News from Lending Tree

Conventional mortgage requirements

Conventional loans, the most popular mortgage option, aren’t guaranteed by any government agency. The government-sponsored enterprises Fannie Mae and Freddie Mac set more stringent conventional home loan requirements than government-backed mortgages.

Homebuyers qualifying for a mortgage for a higher-priced home can borrow more, with 2022 conforming loan limits increasing to $647,200 for most parts of the country. Here are the current minimum conventional home loan requirements:

Current minimum mortgage requirements for conventional loans

• Down payment. The minimum down payment is 3% for conventional loans. The funds can come from your own money or a gift from a family member.

• Mortgage insurance. Conventional loans with less than 20% down require private mortgage insurance (PMI) to protect lenders if you default. The higher your down payment and credit score, the lower your PMI will be. You’ll typically pay between 0.15% and 1.95% of your loan amount in annual PMI premiums, which are normally paid as part of your monthly payment; however, PMI can be paid upfront in a lump sum at closing.

• Credit score. The minimum credit score for a conventional mortgage is 620. Higher scores get you the best mortgage rates and lower PMI premiums.

• Employment. Lenders typically require proof of steady income, focusing on the past two years of employment history.

• Self-employment. Fannie Mae and Freddie Mac usually require two years worth of personal and business federal tax returns, plus a year-to-date accounting of income you’ve received from your company’s activities.

• Income. Most conventional loans don’t have income limits, with the exception of Fannie Mae’s HomeReady® and Freddie Mac’s Home Possible® (covered below). Borrower incomes for these programs must fall within set limits for their area.

• Debt-to-income ratio. Your debt-to-income (DTI) ratio is measured by dividing your total debt by your gross monthly income. Conventional lenders prefer a DTI of 45% or less, but may bump it to 50% with higher credit scores and additional mortgage reserves. In 2021, lenders may accept alternatives to the DTI ratio requirements, which we’ll cover later.

• Cash reserves. Also called mortgage reserves, these are funds you’ll need in addition to your down payment and closing costs to prove you can pay several months of mortgage payments in an emergency. Up to six months of cash reserves may be required depending on your credit scores, DTI ratio, down payment and if you’re buying a two- to four-unit home.

• Occupancy. Borrowers can purchase a home used as a primary residence, second home (commonly called a vacation home) or rental property.

• Property types. Conventional mortgage requirements allow you to finance a one- to four-unit home located in a regular subdivision, condominium project, co-op project or planned unit development (PUD). Conventional loans can also be used to buy manufactured homes attached to a permanent foundation.

• Home appraisals. An appraisal is needed to meet conventional loan requirements for an unbiased opinion of a home’s value from a licensed property appraiser. However, some borrowers making a 20% down payment or more on a one-unit home may be eligible for a property inspection waiver (PIW), and can skip a home appraisal.

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