Conventional Loan Requirements 2019 & 2020

Certified Mortgage Advisor
NMLS 1701021
Published 
August 5, 2019

Things to know on getting a conventional loan

Let's talk about conventional loan requirements. So what do you need to get a conventional loan? And the couple of other videos of talked about conventional versus FHA as well as some of the FHA requirements. And today we're going to talk about conventional requirements.

So what down payment do you need? What credit score do you need? What does your income need to look like? And what are some qualifications that the property you're looking to buy needs to have so right up front?

Minimum down payment

One of the biggest things that people ask is what's the down payment that I need. So the down payment to get a conventional loan there are two answers. Mainly the main guideline that you're going to see with conventional loans, the minimum down payment is usually 5% down. Conventional can go down to 3%, but there are a couple more stipulated in there. And those are one of two things, either.

How to get a 3% down

Number one, you need to be a first-time home buyer, or at least one person on your loan needs to be a first-time home buyer to get 3% down, or you can qualify for the home ready or the home possible loans. But those have an income limit that has actually just recently been shrunk by Fannie Mae and Freddie Mac. So it's a long answer to say, what's the minimum down payment I would expect. Or you should expect 5%. But it can go down to 3%.

Again, if someone on the loan is a first-time home buyer or if you can qualify for the home ready or home possible programs. Keep in mind that the home ready and home possible programs do have income limits though that can be difficult to qualify for.

So one little, strategy in there is maybe you aren't a first-time home buyer. But let's say someone like your spouse is, or a co-borrower might be, you can use that to your advantage, to add somebody else on the loan as a co-borrower to take you from that 5% down requirement down to a 3% requirement by just bringing on one person on the loan. Who's a first-time home buyer to qualify for the 3%. So there's a little trick in there. It might not work out cause it's difficult sometimes to get people to coat borrow with you unless they're a spouse. Having that first-time home buyer in there does help you bring down your down payment.

Mortgage insurance

Now the mortgage insurance requirements for conventional loans are if you're putting less than 20% down, you're going to be required to carry monthly mortgage insurance. So the minute you hit 20% equity in your property, you can get mortgage insurance taken off. But mortgage insurance is there to protect the lender in the event of a default.

So it doesn't help you at all. So conventional does let you, give you that lower down. 5% or even 3%, but you're going to make up that in opportunity cost with paying some mortgage insurance and it can be, mortgage insurance can be all over the place depending on your credit score. And that mortgage insurance cost is going to depend on how risky the loan is.

Mortgage is always fixed to a specific percentage

So things like FHA loans have fixed mortgage insurance, no matter if you know what your credit score is, your mortgage insurance is always going to be a specific percentage of the loan, whereas conventional it's all risk-based.

So that means that if you have a lower credit score on conventional, you're going to pay a lot more in mortgage insurance than somebody with a higher credit score. So that brings us to credit score.

Credit score

What's the credit score requirement on conventional? For most lenders, it's going to be 620. So you need a 620 to get a conventional loan. Now, what I've found is that if you have a 620, even up to a, a high sixes. A conventional loan might not be the best for you in terms of the rate. Conventional loans are loans that are best suited for higher credit scores lowered income ratios and higher down payment buyers. So if you have a credit score within the range of 620 even up to 699, conventional might not have the best rate for you.

700+ can give you better rates

But if you get past that 700 credit score market above conventional might start showing you better rates and giving you better terms than another government loan quote. Also with conventional loans, they can be a lot tighter on their restrictions and credit qualifications.

Debt-to-income

So number one, your debt-to-income ratio is going to be a lot tighter. So debt to income ratio just means how much monthly debt you have a monthly debt obligation. So what are your credit card payments? Your auto payments, your house payment. Take all of that divided by your income, and that gives you your debt-to-income ratio.

FHA is going to allow you to go up to maybe 56% of that income. Conventional they're going to lower that I've never seen it go above 49%. And a lot of times it's going to be even lower than that based on some other risk factors in the loan. So if you have a lot of debt that you're carrying, or maybe a lower income, conventional might be trickier to qualify for, because they want to see a lot more room in leftover income at the end of the month, than other loan programs.

You need to wait longer if you have credit events

Also, some requirements for conventional loans are, that if you've had any credit event in the past, you're going to have to wait a lot longer to get a conventional loan than you would a government loan. So for instance, if you've had a bankruptcy, you're going to have to wait a longer period of time on the conventional side than you would on a loan like FHA, that's more forgiving on things like bankruptcy and collect.

On the conventional side, you're going to have to be mindful and ask your mortgage advisor, how your bankruptcy or foreclosure, sheriff sale collections any missed payments on your credit report with those are going to do to your conventional loan. Because conventional can be a lot tighter on some of their restrictions there.

Property standard is not that strict

Also with conventional loans, we run into some property restrictions in terms of, you're going to get an appraisal on the property. Conventional really is pretty light compared to a lot of other loans. FHA loans are really strict on their appraisal standards. FHA loans almost want you to have a move-in-ready house. Like they don't want any health or safety.

Conventional is also concerned with health and safety, but not as much as FHA conventional loans, which you can use to buy a foreclosed property. You can use it to buy properties that need to be fixed up. It still needs to be habitable.

So keep that in mind with a conventional loan, it still needs to be a habitable home. It can't be so far gone to the point of disrepair that you wouldn't be able to move into the. But conventional loans are a lot more forgiving in terms of some of the property restrictions.

They need consistent employment

Also conventional loans, as far as employment is going to want to see consistent employment. They want to see consistent employment over a period of two years, as well as consistent income or increasing income. So if you've had job losses or gaps in employment talk to your mortgage advisor and find out how long those gaps are, if they need to be explained, and a little bit of how to document some of your employment situations just because conventional is concerned about the quality of the buyers that they want in their loan programs. They want employment to be consistent income, to be consistent as well as assets.

What do you have in the bank account?

They normally want to see two months of your bank statements. Mainly what they're looking for is one, do you have the funds to close on the property. Are the funds not borrowed. So they don't want you to get any sort of loan for the down payment. And then are there any large deposits that they need to look out for things like money laundering or any sort of fraudulent activity going on in the bank statements.

So conventional loans are going to want to look pretty closely at a lot of the employment, income, and asset factors on your loan as well.

Conventional loans are fantastic

If you're well qualified as a buyer, conventional is probably the best route for you. It's going to be the laxest in terms of the property requirements and can give you really great savings compared to other loans that carry heavy mortgage insurance like FHA.

And if you're putting 20% down on a conventional loan, you're never going to have any mortgages. Which is just extra savings for you. And they really are fantastic loans to get. They can be a little bit more difficult to qualify for than a government loan. But overall they're fantastic.

The requirements are a little bit steeper, but they reward you in the fact that you get more savings and less hassle on the property.

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