As with any type of mortgage loan, you’ll need to meet certain qualification requirements if you want to buy a home with a conventional loan. Let’s take a look at what you’ll need to qualify for this type of home loan.
It’s possible for first-time home buyers to get a conventional mortgage with a down payment as low as 3%. However, the down payment requirement can vary based on your personal situation and the type of loan or property you’re getting:
If you’re not a first-time home buyer or making no more than 80% of the median income in your area, the down payment requirement is 5%.
If you’re getting an adjustable-rate mortgage, the minimum down payment requirement is 5%.
A mortgage calculator can help you figure out how your down payment amount will affect your future monthly payments.
If you put down less than 20% on a conventional loan, you’ll be required to pay for private mortgage insurance (PMI). PMI protects mortgage investors in case of a loan default. The cost for PMI varies based on your loan type, your credit score and the size of your down payment.
PMI is usually paid as part of your monthly mortgage payment, but there are other ways to cover the cost as well. Some buyers pay it as an upfront fee included in their closing costs. Others pay it in the form of a slightly higher interest rate. Choosing how to pay for PMI is a matter of running the numbers to figure out which option is the cheapest for you.
The nice thing about PMI is that it won’t be part of your loan forever – that is, you won’t have to refinance to get rid of it. When you reach 20% equity in the home on your regular mortgage payment schedule, you can ask your lender to remove the PMI from your mortgage payments.
If you reach 20% equity as a result of your home increasing in value, you can contact your lender for a new appraisal so they can use the new value to recalculate your PMI requirement. Once you reach 22% equity in the home, your lender will automatically remove PMI from your loan.
A conventional lender will also have the following requirements.
In most cases, you’ll need a credit score of at least 620 to qualify for a conventional loan. When you apply, your lender will check your credit history to determine if you have qualifying credit. If you don’t, you might not get approved for the loan.
Your debt-to-income ratio (DTI) is a percentage that represents how much of your monthly income goes to pay off debts. You can calculate your DTI by adding up the minimum monthly payments on all your debts (like student loans, auto loans and credit cards) and dividing it by your gross monthly income. For most conventional loans, you can be approved up to 50% DTI, however a lower DTI increased your likelihood of approval.
For a conforming conventional loan, your loan must fall within the loan limits set by Fannie Mae and Freddie Mac. For 2024, the conforming loan limit for a single-family home is $766.550. There are exceptions, however. Alaska, Hawaii and other high-cost areas of the country have higher loan limits, ranging up to $1,149,825. To see loan limits for your area, visit the Federal Housing Finance Agency website.
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