If you're contemplating purchasing a house, securing a mortgage loan is likely necessary to fund the purchase. As you delve into your options, you'll encounter a plethora of loan types to consider.

Navigating through the array of choices can be challenging. However, for numerous borrowers, a conventional loan emerges as the optimal option.

Let's delve into understanding what a conventional loan entails, its mechanics, and the qualifications necessary to secure this type of loan.

What Constitutes a Conventional Mortgage Loan?

A conventional mortgage loan does not have direct insurance from a government program. The majority of conventional loans also fall under the category of "conforming" loans, indicating that they meet the criteria set by either Fannie Mae or Freddie Mac. These entities are government-sponsored enterprises that buy mortgages from lenders and sell them to investors. This practice frees up funds for lenders, enabling them to accommodate more qualified buyers in purchasing homes.

Conventional mortgages offer various term options, with many individuals opting for either 15-year or 30-year terms.

Since there are several sets of guidelines categorized under "conventional loans," there isn't a singular set of requirements for borrowers. However, as a general rule, conventional loans impose stricter credit requirements compared to government-backed loans such as Federal Housing Administration (FHA) loans.

Conventional Loan Eligibility Criteria

Just like with any mortgage loan, specific qualification criteria must be met if you're considering purchasing a home with a conventional loan. Let's delve into the requirements you'll need to fulfill to qualify for this type of home loan.

Down Payment

First-time homebuyers can secure a conventional mortgage with a down payment as low as 3%. However, the down payment requirement can vary depending on your individual circumstances and the type of loan or property you're pursuing:

• If you're not a first-time homebuyer or if your income doesn't exceed 80% of the median in your area, the down payment requirement is 5%.

• If the property you're purchasing isn't a single-family home (i.e., it has multiple units), you may need to put down 15%.

• For a second home, a minimum of 10% down payment is required.

• If you opt for an adjustable-rate mortgage, the minimum down payment requirement is 5%.

Private Mortgage Insurance

Should your down payment be less than 20% on a conventional loan, you'll need to pay for private mortgage insurance (PMI). PMI safeguards mortgage investors in the event of a loan default. The cost of PMI varies based on your loan type, credit score, and down payment size.

While PMI is typically included in your monthly mortgage payment, there are alternative methods to cover the cost. Some buyers incorporate it as an upfront fee in their closing expenses, while others opt for a slightly higher interest rate. The method of payment depends on your individual financial situation.

The advantageous aspect of PMI is that it's not a permanent fixture of your loan – meaning you won't need to refinance to eliminate it. Once you attain 20% equity in your home according to your regular mortgage payment schedule, you can request your lender to remove the PMI from your mortgage payments.

If your home's equity reaches 20% due to an increase in its value, you can request a new appraisal from your lender to recalibrate your PMI requirement based on the updated value. Upon reaching 22% equity in your home, your lender will automatically eliminate PMI from your loan.

Additional Requirements

Conventional lenders also impose the following stipulations:

Credit Score

In most instances, a credit score of at least 620 is required to qualify for a conventional loan. During the application process, your lender will scrutinize your credit history to ascertain if you meet the qualifying credit criteria. Failure to meet these standards may result in disqualification for the loan.

Debt-To-Income Ratio

Your debt-to-income ratio (DTI) is a percentage reflecting the portion of your monthly income allocated to debt repayment. You can calculate your DTI by totaling the minimum monthly payments on all your debts (such as student loans, auto loans, and credit cards) and dividing it by your gross monthly income. While most conventional loans approve up to a 50% DTI, a lower DTI enhances your approval prospects.

Loan Size

For a conforming conventional loan, the loan amount must fall within the loan limits established by Fannie Mae and Freddie Mac. As of 2023, the conforming loan limit for a single-family home is $726,200. However, exceptions exist. States like Alaska, Hawaii, and other high-cost areas have higher loan limits, reaching up to $1,089,300. To ascertain loan limits for your locality, visit the Federal Housing Finance Agency website.