Conventional loan benefits
- Low minimum down payments: Put down as little as 3%
- No upfront mortgage insurance: Unlike USDA, FHA, and VA loans, conventional mortgages do not require an upfront mortgage insurance premium or funding fee
- Cancellable PMI: Unlike FHA or USDA loans, private mortgage insurance (PMI) falls off a conventional loan once you have 20% home equity. You can also avoid PMI altogether if you put 20% down
- Fewer property restrictions: Conventional home loans are go-to products if you’re buying an investment property or a second home since government-backed loans, including USDA, VA, and FHA, do not allow that property uses
- Higher loan limits: Compared to FHA loans, conventional loans have higher loan limits, so you may be able to finance a more expensive home
Conventional loan requirements
Higher loan limits, low down payment requirements, competitive interest rates for well-qualified homebuyers - conventional loans have a lot to offer when you’re starting your homebuying journey. But you will need to meet conventional home loan requirements, which include:
- Credit score: 620 is the minimum credit score for conventional loans, but to get more competitive rates, you’ll likely need a score above 700
- Down payment: 3% is the minimum, but putting down more may help you qualify and get a better rate
- DTI: Debt to Income is determined by the Automated Underwriting Response your loan receives. This amount is based on your loan scenario.
Conventional loan alternative
Don’t give up if you don’t meet these conventional loan qualifications. You could still buy a home with a government-backed loan program. FHA loans have a lower credit score requirement of 580 for a 3.5% down payment, so you may be able to buy a home by saving just a little more to put down. USDA and VA loans offer 0% down payment options and have flexible credit score requirements. You may also qualify for down payment assistance programs or be able to use gift funds from family or friends. More on that later, though.
How much do you need for a conventional loan down payment?
The minimum down payment for a conventional loan is 3%. For a $600,000 home, 3% down would equal $18,000 down. Some conventional loan programs require higher down payments:
Conventional 97 program: 3% minimum down payment
Fannie Mae HomeReady program: 3% minimum down payment
Freddie Mac Home Possible program: 3% minimum down payment
Conventional loan without PMI: 20% minimum down payment Pro Tip: While 3% is the minimum down payment for a conventional loan, you could save more money by making a more significant down payment. Let’s explore the reasons why. More money down = lower monthly payments The more you put down, the less you’ll have to borrow. The less you borrow, the less interest you’ll pay over the life of the loan. Let’s compare monthly payments based on down payment sizes. In this example, your home costs $600,000, and you’re getting a fixed rate of 3% and a 30-year loan term:
Conventional loan limits 2023
Fannie Mae sets conforming loan limits each year for conventional loans. Conforming loan limits vary by the number of housing units within a property and the location.
|# of housing units within a property||Max loan size in Continental U.S. (48 contiguous states plus D.C.)||Max loan size for higher value areas (and all areas in Hawaii, Alaska, Guam, and U.S. Virgin Islands)|
|County||FHFA limit||FHA limits|
Surrounding state conforming and FHA loan limits
- Vermont conforming and FHA loan limits
- New Hampshire conforming and FHA loan limits
- Rhode Island conforming and FHA loan limits
- Connecticut conforming and FHA loan limits
- New York conforming and FHA loan limits
Fannie Mae increases conventional loan limits in higher-value metro areas where homes cost more. Eighteen states, plus D.C., include higher-value metro areas. You can enter your property’s address in this tool to see loan limits specific to that property. Conventional loan limits do not show your actual borrowing power. They offer the conventional max loan amount for the property you’re buying. Your lender will set your actual loan size based on your credit score, down payment amount, income, and existing debts.
Conventional loan interest rates
Conventional home loan rates vary based on your financial profile, including your down payment, credit score, and debt-to-income ratio. Getting quotes from at least three mortgage lenders is a good idea. Comparing multiple quotes will give you a sense of your interest rate range and allow you to see who is offering the best deal overall. You want to look at the interest rate and the other fees they’re charging, including origination and processing fees.
Conventional loan appraisal requirements 2023
Your lender will order a property appraisal to ensure the home has enough value to justify the loan size and meet the conventional loan property requirements. Fannie Mae’s conventional loan property requirements for 2023 include that the home must be:
- Safe, sound, and structurally intact
- A single-family home (or multi-family property with no more than four housing units)
- Able to be used year-round
- Residential and not commercial
- It is located in the U.S. or its territories (Guam, Puerto Rico, U.S. Virgin Islands), although not all lenders will approve loans outside the 50 states and D.C.
- Accessible by public roads and connected to public utilities
- Insurable (your home insurance company may ask for a few structural improvements)
- Able to be titled to you (a title search will be part of the closing process)
Most homes on the market will meet these requirements. Conventional loan property requirements can be less strict than government loan requirements, and sellers are sometimes more inclined to accept conventional loan offers for this reason. Lenders cannot move forward with FHA, VA, or USDA loans if the appraiser determines that the property doesn’t meet strict government guidelines. In contrast, conventional loans may allow for more flexibility in going ahead with the purchase and how and when the repairs are made.
Property use requirements
VA, USDA, and FHA loans can help you buy your primary residence, but they typically don’t finance investment properties or vacation homes. However, you can use a conventional mortgage to buy a vacation home or a rental property. If you own your primary residence but want to buy another home to rent out, or if you’re ready to buy a second home at the beach or in the mountains, you’ll need a conventional loan.
I’m a first-time homebuyer. Should I apply for a conventional loan?
First-time homebuyer conventional loans can offer higher loan limits, lower mortgage insurance costs, and more lenient property requirements. But not all first-time homebuyers can get a competitive conventional loan rate. Borrowers who have average to poor credit, lower incomes, or higher debt burdens should consider a government-backed loan instead of a first-time homebuyer conventional loan. As you can see on the chart below, government-backed loan programs offer more flexibility to someone with some gaps in their borrower profile.
|Minimum down payment||0%||3.5%||0%||3%|
*There are income limits on specific Affordable Housing Programs such as Freddie Mac’s Home Possible®. Not all government-backed loans are available to all borrowers. USDA loans work only in rural and some suburban areas and only for borrowers with moderate incomes, for example. Only veterans, active-duty service members, Reservists, and eligible surviving spouses can qualify for a VA loan.
How much does a conventional loan cost?
Along with cash for a down payment, you’ll need money for your conventional loan’s closing costs, which average 3% to 5% of the purchase price. Closing costs include fees, though specifics vary based on your lender and where you buy. BUT SOME COMMON CLOSING COSTS INCLUDE:
- Lender’s fees: Lenders charge loan origination fees which could be 0.5% to 1% of the loan amount. For a $300,000 home with 3% down, a 1% original fee would total $2,910. Some banks also tack on application fees of $500 or so. Others also add smaller rate-lock fees or underwriting fees
- Appraisal fee: A third-party appraiser typically charges about $600 to assign a market value to the home
- Title company fees: Making your home purchase official requires all sorts of paperwork, including title searches and making records of deeds. Expect to pay an attorney about $1,200 to $1,500 for this service.
- Taxes and homeowners insurance: You may have to prepay a year’s worth of property taxes or homeowners insurance right off the bat
- Miscellaneous fees: You’ll see all sorts of small fees to pay for details such as transferring documents, pulling your credit report, and inspecting for lead paint (in homes built in 1978 or before), and flood insurance certifications (for homes in FEMA-designated flood zones)
Some borrowers also “buy down” their mortgage rates with discount points at closing. Paying an extra 1% of the loan amount could shave 0.25% off your interest rate, which could pay off if you stay in the home long enough. Like down payment assistance, it’s possible to find closing costs assistance programs in your area. Use the tips included in the down payment assistance section to search for closing cost help. You can also negotiate with the seller and ask them to cover up to 3% of the home’s price in closing costs for you. If the seller has multiple offers, including ones that don’t request seller concessions, you’ll have a more challenging time getting them to agree.
How to qualify for a conventional loan
Conventional loans can be more challenging to qualify for than government-backed programs. To give yourself the best shot at a conventional mortgage, follow these steps:
- Monitor and improve your credit: Get free credit reports and dispute inaccurate entries. Make sure you pay your credit card bills on time to build a positive credit history and increase your credit score.
- Pay down debts: Try to pay off any installment loans you may have, especially personal loans and auto loans, as well as high-balance credit cards to lower your debt-to-income ratio.
- Save as much as possible: Money in the bank can make qualifying for a conventional loan much more accessible. Not only can you cover closing costs and a conventional loan down payment, but the lender will see you have a financial cushion and could still make payments if you lose your income due to a layoff or illness.
- Get preapproved: When you’ve improved your loan status, it’s time to get pre-approved with a lender. A preapproval tells you how much you’ll likely be able to borrow, allowing you to begin your home search with an accurate idea of what you can afford.
Conforming loan vs. conventional: What’s the difference?
The term “conventional loans” refers to non-government-backed mortgages. But there are different types of loans under the conventional category. Conforming loans are a specific kind of conventional loan. They’re called “conforming” because they conform to Fannie Mae’s and Freddie Mac’s guidelines, including credit score and DTI criteria. They also work to conforming loan limits set by the Federal Housing Finance Agency (FHFA) and cap the amount a lender can approve for a conforming loan in a given area. What does this mean for you? Suppose your conventional loan doesn’t conform to all of Fannie’s lending guidelines. In that case, you may need a non-conforming loan, which increases your lender’s risk and may translate to a higher interest rate or a higher down payment requirement. Jumbo loans are an excellent example of this. These loans exceed Fannie Mae’s maximum loan size, so they’re considered non-conforming loans. Qualified borrowers can get significantly higher loans than they would with a conforming loan, but they often need exceptional credit and more money down.