import ConventionalLoansCalculator from '@/components/types-of-mortgages/conventional-loans/ConventionalLoansCalculator'
Conventional loans remain the most popular mortgage choice for homebuyers in 2024, accounting for nearly 70% of all home purchases. Understanding the requirements is crucial for positioning yourself as a strong borrower and securing the best possible terms.
What Is a Conventional Loan?
A conventional mortgage is any home loan that isn't insured or guaranteed by the federal government. Unlike FHA, VA, or USDA loans, conventional loans are originated and serviced by private lenders, then often sold to Fannie Mae or Freddie Mac.
Key Advantages of Conventional Loans
- No upfront mortgage insurance premium unlike FHA loans
- PMI cancellation once you reach 20% equity
- Higher loan limits than government-backed loans
- More property type flexibility including investment properties
- Potentially lower overall costs for well-qualified borrowers
Credit Score Requirements
Your credit score is the most critical factor in qualifying for a conventional loan and determining your interest rate.
Minimum Credit Score Thresholds
- 620: Absolute minimum for most lenders
- 680: Better rates and more lender options
- 740+: Best available rates and terms
- 780+: Premium pricing and maximum flexibility
How Credit Scores Impact Your Rate
The difference between a 620 and 740 credit score can mean:
- 0.75-1.5% higher interest rate for lower scores
- $200-400 more per month on a $400,000 loan
- $72,000-144,000 more over the life of a 30-year mortgage
Down Payment Requirements
Contrary to popular belief, you don't need 20% down for a conventional loan.
Minimum Down Payment Options
- 3% down: First-time homebuyers with strong credit
- 5% down: Repeat buyers or primary residences
- 10% down: Vacation homes
- 20% down: Investment properties (25% preferred)
Benefits of Larger Down Payments
- Avoid private mortgage insurance (PMI)
- Qualify for better interest rates
- Lower monthly payments
- Stronger offer in competitive markets
- More equity from day one
Income and Employment Requirements
Lenders want to see stable, verifiable income that comfortably covers your mortgage payment.
Employment History Standards
- 2 years in the same field or industry
- 6 months minimum at current job (with prior experience)
- Consistent or increasing income over time
- Gaps explained with documentation
Acceptable Income Sources
- W-2 employment income
- Self-employment (2 years tax returns required)
- Bonuses and commissions (2-year average)
- Investment income and dividends
- Rental property income (75% of gross rents)
- Pension and Social Security benefits
Debt-to-Income Ratio (DTI)
Your DTI compares your monthly debt payments to your gross monthly income.
DTI Calculation
Front-end DTI = (Housing Payment) ÷ (Gross Monthly Income)
Back-end DTI = (All Monthly Debts) ÷ (Gross Monthly Income)
Maximum DTI Limits
- 28% front-end DTI: Traditional guideline for housing costs
- 36% back-end DTI: Conservative total debt limit
- 45% back-end DTI: Standard maximum for qualified mortgages
- 45-50% back-end DTI: Possible with compensating factors
Property Requirements
The property must meet certain standards to qualify for conventional financing.
Eligible Property Types
- Single-family homes
- Condominiums (warrantable)
- Townhouses
- 2-4 unit properties
- Manufactured homes (specific requirements)
- Planned unit developments (PUDs)
Property Condition Standards
- Must be habitable and safe
- No major structural issues
- Functioning mechanical systems
- Comparable sales available
- Clear title with no liens
Calculate Your Conventional Loan Payment
Use our calculator to estimate your monthly payment based on current conventional loan requirements:
Documentation Checklist
Be prepared to provide comprehensive documentation:
Income Documentation
- [ ] Last 2 years of tax returns
- [ ] Last 2 years of W-2s or 1099s
- [ ] Last 30 days of pay stubs
- [ ] Profit/loss statements (self-employed)
- [ ] Bank statements showing deposits
Asset Documentation
- [ ] 2 months of bank statements
- [ ] Investment account statements
- [ ] Retirement account balances
- [ ] Gift letter (if applicable)
- [ ] Proof of down payment source
Credit Documentation
- [ ] Authorization for credit check
- [ ] Explanation letters for any derogatory credit
- [ ] Proof of resolved collections/judgments
- [ ] Bankruptcy/foreclosure documents (if applicable)
Loan Limits for 2025
Conventional loan limits vary by county and are adjusted annually.
2025 Conforming Loan Limits
- Baseline limit: $806,500 (most U.S. counties)
- High-cost areas: Up to $1,209,750
- Multi-unit properties: Higher limits available
- Jumbo loans: Amounts exceeding conforming limits
Private Mortgage Insurance (PMI)
PMI is required when your down payment is less than 20%.
PMI Cost Factors
- Credit score: Higher scores mean lower PMI
- Down payment: More down equals less PMI
- Loan type: Fixed vs. adjustable rates
- Property type: Single-family vs. condo
PMI Removal Options
- Automatic termination at 78% LTV
- Request removal at 80% LTV
- Refinance to eliminate PMI
- Home appreciation with new appraisal
Tips for Qualifying
Strengthen your application with these strategies:
Before Applying
- Review and improve your credit score
- Save for a larger down payment
- Pay down existing debts
- Avoid new credit applications
- Document all income sources
- Maintain stable employment
During the Process
- Respond quickly to lender requests
- Don't make large purchases
- Keep all accounts current
- Maintain cash reserves
- Be honest about your financial situation
Common Reasons for Denial
Understanding why loans get denied helps you avoid these pitfalls:
- Insufficient credit history or score
- DTI ratio too high
- Inadequate cash reserves
- Unexplained income gaps
- Recent bankruptcy or foreclosure
- Property appraisal issues
- Title problems
Comparing Conventional to Other Loan Types
Conventional vs. FHA
- Lower mortgage insurance costs
- No upfront MIP requirement
- Higher credit score needed
- PMI can be cancelled
Conventional vs. VA
- Available to all qualified borrowers
- PMI required under 20% down
- Investment properties allowed
- No funding fee
Conventional vs. Jumbo
- Lower rates typically
- Easier qualification
- Lower down payment options
- Conforming loan limits apply
Working with SRK CAPITAL
At SRK CAPITAL, we specialize in helping borrowers navigate conventional loan requirements and secure the best possible terms. Our expertise includes:
- Pre-approval analysis to identify potential issues
- Credit optimization strategies to improve your rate
- Multiple lender options for competitive pricing
- Fast processing with typical 15-21 day closings
- Ongoing support throughout the entire process
Frequently Asked Questions
Can I qualify with a 600 credit score?
While 620 is typically the minimum, some lenders may consider 600 with compensating factors like a larger down payment or lower DTI.
How much do I need for reserves?
Most lenders require 2-6 months of mortgage payments in reserves after closing, depending on your overall profile.
Can I use gift funds for down payment?
Yes, conventional loans allow gift funds from family members for your entire down payment on primary residences.
What if I'm self-employed?
Self-employed borrowers can qualify but need 2 years of tax returns and may face more scrutiny of their income stability.
Take the Next Step
Understanding conventional loan requirements is just the beginning. The key to success is working with experienced professionals who can guide you through the process and help you avoid common pitfalls.
Ready to see if you qualify for a conventional loan? Contact SRK CAPITAL today for a free consultation. Our team will review your situation, explain your options, and help you secure the best possible financing for your home purchase.
This article is for educational purposes only. Actual loan requirements may vary by lender and are subject to change. Consult with a qualified mortgage professional for personalized advice.