Conventional loan requirements include a minimum credit score of 620 (740+ for best rates), a down payment of 3-20%, a debt-to-income ratio of 43-45%, stable employment for 2 years and private mortgage insurance if you put less than 20% down. Conventional loans are not government-backed and typically offer the best rates for borrowers with strong credit.
What Is a Conventional Loan?
Conventional loans are mortgages not insured by a government agency (FHA, VA or USDA). They’re backed by private lenders and sold to Fannie Mae or Freddie Mac—government-sponsored enterprises that set the qualification guidelines.
Two types of conventional loans:
Conforming loans: Meet Fannie Mae/Freddie Mac guidelines and loan limits. Most conventional loans are conforming.
Non-conforming loans: Exceed loan limits (jumbo loans) or don’t meet standard guidelines.
Conventional loan advantages:
- No upfront mortgage insurance premium
- PMI cancels at 20% equity
- More flexible property types
- Higher loan limits than FHA
- Faster processing than government loans
- No geographic restrictions
Conventional Loan Credit Score Requirements
Your credit score significantly impacts approval and rate.
Minimum Credit Scores
| Credit Score | Approval Odds | Rate Impact |
|---|---|---|
| 760+ | Excellent | Best rates |
| 740-759 | Very good | Near-best rates |
| 720-739 | Good | Slightly higher |
| 700-719 | Good | Moderate increase |
| 680-699 | Fair | Higher rates |
| 660-679 | Fair | Significant increase |
| 640-659 | Challenging | Limited options |
| 620-639 | Minimum | Highest rates |
| Below 620 | Not eligible | Consider FHA |
Credit Score Impact on Rates
On a $350,000 loan, credit score affects both rate and monthly payment:
| Score | Typical Rate | Monthly P&I | Extra Cost vs 760 |
|---|---|---|---|
| 760+ | 6.50% | $2,212 | Baseline |
| 720 | 6.75% | $2,270 | +$58/month |
| 680 | 7.00% | $2,329 | +$117/month |
| 660 | 7.25% | $2,388 | +$176/month |
| 640 | 7.50% | $2,447 | +$235/month |
| 620 | 7.75% | $2,508 | +$296/month |
A 620 borrower pays $296 more monthly than a 760 borrower—that’s $106,560 over 30 years.
Improving Your Credit Before Applying
Quick wins (1-2 months):
- Pay credit card balances below 30% of limits
- Dispute errors on credit reports
- Don’t close old accounts
- Become authorized user on old account
Medium-term (3-6 months):
- Make all payments on time
- Let accounts age
- Avoid new credit applications
Marcus Thompson improved his score from 665 to 715 over three months by paying down credit cards. His rate dropped from 7.25% to 6.75%, saving him $88/month.
Conventional Loan Down Payment Requirements
Conventional loans offer flexibility in down payment size.
Minimum Down Payments
| Loan Type | Minimum Down | PMI Required |
|---|---|---|
| Conventional 97 | 3% | Yes |
| HomeReady/Home Possible | 3% | Yes (reduced) |
| Standard conventional | 5% | Yes |
| Conventional | 10% | Yes |
| Conventional | 15% | Yes |
| Conventional | 20%+ | No |
Down Payment Impact
On a $400,000 home:
| Down Payment | $ Amount | Loan Amount | Est. PMI/month |
|---|---|---|---|
| 3% | $12,000 | $388,000 | $250+ |
| 5% | $20,000 | $380,000 | $220 |
| 10% | $40,000 | $360,000 | $150 |
| 15% | $60,000 | $340,000 | $100 |
| 20% | $80,000 | $320,000 | $0 |
3% Down Programs
Conventional 97: Standard 3% down option
- At least one borrower must be first-time buyer
- Maximum DTI: 43% (45% with exceptions)
- Requires homebuyer education for first-timers
HomeReady (Fannie Mae):
- 3% down for income-qualified borrowers
- Income limit: 80-100% of area median
- Reduced PMI rates
- Allows boarder and ADU income
Home Possible (Freddie Mac):
- 3% down for income-qualified borrowers
- Income limit: 80% of area median
- Reduced PMI rates
- Sweat equity allowed for down payment
Gift Funds for Down Payment
Conventional loans allow gift funds with documentation:
Who can give:
- Family members (parents, siblings, grandparents)
- Domestic partner
- Fiancé/fiancée
- Close friend (with explanation)
Gift letter requirements:
- Donor name and relationship
- Gift amount
- Property address
- Statement that no repayment expected
- Donor signature
Minimum borrower contribution:
- 3-5% down: No minimum from borrower (100% gift allowed)
- 10-15% down: 5% must be from borrower
- 20%+ down: No restrictions
Conventional Loan Income and Employment Requirements
Lenders verify stable, ongoing income that will continue.
Employment History
Standard requirement: 2 years in the same line of work
Acceptable:
- Same employer for 2+ years
- Job changes within same field
- Promotions and raises
- Recent graduates in related field
Requires explanation:
- Employment gaps over 30 days
- Frequent job changes
- Income decreases
- Career changes
Income Documentation
W-2 employees:
- 2 years of W-2s
- 30 days of pay stubs
- Verification of employment
Self-employed (2+ years):
- 2 years of personal tax returns
- 2 years of business tax returns (if applicable)
- Year-to-date profit and loss
- Business license or CPA letter
Variable income (overtime, bonus, commission):
- 2-year history required
- Average of 2 years used
- Declining income is concerning
Income Types Counted
Fully counted:
- Base salary/wages
- Overtime (2-year history)
- Bonuses (2-year history)
- Commission (2-year history)
- Social Security, pension, disability
- Alimony/child support (continuing 3+ years)
Partially counted:
- Rental income (typically 75% of net rent)
- Part-time income (2-year history needed)
- Seasonal income (averaged)
Conventional Loan DTI Requirements
Debt-to-income ratio measures your ability to handle monthly payments.
DTI Limits
Front-end ratio (housing only): No strict limit, but 28% is guideline
Back-end ratio (all debts):
- Standard maximum: 43%
- With compensating factors: Up to 45-50%
What Counts as Debt
Included in DTI:
- Proposed mortgage payment (PITI + PMI)
- Car loans and leases
- Student loans
- Credit card minimum payments
- Personal loans
- Child support/alimony paid
- Other mortgages
Not included:
- Utilities
- Insurance (except homeowners in payment)
- Phone/internet
- Groceries
- Entertainment
DTI Calculation Example
Jennifer Walsh earns $7,200/month gross. Her proposed housing payment is $2,000 and other debts total $650.
- Front-end: $2,000 ÷ $7,200 = 27.8%
- Back-end: $2,650 ÷ $7,200 = 36.8%
Both within limits—she qualifies.
Compensating Factors for Higher DTI
With these factors, DTI can exceed 43%:
- Large cash reserves (6+ months)
- Significant equity in property
- Excellent credit history
- Minimal increase from current housing
- Strong residual income
Conventional Loan Limits
Conforming loan limits set the maximum you can borrow with a conventional loan.
2024 Loan Limits
| Area Type | Limit |
|---|---|
| Standard (most areas) | $766,550 |
| High-cost areas | Up to $1,149,825 |
| Alaska, Hawaii, Guam, Virgin Islands | Up to $1,149,825 |
High-cost areas include: Most of California, New York City metro, Seattle, Boston, Washington D.C. metro, Denver and other expensive markets.
Above the Limit?
If you need more than the conforming limit:
- Jumbo loan: Higher rates, stricter requirements
- Larger down payment: Bring loan under limit
- Piggyback loan: First mortgage at limit, second for remainder
Private Mortgage Insurance (PMI)
PMI is required with less than 20% down payment.
PMI Costs
| Credit Score | 5% Down | 10% Down | 15% Down |
|---|---|---|---|
| 760+ | 0.30% | 0.22% | 0.19% |
| 720-759 | 0.45% | 0.35% | 0.28% |
| 680-719 | 0.70% | 0.55% | 0.45% |
| 640-679 | 1.05% | 0.85% | 0.70% |
| 620-639 | 1.50% | 1.25% | 1.10% |
On a $350,000 loan with 5% down and 700 credit:
- PMI rate: 0.70%
- Annual: $2,450
- Monthly: $204
Removing PMI
Automatic termination: At 78% LTV based on original value
Request at 80% LTV: Write to servicer, may need appraisal
Early removal with appreciation: At 75-80% LTV based on new appraisal (after 2 years)
Refinance: New loan without PMI if you have 20%+ equity
Conventional Loan Property Requirements
Conventional loans are more flexible than government loans on property types.
Eligible Properties
Allowed:
- Single-family homes
- Condos (warrantable and non-warrantable with restrictions)
- Townhouses
- 2-4 unit properties
- Second homes
- Investment properties
- Manufactured homes (with restrictions)
Property Condition
Conventional loans are less strict than FHA/VA on condition:
Must have:
- Safe and sound structure
- Functional systems (HVAC, plumbing, electrical)
- No major health/safety hazards
More flexibility on:
- Cosmetic issues
- Deferred maintenance
- Older systems still functioning
- Minor repairs needed
Investment Property Requirements
For rental/investment properties:
- Minimum 15-20% down
- Higher rates (0.5-0.75% more)
- 6 months reserves required
- Rental income at 75% for qualification
- Maximum 10 financed properties
Conventional vs. Government Loans
| Feature | Conventional | FHA | VA | USDA |
|---|---|---|---|---|
| Min credit | 620 | 580 | None (620 typical) | 640 |
| Min down | 3% | 3.5% | 0% | 0% |
| Upfront fee | None | 1.75% | 2.15% | 1.0% |
| Annual insurance | PMI (varies) | 0.55% | None | 0.35% |
| PMI removal | Yes (20%) | Rarely | N/A | No |
| Loan limits | Higher | Lower | None (full entitlement) | None |
| Property standards | Flexible | Strict | Moderate | Moderate |
Choose conventional if:
- Credit score is 680+
- You have 10-20% down payment
- You want PMI to drop at 20%
- Property has minor condition issues
- You’re buying investment property
How to Apply for a Conventional Loan
Step 1: Check Your Credit
Pull your credit reports and scores. Aim for 680+ for best conventional rates.
Step 2: Calculate Your Budget
Use the 28/43 rule:
- Housing under 28% of gross income
- Total debts under 43% of gross income
Step 3: Save for Down Payment and Closing Costs
Budget for:
- Down payment (3-20%)
- Closing costs (2-5%)
- Reserves (2-6 months for some loans)
Step 4: Get Pre-Approved
Submit to multiple lenders:
- 2 years tax returns
- 2 years W-2s
- 30 days pay stubs
- 2-3 months bank statements
Step 5: Find a Home and Close
Work with a real estate agent. Timeline from contract to close: 30-45 days.
Frequently Asked Questions
What credit score do I need for a conventional loan?
Minimum 620, but 680+ gets much better rates. At 620, you’ll pay the highest rates and may have limited lender options. At 740+, you’ll qualify for the best available rates.
Is 5% down enough for a conventional loan?
Yes. With 5% down, you’ll pay PMI but at lower rates than 3% down. PMI drops when you reach 20% equity through payments or appreciation.
How much income do I need for a conventional loan?
There’s no minimum income. What matters is your DTI ratio—total debts (including new mortgage) should stay under 43-45% of gross monthly income.
Can I get a conventional loan with collections?
Yes. Unlike FHA, conventional loans don’t require you to pay off collections. However, recent collections hurt your credit score, which affects approval and rate.
How long after bankruptcy can I get a conventional loan?
Generally 4 years after Chapter 7 discharge or 2 years after Chapter 13 discharge. Some lenders may have different requirements.
Is conventional better than FHA?
For borrowers with 680+ credit and 10%+ down payment, usually yes. Conventional has no upfront insurance premium, and PMI drops at 20% equity. FHA MIP typically lasts the life of the loan.
Sarah Mitchell
Licensed Mortgage Broker, 15+ Years Experience
Our team of mortgage experts provides accurate, up-to-date information to help you make informed decisions about your home financing.
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