A conventional loan is any mortgage loan that is not insured nor guaranteed by the United States Federal Government. A conventional loan is also known as a conformining loan which conforms to the standards, lending guidelines and loan limits set by a GSE, which stands for a Government Sponsored Enterprise. Examples of Government Sponsored Enterprises, GSE, are mortgage giants Fannie Mae and Freddie Mac. Conventional loans that do not meet these GSE mortgage lending guidelines are known as non-conforming mortgage loans.
Conventional Loan Requirements
Conventional loan programs have stricter lending guidelines than government mortgage loans. Debt to income ratio for conventional loan programs are capped at 45% DTI. For FHA insured mortgage loans, the maximum debt to income ratios are 46.9% front end DTI and 56.9% back end DTI. There are no front end debt to income ratio for conventional loan. As long as you can meet the 45% debt to income ratio for conventional loan requirements, the front end debt to income ratio does not matter.
What Is Debt To Income Ratio?
Debt to income ratio is the total amount of minimum monthly payments a borrower has which includes minimum credit card payments, auto payments, student loan payments, installment payments, child support payments, and any other minimum monthly credit payments divided by the borrower’s gross monthly income. The percentage you get is the debt to income ratio.
Conventional Loan Lending Guidelines
Conventional loan programs have higher credit standards than FHA insured mortgage programs. To qualify for a 3.5% down payment FHA insured mortgage loan, the minimum credit score required is 580 FICO. However, to qualify for a conventional loan, a mortgage loan applicant needs a minimum credit score of at least a 620 FICO. However, a 620 FICO credit score is normally considered a poor credit score for a conventional loan and those with a low credit score will most likely pay a much higher mortgage rate on a conventional loan. With FHA loans, as long as you have a 640 FICO or higher credit score, you will most likely get the best FHA mortgage rate. For a conventional loan mortgage applicant to get the best available conventional mortgage rate, they would need a credit score higher than 740 FICO.
Minimum Down Payment Requirements On Conventional Loans
The minimum downpayment requirement for a conventional loan is 5.0% downpayment on a home purchase. FHA requires a minimum 3.5% downpayment. VA loans and USDA loans do not require any downpayment on a home purchase.
2015 Update On Minimum Down Payment On Conventional Loans: 97% LTV
Fannie Mae has brought back the 3% down payment conventional loan home purchase program for first time home buyers. Freddie Mac will offer the 3% down payment conventional home purchase loan program to first time home buyers plus to home buyers who had not owned a property in the past three years.