What Is A Conventional Loan?
- A conventional loan is used to finance the purchase of either your primary residence, secondary residence, or a rental property.
- Requires a 3% minimum down payment, can be as high as 10-20%, depending on what your lender requires.
- Fixed interest rate or adjustable-rate (ARMs) terms.
- Various term lengths, ranging from 10-30 years.
What Are Conventional Loan Requirements?
Conventional loan requirements are pretty stringent—especially when compared to government-backed mortgages. Private lenders want to make sure that you can afford the property that you are buying and that you will repay the loan.
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Credit Score: Most conventional loans require a minimum score of 620-640 but are better suited for applicants with credit scores above 680. The better your credit score, the better your interest rates, terms, and overall costs will be as you are considered a lower credit risk.
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Debt-to-income (DTI) ratio: This measures your monthly debt obligations against your income.
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Down Payment: Your down payment can vary widely, but expect to put down anywhere from 5-20% of your mortgage value down.
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Income and Asset Documentation: Your lender will thoroughly verify your income and assets. Prepare to hand over the following when you apply for a conventional loan:
- 60 days of bank statements
- 30 days of pay stubs
- Two years of tax returns if you’re self-employed, own rental properties or receive non-salary income (like retirement or a pension)
- Two years of W2s
- Proof of social security, retirement or pension awards and two years of 1099’s
- Rental agreements for any investment properties that you own
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Property Requirements: This year, the conventional loan limit is $510,400 for a single-family home.
Conventional loans apply to many types of properties, including single-family homes, Planned Unit Developments (detached homes within a homeowner’s association), condos, multi-unit dwellings, co-op properties, and on occasion, manufactured homes.
You can also use conventional loans to finance the purchase of a second home or a rental property. In those cases, interest-rates and down payments are usually higher since the property is not your primary dwelling and, as such, is deemed higher risk by lenders.
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