What is a conventional loan?
A conventional home loan does not have backing from a government agency the way an FHA, USDA, or VA loan does. Instead, it’s underwritten by private mortgage lenders.
Conventional loans appeal to homebuyers with strong financial standing and good credit histories. Terms and conditions of conventional loans vary according to the lender. They may be available with either fixed or adjustable interest rates.
How to qualify for a conventional loan
Here’s a summary of the new qualification limits for a conventional home loan.
Credit score
In 2024, a buyer needs a credit score of 620 or higher for a conventional mortgage loan. This is a comparatively low rate, squarely in the middle of the “fair” score range. Scores of 670 or higher are considered “good.”
Credit scores come from three separate agencies: Experian, Equifax, and TransUnion. Mortgage lenders will consider the single score in the middle. They may approve borrowers with lower credit scores, but that approval will come with more stringent requirements and higher mortgage interest rates.
Down payment
There’s a misconception that if a buyer puts down less than 20%, they’ll have trouble repaying their mortgage. This isn’t quite true. The median down payment on a house in the United States in 2024 is 13%, so it’s possible to obtain a loan with a payment of less than 20%.
Although a higher down payment makes it easier to qualify for a conventional loan, a down payment of at least 3% of the selling price of the home can suffice. This is a good option for first-time homebuyers who can pay monthly mortgage bills but can’t afford a larger down payment.
With a 3% down payment, homebuyers have a few options for conventional loans, such as a Conventional 97 loan, a Fannie Mae HomeReady loan, or a Freddie Mac Home Possible loan.
Income and employment
You will have to provide proof of employment. Potential lenders ask for proof of earnings, which can be shown with pay stubs, W-2 forms, tax returns, and bank statements. There is no minimum income for taking out a conventional home loan.
Debt-to-income ratio
Lenders often impose a maximum debt-to-income ratio (DTI). Your DTI ratio is an approximation of how much of your regular income pays off existing debts. This is calculated by adding up all of your monthly debts, dividing the sum by your monthly income, and multiplying that by 100 for a percentage.
Most lenders prefer to see a DTI ratio of 36% or so. Some lenders are willing to lend to those with higher DTI ratios but may impose higher interest rates or require private mortgage insurance.
Property requirements
Conventional mortgages are generally reserved for residential properties: single-family homes, condominiums, planned unit developments, and more. Before closing, the lender will want to have an appraisal to derive the fair market value.
If the buyer has agreed to pay a certain amount for the home but the appraiser arrives at a lower value, the borrower could apply the balance toward the down payment.
Conforming loan limits in 2024
A conforming loan limit is the most you can borrow for a home within the parameters set by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac, along with limits set by the Federal Housing Finance Agency (FHFA).
For a single-unit home in the continental U.S. that isn’t in high-cost areas, the maximum loan amount one can borrow in 2024 is $766,550. For a similar property located within a high-cost area, the 2024 limit is $1,149,825. High-cost properties are subject to high-balance loan requirements. If the loan amount exceeds the high-cost loan limit, then it is considered a Jumbo loan.
Types of conventional loans
Conventional home loans are issued for one of two potential purposes. The most common purpose is, of course, to buy a home. However, conventional loans can also cover the refinancing of an existing loan. Here’s how the two differ.
Conventional purchase
A conventional loan applies to the original value of the home in question. Homebuyers borrow the balance due after the down payment on their new home and repay the loan over a certain time, usually 15 or 30 years.
Depending on the type of mortgage, different terms and conditions are offered based on the borrower’s qualifications. But the basic framework of a conventional, unaltered purchase loan is the same: make a down payment, take out the loan, and repay it in monthly installments.
Conventional refinance
A homeowner may have the opportunity to change the terms of their original mortgage. They may want to take advantage of lower interest rates, alter the term length, switch between fixed and adjustable rates, or simply consolidate their financial obligations.
In that case, they might apply for a conventional refinance loan. They can request to switch from a 15-year term to a 30-year term, get a lower interest rate, or arrange a cash-out refinance to merge debts or make home improvements.
To refinance a home, the owner needs to fill out an online application and consult with their mortgage partners to settle an interest rate. A new appraisal might be required. The final proposal is submitted to an underwriter, who decides whether the new terms are acceptable. If they are, the house is refinanced.
How to get a conventional loan
The specifics of what conventional home loans require may differ, but the overall process is the same. Here are the crucial steps.
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Before applying for a mortgage, make a clear estimation of what loan amounts you can afford. It may be easier and more realistic to think about this in terms of monthly payments and combine them with current interest rates to “reverse-engineer” the home value you can afford.
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Before you make an offer on a house, you should try to get your lender to issue a letter pre-approving your mortgage. Most real estate agents only consider buyers who have gotten pre-approval, so this step is almost mandatory.
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After you and your agent have gone shopping and found a suitable home, your agent can draw up your official offer and submit it to the seller. You may also be asked to make an earnest money deposit to show you’re acting in good faith.
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You can use the lender who pre-approved your mortgage, but you can (and should) shop around for another one. When applying for the mortgage, you may refer to the materials you submitted for pre-approval, but you’ll have more documentation to complete as well.
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A home inspection may uncover structural and operational issues that aren’t visible from a surface view. These flaws might be used to negotiate a price change. Your lender will then order a home appraisal to arrive at an objective estimate of the home’s true worth.
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Before the mortgage deal closes, you’ll play a bit of a waiting game as the loan processor considers your application. Once they’re done, the application is submitted to an underwriter for final write-off.
On closing day, you’ll receive closing documents needing your signature on every page. The Closing Disclosure confirms the costs associated with the sale and should be similar or very close to the figures on the original loan estimate pages.
Finally, the agent gives you your house keys. You’re home.
