Conventional loan requirements: First-time buyer’s guide

Valencia Higuera
Valencia Higuera
The Mortgage Reports Contributor
September 28, 2022 - 9 min read

Who qualifies for a conventional loan?

Conventional loan requirements aren’t as tough as many home buyers expect. Borrowers can often qualify for a conventional loan with a credit score of 620 or higher, reliable income, and at least 3% down. In addition, lenders usually want to see a two-year history of steady income and employment. And you’ll need to provide financial documents like bank statements and tax forms to verify your financial information.

Home buyers no longer need 20% down or perfect credit to get a conventional mortgage. So don’t let those “traditional” standards get in your way if you’re ready to buy a home now.

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Note on mortgage terminology: A “conventional loan" is any mortgage not backed by the federal government. Most conventional loans are also “conforming loans,” meaning they follow lending guidelines set by Fannie Mae and Freddie Mac. The terms are often used interchangeably, although not all conventional loans are conforming loans. In this article, we use the term “conventional loans” to refer to conforming loans that meet Fannie Mas and Freddie Mac requirements.

What do you need for a conventional loan?

In order to get a conventional loan, you need to meet basic lending requirements set by Fannie Mae, Freddie Mac, and your individual lender.

Typical conventional loan requirements include:

  • Minimum credit score of 620
  • Minimum down payment of 3-5%
  • Debt-to-income ratio below 43%
  • Loan amount within local conforming loan limits
  • Proof of stable employment and income
  • Clean credit history (no recent bankruptcy or foreclosure)

Although Fannie Mae and Freddie Mac set the minimum conventional loan requirements, lenders can set their own stricter rules, too. For instance, you can technically get a conventional loan with just 3% down according to Fannie and Freddie’s guidelines. But some lenders require 5 percent. Lenders might also have higher standards for credit score or debt-to-income ratio.

Since requirements vary by lender, it can be helpful to shop around when you’re on the borderline of qualifying for a conventional mortgage. If you get denied at first, try with a few other lenders to see whether one will approve your mortgage application.

Conventional loan requirements

Here’s a detailed look at the basic requirements for a conventional loan.

Credit score

As a rule of thumb, approval for a conventional loan requires a minimum credit score of 620. However, a better credit score leads to lower interest rates and lower PMI costs. Borrowers with credit scores over 720 generally get the lowest conventional mortgage rates.

When you apply for a mortgage, the lender will pull both your credit score and your credit report. Your credit history helps gauge creditworthiness. If you have credit issues like late and missed payments, bankruptcy, or foreclosure in your past, it can be more difficult to qualify for a home loan.

Down payment

One common misconception is that buyers need 20% down to purchase a home. However, standard conventional loans require just 5% down. And select conventional loan programs let you buy with only a 3% down payment.

Home buyers can put as little as 3% down using conventional products like Fannie Mae’s HomeReady and Freddie Mac’s Home Possible loan. These programs also have reduced private mortgage insurance rates and more lenient income requirements, making them a great choice for first-time home buyers.

If you don’t use one of these specialized programs, the standard down payment for a conventional loan is typically 5 percent.

Keep in mind that a conventional loan with less than 20% down will require private mortgage insurance (PMI). Although you pay this premium, the policy protects your lender in the event of default. You can ask your lender to remove PMI once you build 20% equity.

Income and employment

Getting approved also requires at least two years of stable, consistent income with the same employer or within the same field. Different types of income can help you qualify for a conventional home loan, such as:

  • Salary or hourly income
  • Bonuses
  • Overtime
  • Commission
  • Part-time income
  • Self-employment
  • Contract or gig work

Lenders can include other sources of income for qualifying purposes, too, such as retirement income, alimony, child support, and Social Security payments. If you receive support payments like alimony or child support, these payments must be expected to continue for at least three years after getting the mortgage.

All income sources must be documented using your most recent W-2s, tax returns, bank statements, and pay stubs. Self-employed borrowers typically provide at least two years of business tax returns as well as personal tax returns.

Debt-to-income ratio

Mortgage lenders look at your income in comparison to your existing debt load when approving your home loan. Debt-to-income ratio (DTI) refers to the percentage of your gross monthly income that goes toward monthly debt payments (including the future mortgage payment).

For a conventional loan, lenders prefer a DTI ratio under 36 percent. However, DTIs up to 43% are commonly allowed. And you may even qualify with a DTI as high as 45-50% if you have “compensating factors.” These could include a high credit score or large cash reserves in the bank.

To calculate your DTI ratio, add up your monthly debt payments and then divide this figure by your monthly gross income. For example, if you have a gross income of $5,000 and monthly debt payments of $1,500, your debt-to-income ratio is 30 percent.

Loan limits

To get a conventional conforming mortgage, your loan amount must fall within local loan limits set by the Federal Housing Finance Agency (FHFA). Loan limits change from year to year, and are generally higher in areas with exceptionally high property values. In 2022, the conforming loan limit for a single-family home in most of the U.S. is $, while high-value loan limits go up to $. You can check your area’s current loan limits here.

For loan limits that exceed this amount, borrowers must apply for a non-conforming loan or a “jumbo loan.” Jumbo loans typically require anywhere between 10% and 20% down.

Property requirements

Conventional loans also have property requirements. Homes must meet the following criteria:

  • Single-family home or multi-unit home (no more than four units)
  • A residence, not a commercial property
  • Structurally sound
  • No claims against the property
  • Appraisal required
  • For condos, at least 51% of total units must be owner-occupied or second homes

In addition, lenders will not let you borrow more than a home is worth. Once you have a signed purchase agreement, your mortgage lender will order a home appraisal to ensure that the sale price doesn’t exceed the property’s true market value.

Conventional loan requirements FAQ

Is it hard to qualify for a conventional loan? 

It’s easier to qualify for a conventional loan than many first-time home buyers expect. You’ll need a minimum credit score of 620 as well as two consecutive years of stable income and employment. Getting approved also requires a minimum down payment between 3 and 5 percent and a debt-to-income ratio below 43 percent in most cases.

Do all conventional loans require 20% down?

Many mortgage programs, including conventional loans, do not require a 20 percent down payment. Down payment requirements vary depending on the type of conventional loan. Some first-time homebuyers can purchase with only 3 percent down, while other buyers will need at least 5 percent. Keep in mind that buying a house with less than 20 percent down will require private mortgage insurance.

What's the maximum debt-to-income ratio for a conventional loan? 

Ideally, conventional mortgage lenders prefer a maximum debt-to-income ratio at or below 36 percent. This is the percentage of your pre-tax monthly income that goes toward monthly debt payments (mortgage, auto loans, student loans, minimum debt payments, etc.). However, some lenders allow a maximum debt-to-income ratio of up to 45 or 50 percent if the borrower has compensating factors. Those could include a high credit score, a bigger down payment, or several months’ worth of mortgage payments in reserves after closing.

Is an FHA or conventional loan better?

A conventional loan is generally better than an FHA loan if you have good credit (around 680 or higher) and at least 3 percent down. However, if your credit score is in the high-500s or low-600s, an FHA loan might be more affordable. That’s because FHA loans don’t charge higher mortgage insurance premiums for borrowers with lower credit. However, keep in mind that conventional private mortgage insurance can be canceled once you have sufficient home equity whereas FHA mortgage insurance is usually permanent.

How long does it take to get approved for a conventional loan?

The mortgage process for a conventional loan can take, on average, between 30 and 45 days. Once you submit a full mortgage application, the loan files goes through processing and underwriting, during which time the lender reviews all your financial documentation in detail. The lender will also arrange an appraisal to verify your new home’s fair market value. Some initial mortgage approvals are conditional, meaning you need to submit additional information or documentation to get final approval. Upon completion of the underwriting process, the lender schedules a closing date.

Find out if you qualify for a conventional loan

Conventional home loans have low down payment requirements, making them a great option for first-time homebuyers. To see if you qualify for a conventional loan, check your eligibility with a mortgage lender. That could be a bank, credit union, online lender, or mortgage broker. Your loan officer will ask a few basic questions about your finances and help you determine whether a conventional loan is the right choice for you.