Conventional loan requirements: credit, down payment, DTI, reserves, property

“Conventional” means a mortgage not insured by the federal government — in practice, one that follows Fannie Mae or Freddie Mac guidelines so the lender can sell it. Those guidelines are public, and they are the requirements.

Credit

Minimum 620 representative score (the middle of three bureau scores). Pricing improves in steps at roughly 680, 700, 720, 740 and 760 through loan-level price adjustments. Waiting periods after major events: four years after Chapter 7 bankruptcy (two with extenuating circumstances), two years after Chapter 13 discharge, seven years after foreclosure (three with extenuating circumstances), four years after a short sale or deed in lieu (two with extenuating circumstances).

Down payment

3% for a one-unit primary residence under HomeReady, Home Possible or the 97% LTV programs; 5% standard. 10% for a second home; 15% for a one-unit investment property; 25% for two-to-four unit investments. Gifts may cover the entire down payment on a one-unit primary residence. Below 20% down, private mortgage insurance is required.

Debt-to-income

Up to 45% back-end through automated underwriting as a general matter, up to 50% with strong compensating factors (reserves, credit, low LTV). Manual underwriting caps at 36%, or 45% with specific factors. See DTI limits.

Income and employment

Two years of documented history is the standard. Wage earners: recent pay stubs, two years of W-2s, verbal verification of employment before closing. Self-employed: two years of personal and business tax returns (one year possible in some cases), a year-to-date profit and loss statement, and proof the business is active. Variable income (bonus, commission, overtime) is averaged over two years and must be stable or increasing.

Assets and reserves

Two months of statements for every account used, with large deposits explained. Reserves — months of full housing payments left after closing — are often not required on a primary residence with automated approval, but two to six months are required for second homes, investment properties and multiple financed properties.

Property

A full appraisal (or an appraisal waiver on strong files), a one-to-four unit residential property in acceptable condition, and — for condos — a project review unless the project is already approved. Manufactured homes must be titled as real property. Conforming loan limits cap the loan amount by county; above them you are in jumbo territory.

Occupancy

Primary residence (occupy within 60 days, for at least a year), second home (one unit, suitable for year-round use, not a rental business), or investment. The category changes down payment, rate and reserve requirements, and misrepresenting it is mortgage fraud.

Frequently asked questions

Are conventional loans only for people with great credit?

No — 620 is the floor. But the cost of a conventional loan rises steeply below about 680, at which point FHA often becomes cheaper for the same borrower.

Can I get a conventional loan without two years at my job?

Often yes, if you have a two-year history in the same field (school counts in some cases) and the new job is salaried without a probationary gap. Job-hoppers with stable income are generally fine; gaps over six months need explanation.

Is there an income limit?

Not for standard conventional loans. HomeReady and Home Possible (the 3% programs with cheaper PMI) cap income at 80% of area median.