosure, Short-sale

Down Payment Requirements

Conventional loans require a down payment between 3%-20% of the purchase price depending on which type of conventional loan you qualify for.

Conventional Loan Type

Requirements

Conventional 95

5% down payment, 620 credit score, PMI required

Home Possible

First-time homebuyer, 3% down payment, income limits

Conventional 90

10% down payment, 620 credit score, PMI required

Piggyback 80/10/10

80% LTV conventional loan, 10% second loan, 10% down, no PMI

Fannie Mae program for first-time homebuyers with 3% down & 620 credit score

Conventional 97

3% down payment, 680 credit score, no income limits, PMI required

The down payment cannot be a loan. You will need to provide 2-3 months of bank statements showing you have the funds in savings. The down payment can also be can be a gift from a friend or family member.

Conventional Loan Down Payment Guidelines

  • Down payment between 3%-20%

  • Mortgage insurance required if down payment is less than 20%

  • Can be a gift from a friend or family member

  • Down payment can come from savings, 401k, or investment accounts

  • Cannot use a loan

3% Down Conventional Loans

First-time homebuyers generally have lower credit scores and less money to put down than other buyers. Because of this, Fannie Mae and Freddie Mac, the two biggest buyers of conventional mortgage loans created 3% down payment mortgage loan programs for first-time homebuyers.

HomeReady and Home Possible Loans

The Fannie Mae HomeReady and Freddie Mac Home Possible loan programs were designed to offer a low down payment loan option for low-income first-time homebuyers.

They require just a 3% down payment, 620 credit score, and allow for up to a 50% DTI ratio. You must be a first-time homebuyer and not exceed the income limit of 80% of the area median income.

2020 HomeReady™ Home Possible Loan Requirements

  • Only first-time homebuyers are eligible

  • Minimum 620 credit score

  • Two years of stable employment history

  • Alternative credit lines can be considered

  • Income cannot exceed 80% of area median income

  • 50% maximum debt-to-income ratio

  • Cannot have another open HomeReady mortgage

  • Attend 4-6 hours of homeownership education courses

Conventional Loan Limits

The loan limit in low-cost areas is $ 510,400. There are higher costs areas such as Los Angeles and New York, where the loan limit reached $ 765,600. This is much higher than the FHA loan limits of $ 331,100 and $ 625,050 in the highest areas.

2020 Conventional Loan Limits

Low-Cost area loan limit

High-Cost area loan limit

$ 1,184,925

$ 1,472,550

Private Mortgage Insurance (PMI)

Conventional home loans require private mortgage insurance (PMI) with less than a 20% down payment. PMI will be canceled once the loan-to-value ratio reaches 78%.

Private mortgage insurance companies base their rates on the borrower’s risk profile including, credit score, down payment, and income. The higher your credit score and down payment the lower the PMI rate will be.

DTI (Debt-to-income)

Your debt-to-income ratio (DTI ratio) is the amount of monthly debt obligation you have compared to your income. Typically, conventional loans have a maximum debt-to-income ratio of 43%.

The DTI ratio can be stretched to 45% in some cases, and maybe even higher if you have strong compensating factors such as a large down payment, large cash reserves, or an excellent credit score.

Compensating factors for high DTI ratios

  • High down payment (Over 20%)
  • Excellent credit score (700+)
  • Large cash reserves
  • High income
  • 5+ years at current position/employer

Eligible Property Types

A great benefit of a conventional mortgage is that they are available on many types of properties. They also have less strict property requirements than FHA loans so you can buy fixer-uppers and uncompleted homes.

Conventional Loan Eligible Property Types

  • Single Family Homes

  • Second homes and investment properties

  • Condos and townhomes

  • Rehab properties

  • Multi-unit properties

  • Planned unit developments (PUDs)

Conventional Loan Rates

Conventional Loan Rates (October 2020)

Interest rate

30-year fixed-rate mortgage

15-year fixed-rate mortgage

5/1 adjustable-rate mortgage

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Using a Conventional Loan for an Investment Property

You can use a conventional mortgage to buy investment properties to either fix and flip or keep as a rental property. If you’re buying an investment property, you will need to get a conventional loan because government-backed loans such as FHA and VA are only available to owner-occupied borrowers.

Real estate investors can use conventional loans to purchase an investment property in good condition or one in need of repairs.

  • Primary residence
  • Second home/Vacation home
  • Fix and flip properties
  • Rental homes

The Bottom line

Conventional loans offer a wealth of benefits and are the most used type of home loan used today.

Whether you are planning to occupy the property, buying a second home, or an investment property, a conventional mortgage is a great option.

If you’re looking into purchasing a home in the near future, you should speak to a lender about getting pre-approved for a mortgage.

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