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Requirements of a Conventional Home Loan

Certain loan programs are a good fit for certain borrowers, so it’s important to understand your lending options when shopping for a mortgage. Conventional loans can be a great fit with the qualifying requirements.

Some home buyers need a low down payment mortgage, whereas others are on the hunt for a no money down solution. Of all the mortgage programs available, conventional home loans are a popular choice. But, what is a conventional loan? And more importantly, do you meet the requirements for a conventional mortgage?


What is a Conventional Loan?

A conventional mortgage is a loan that meets the lending requirements set by Fannie Mae and Freddie Mac. These entities don’t make loans, but rather they guarantee loans on the secondary market. They purchase many of the mortgages created in the United States.

Once you receive a mortgage from a bank or mortgage company, your lender will likely sell the loan on the secondary market. By selling off mortgages, banks and mortgage companies maintain enough cash to create new loans. Fannie Mae and Freddie Mac will only purchase conventional loans that meet their lending requirements.

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Credit Score Requirements for a Conventional Loan

The higher your credit score, the easier it will be to get approved for a mortgage. In addition, a high credit score (within the 700 or 800 range) helps you get a low mortgage rate. This can reduce the overall cost of the loan and lower your monthly payment.

But while good credit is a plus, you don’t need “great” credit to get a conventional loan. You do need to meet certain credit requirements, though. To qualify for a conventional loan, you must have a minimum credit score of 620.

Conventional loans also have waiting period guidelines following a foreclosure and bankruptcy. Typically, you can get a conventional loan four years after a bankruptcy, two years with extenuating circumstances. The wait period after a foreclosure or short sale is generally seven years.


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Jumbo Financing

If you're looking for a higher-priced home, jumbo mortgage financing may be the best option.


Flexible Credit

Credit requirements are lower on FHA loans. See if you qualify today.

Loan Limits on a Conventional Mortgage

Conventional loans are either conforming or non-conforming. Conforming loans are mortgages that don’t exceed the financing limit set by the Federal Housing Finance Agency (FHFA). Conforming loans are backed by Fannie Mae and Freddie Mac. For 2020, the conforming loan limit is $510,400. In high-cost areas, the conforming loan limit is $765,600.

If you want to purchase a property that exceeds the conforming loan limit for your area, you will need a non-conforming mortgage or a jumbo loan. Loan limits for a jumbo loan vary from lender to lender. These mortgages are larger in size and riskier, so they typically have higher down payment requirements, stricter credit requirements and higher interest rates.

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Down Payment Requirements for a Conventional Home Loan

Some people believe that they need a down payment of 20% for a conventional mortgage loan. Yes, this is an ideal down payment amount. And yes, you can avoid private mortgage insurance (PMI) with a down payment of at least 20%. However, it is possible to get a conventional loan with far less. A standard conventional loan only requires a down payment of 5%. If you need to put down less, you may qualify for the HomeReady program, the Home Possible program or the Conventional 97. These loans only require 3% down.

Along with a down payment, you're also responsible for your closing costs, which can range from 2% to 5% (or more) of the loan amount.

Conventional Loan Property Requirements

Conventional mortgage loans are flexible and can be used to purchase different property types. Use this loan for a primary residence, a second home, and even a rental property. Some people use these loans to buy a single-family home, a townhouse or condo. However, you can also use a conventional loan to buy 2 to 4-unit properties.

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