Conventional loans — mortgages that are not insured by the federal government — are the most popular type of mortgage and offer affordability to homebuyers.
Private mortgage lenders originate and fund conventional loans, which are then often bought by Fannie Mae and Freddie Mac, publicly traded companies that are run under a congressional charter.
By buying and selling these mortgages, Fannie and Freddie help to ensure a reliable flow of mortgage funding.
Key Points
• Conventional loans in 2024 typically require a minimum FICO® score of 620, with better interest rates offered to those with higher scores.
• A down payment of 20% is ideal to avoid PMI, but first-time homebuyers can qualify with as little as 3% down.
• A borrower’s loan-to-value ratio and debt-to-income ratio are also important considerations for lenders.
• Conventional loans above a certain amount set by the Federal Housing Finance Administration are considered nonconforming loans.
• Conforming loan limits vary by location, with higher limits in high-cost areas.
Requirements for Conventional Loans
It can be confusing to know how to qualify for a mortgage.
Just realize, for one thing, that a higher credit score is usually required for a conventional home loan than an FHA loan backed by the Federal Housing Administration, a type popular among first-time buyers.
Here are factors a lender will consider when sizing you up for a conventional loan.
Your Credit Score
You’ll usually need a FICO credit score of at least 620 for a fixed-rate or adjustable-rate mortgage.
The FICO score range of 300 to 850 is carved into these categories:
• Exceptional: 800 to 850
• Very Good: 740 to 799
• Good: 670 to 739
• Fair: 580 to 669
• Poor: 300 to 579
In general, the higher your credit score, the better the interest rates you’re offered.
Down Payment
Putting 20% down is desirable because it means you can avoid paying PMI, or private mortgage insurance, which covers the lender in case of loan default.
But many buyers don’t put 20% down. The median down payment on a home is 15%, according to a recent study by the National Association of Realtors®.
Conventional loans require as little as 3% down for first-time homebuyers, and the down payment can be funded by a gift from a close relative; a spouse, fiancé or domestic partner; a buyer’s employer or church; or a nonprofit or public agency. The gift may require a gift letter for the mortgage.
Just keep in mind that the smaller the down payment, the higher your monthly payments are likely to be, and PMI may come along for the ride until you reach 20% equity.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Debt-to-Income Ratio
Your debt-to-income ratio (DTI) helps a lender understand your ongoing monthly debt obligations relative to your gross monthly income.
To calculate back-end DTI:
1. Add up your monthly bills (but do not include groceries, utilities, cellphone bill, car insurance, and health insurance).
2. Divide the total by your pretax monthly income.
3. Multiply by 100 to convert the number to a percentage.
In general, lenders like to see a DTI ratio of 36% but will accept 43%.
The Fannie Mae HomeReady® loan, for lower-income borrowers, may allow a DTI ratio of up to 50%.
In any case, the lower your DTI ratio, the more likely you are to qualify for a mortgage and possibly better terms.
Loan-to-Value Ratio
The loan-to-value ratio (LTV) is the amount of the mortgage you are applying for compared with the home value. The higher the down payment, the lower the LTV ratio.
Fannie Mae typically sets LTV limits at 97% for a fixed-rate mortgage for a principal residence (think: 3% down) and 85% for a fixed or adjustable loan for a one-unit investment property.
When LTV exceeds 80% on a conforming loan, PMI will likely apply, although some borrowers employ a piggyback loan to avoid mortgage insurance.
Conventional Conforming Loan Limits
Many loans are both conventional and conforming — meaning they meet the guidelines of secondary mortgage market powerhouses Fannie Mae and Freddie Mac, which buy such mortgages and often package them into securities for investors.
Conventional conforming loans fall below limits set by the Federal Housing Finance Agency (FHFA) every year.
Staying under a conforming loan limit often equates to a lower-cost mortgage because the loan can be acquired by Fannie and Freddie.
The conforming loan limits for 2024 in many counties in the contiguous states, Washington, D.C., and Puerto Rico rose with market prices:
• One unit: $766,550
• Two units: $981,500
• Three units: $1,186,350
• Four units: $1,474,400
In high-cost areas like Alaska, Hawaii, Guam, and the U.S. Virgin Islands, the 2024 conforming loan limits are:
• One unit: $1,149,825
• Two units: $1,472,250
• Three units: $1,779,525
• Four units: $2,211,600
If you’re curious about your county’s specific conforming loan limits are, you can check out this FHFA guide.
Nonconforming Loans
Word games, anyone? Nonconforming loans are simply mortgages that do not meet Fannie and Freddie standards for purchase. They usually take the form of jumbo loans and government-backed loans.
A homebuyer or refinancer who needs a mortgage beyond the FHFA limits can seek a jumbo mortgage loan. A jumbo loan is still a conventional loan if it’s not backed by a government agency; it’s just considered a “nonconforming” loan.
FHA, VA, and USDA mortgages — those backed by the Federal Housing Administration, Department of Veterans Affairs, and the U.S. Department of Agriculture — are also nonconforming loans.
Nonconforming mortgage rates for jumbo loans may be higher because the loans carry greater risk for lenders, but when the nonconforming loan is backed by the government, its rate might skew lower than conventional conforming rates.
The Takeaway
Conventional loan requirements are good to know when you’re looking at the most popular type of mortgage around. Would-be homebuyers will want to make sure their credit score, debt-to-income ratio, and down payment numbers are lined up as favorably as possible before pursuing their dream property.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
FAQ
Are there any drawbacks to a conventional loan?
The main drawback to a conventional loan is that you will need to make some type of down payment on the property. It doesn’t need to be the 20% down payment that was common in decades past. But even a low down payment of, say, 3.5% could add up to tens of thousands of dollars given today’s home prices.
What’s the main reason I might not qualify for a conventional loan?
The most common reason someone might not qualify for a conventional home loan is usually related to credit — perhaps the applicant has a credit score below 620, or maybe there is some other significant warning sign on the credit report, such as a history of delinquencies or bankruptcy.
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*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
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¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
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