Even though a conventional loan is the most common mortgage, it is surprisingly difficult to get. Borrowers need to have a minimum credit score of about 640 in order to qualify—the highest minimum score of all mortgage products—and have a debt-to-income ratio of 43% or less.
If you have a 600 credit score, bumping your score up to 620 (which is considered a fair credit score), can help you qualify for a conventional loan. The Fannie Mae HomeReady program is available to home buyers with a 620 score.
Options for putting down less than 20 percent
Here are some common options: A conventional loan with private mortgage insurance (PMI). “Conventional” just means that the loan is not part of a specific government program. Typically, conventional loans require PMI when you put down less than 20 percent.
Credit score: In most cases, you'll need a credit score of at least 620 to qualify for a conventional loan.
A conventional loan requires a credit score of at least 620, but it's ideal to have a score of 740 or above, which could allow you to make a lower down payment, get a more attractive interest rate and save on private mortgage insurance.
To qualify for a conventional loan, you'll typically need a credit score of at least 620. Borrowers with credit scores of 740 or higher can make lower down payments and tend to get the most attractive conventional loan rates, however.
Cons: Why a conventional mortgage may not be right for you
The eligibility requirements for conventional loans are more stringent than government-backed loans. Conforming loans are sold to Fannie Mae or Freddie Mac soon after being created to help keep mortgages affordable for homebuyers.
A conventional loan is often better if you have good or excellent credit because your mortgage rate and PMI costs will go down. But an FHA loan can be perfect if your credit score is in the high-500s or low-600s. For lower-credit borrowers, FHA is often the cheaper option. These are only general guidelines, though.
The mortgage approval process can take anywhere from 30 days to several months, depending on the status of the market and your personal circumstances.
Lenders will usually offer an FHA loan to someone with a credit score as low as 500, as long as they can put down 10%. With a credit score above 580, you could qualify for a down payment as low as 3.5%.
To purchase a $300K house, you may need to make between $50,000 and $74,500 a year. This is a rule of thumb, and the specific salary will vary depending on your credit score, debt-to-income ratio, the type of home loan, loan term, and mortgage rate.
Conventional loan debt-to-income (DTI) ratios
The maximum debt-to-income ratio (DTI) for a conventional loan is 45%. Exceptions can be made for DTIs as high as 49.9% with strong compensating factors like a high credit score and/or lots of cash reserves.
It is a common misconception that in order to obtain a conventional loan, you must pay a 20% down payment, but that is not the case. In fact, you can qualify for a conventional loan by putting down as low as a 5% down payment.
Yes. The Conventional 97 program allows 3 percent down and is offered by most lenders. Fannie Mae's HomeReady and Freddie Mac's Home Possible programs also allow 3 percent down with extra flexibility for income and credit qualification. FHA loans come in a close second, with a 3.5 percent minimum down payment.
FHA loans tend to have higher closing costs than conventional loans, but because FHA loans allow the seller to pay for more of your closing costs than conventional loans, they may actually be cheaper.
Sellers' Own Perceptions
Sellers often prefer conventional buyers because of their own financial views. Because a conventional loan typically requires higher credit and more money down, sellers often deem these reasons as a lower risk to default and traits of a trustworthy buyer.
Typically, mortgage lenders want you to put 20 percent down on a home purchase because it lowers their lending risk. It's also a “rule” that most programs charge mortgage insurance if you put less than 20 percent down (though some loans avoid this).
If you're unable to make a large payment upfront, conventional loans are available with a down payment as low as 3%. In most cases, borrowers save money in the long run with a conventional loan because there's no upfront mortgage insurance fee, and the monthly insurance payments are cheaper.
2021 Conforming Limit California is $548,250 and goes up to $822,375 for high-cost counties for one-unit properties. 2021 Conforming Limit California for 2-unit properties is $702,000 and goes up to $1,053,000 for high-cost counties.
An FHA loan allows for lower credit scores and can be easier to qualify for than a Conventional loan. However, Conventional loans may not require mortgage insurance with a large enough down payment. The benefit of FHA vs Conventional down to the individual needs of the borrower.
As mentioned above, a 680 credit score is high enough to qualify for most major home loan programs.
It's recommended you have a credit score of 620 or higher when you apply for a conventional loan. If your score is below 620, lenders either won't be able to approve your loan or may be required to offer you a higher interest rate, which can result in higher monthly payments.
The credit scores and reports you see on Credit Karma should accurately reflect your credit information as reported by those bureaus. This means a couple of things: The scores we provide are actual credit scores pulled from two of the major consumer credit bureaus, not just estimates of your credit rating.