A conventional loan requires a minimum 620 credit score, 3-20% down payment, and debt-to-income ratio below 50% in most cases. These mortgages aren’t backed by the government and follow Fannie Mae or Freddie Mac guidelines, making them the most common home financing option for borrowers with solid credit.
What Is a Conventional Loan?
A conventional loan is a mortgage that private lenders offer without government backing. These loans follow standards set by Fannie Mae and Freddie Mac, the two main agencies that buy mortgages from lenders.
You’ll find two types: conforming loans that meet agency limits (typically $806,500 for 2025 in most areas) and non-conforming loans that exceed these limits. Most buyers work with conforming conventional loans because they offer better rates and more flexible terms.
Credit Score Requirements for Conventional Loans
You need a minimum 620 credit score to qualify for a conventional loan. That’s the floor, but your score affects everything from approval odds to interest rates.
Here’s what lenders actually look for:
| Credit Score Range | Approval Likelihood | Expected Rate Impact |
|---|---|---|
| 760+ | Excellent | Best available rates |
| 700-759 | Very Good | 0.25-0.5% higher |
| 660-699 | Good | 0.5-0.75% higher |
| 620-659 | Fair (requires strong compensating factors) | 1-1.5% higher |
| Below 620 | Typically denied (consider FHA) | Not applicable |
A score of 740 or higher gets you into the best pricing tier. The difference between 740 and 620 can cost you $200-300 more per month on a $400,000 loan.
How to Improve Your Credit Score Before Applying
If you’re sitting at 650 and want to hit 700, focus on these areas. Pay down credit card balances below 30% of your limits. One late payment can drop your score 60-100 points, so set up autopay. Don’t close old credit cards—they help your credit age. Dispute any errors on your credit report through AnnualCreditReport.com.
Down Payment Requirements
You can put down as little as 3% on a conventional loan through Fannie Mae’s HomeReady or Freddie Mac’s Home Possible programs. Most buyers choose between 3%, 5%, 10%, or 20% down.
Here’s what each option means for you:
3% Down: Available for first-time buyers or those who haven’t owned a home in three years. You’ll pay PMI until you reach 20% equity. Your loan must be for a primary residence, and you’ll face slightly higher rates than 5% down options.
5% Down: The most popular choice for buyers with good credit. You still pay PMI but get access to more property types and slightly better rates. This works for primary homes, second homes, and some investment properties.
10% Down: Reduces your PMI cost and opens up manual underwriting options if you have unique income situations. Sellers see you as more serious, which helps in competitive markets.
20% Down: Eliminates PMI completely and gives you the best rates. You’ll have lower monthly payments and can close faster since there’s no PMI approval process. This also lets you avoid appraisal requirements in some cases.
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Where Your Down Payment Can Come From
You can use gift money from family members—just get a gift letter stating it’s not a loan. Your own savings work, obviously. Retirement account withdrawals are allowed but check the tax implications first. Down payment assistance programs exist in most states for first-time buyers. You cannot use borrowed money or credit cards.
Debt-to-Income Ratio (DTI) Requirements
Your DTI ratio measures how much of your monthly income goes to debt payments. Lenders want to see 43% or lower, though some approve up to 50% with strong compensating factors.
Calculate it yourself: Add up all monthly debt payments (mortgage, car loans, credit cards, student loans, personal loans). Divide by your gross monthly income. Multiply by 100.
Example: You make $6,000 per month. Your debts total $2,400. That’s a 40% DTI ($2,400 ÷ $6,000 = 0.40).
Front-End vs. Back-End Ratios
Lenders check two ratios. The front-end ratio (housing ratio) includes just your housing costs: mortgage payment, property taxes, insurance, and HOA fees. This should stay below 28%.
The back-end ratio includes all debts plus housing costs. This is your main DTI that needs to be under 43-50%.
How to Lower Your DTI Before Applying
Pay off small debts completely rather than spreading payments across multiple accounts. Increase your income with a side job or raise—lenders count bonuses and overtime if you’ve received them for two years. Avoid taking on new debt six months before applying. If you’re close to paying off a car or student loan, consider finishing it early.
Income and Employment Verification
You need at least two years of steady employment in the same field. Lenders verify this through W-2s, pay stubs from the last 30 days, and direct calls to your employer.
Self-employed borrowers face tougher scrutiny. You’ll provide two years of tax returns, profit and loss statements, and bank statements. Lenders average your income over 24 months, which means a great year doesn’t offset a bad one.
Job gaps longer than six months require explanation letters. Switching careers right before applying can delay approval. Military members and recent graduates get some flexibility here.
Additional Conventional Loan Requirements
Property Appraisal: The home must appraise at or above the purchase price. Lenders want to confirm the property is worth what you’re paying. Low appraisals kill deals or require renegotiation.
Cash Reserves: Many lenders want 2-6 months of mortgage payments in savings after closing. Investment properties require larger reserves, often 6-12 months.
Property Type Restrictions: Single-family homes are easiest to finance. Condos need Fannie Mae or Freddie Mac approval of the building. Co-ops face strict limits. Manufactured homes require permanent foundations.
Occupancy Rules: You must move into a primary residence within 60 days. Second homes need to be 50+ miles from your primary home. Investment properties require 15-25% down and have higher rates.
Private Mortgage Insurance (PMI) Explained
PMI protects the lender if you default. You pay it monthly when you put down less than 20%. Costs range from 0.3% to 1.5% of the loan amount annually, depending on your credit score and down payment.
On a $300,000 loan with 5% down, expect $125-250 per month in PMI. You can request PMI removal once you hit 20% equity through payments or appreciation. Lenders must automatically cancel it at 22% equity.
Some lenders offer lender-paid PMI where you accept a slightly higher interest rate instead of separate PMI payments. This can make sense if you plan to stay in the home long-term.
How to Strengthen Your Application
Pay down debts to improve your DTI. Save extra cash for reserves. Get pre-approved before house hunting—pre-qualification letters don’t carry weight. Avoid major purchases or credit applications during the process. Keep your job stable.
If you’re borderline on credit or DTI, compensating factors help. Large down payments offset lower credit scores. High cash reserves balance higher DTI ratios. Long job tenure and stellar payment history work in your favor.
Common Mistakes That Delay Approval
Buyers sabotage themselves by switching jobs mid-process. Don’t do it. Others max out credit cards right before applying, tanking their scores. Some make large bank deposits without documentation—lenders need to verify where money comes from.
Missing documents slow everything down. Gather tax returns, bank statements, and pay stubs before you start. Don’t co-sign loans for friends or family during your application period. Avoid opening new credit accounts, even for furniture or appliances.
Conventional Loan vs. FHA: Which Is Better?
FHA loans accept 580 credit scores and 3.5% down payments, but you pay mortgage insurance for the life of the loan in most cases. Conventional loans have stricter requirements but let you drop PMI.
Choose conventional if you have 620+ credit and can afford 3-5% down. Choose FHA if your credit is below 620 or you need more flexible debt ratios. FHA makes sense for credit-challenged buyers, while conventional works better for those with decent credit who want to build equity faster.
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Frequently Asked Questions
Q1: Can I get a conventional loan with a 580 credit score?
No, conventional loans require a minimum 620 credit score. If your score is below 620, consider an FHA loan which accepts scores as low as 580 with 3.5% down. You can also work on improving your credit for 6-12 months before applying for a conventional loan to get better terms.
Q2: How much income do I need to qualify for a $300,000 conventional loan?
You need enough income to keep your DTI below 43-50%. On a $300,000 loan at 7% interest with 5% down, your monthly payment is around $2,300 including taxes and insurance. With a 43% DTI limit, you’d need at least $5,350 in gross monthly income ($64,200 annually) if you have no other debts.
Q3: When can I remove PMI from my conventional loan?
You can request PMI removal once you reach 20% equity through payments or home appreciation. You’ll need a current appraisal to prove the value. Lenders must automatically cancel PMI when your balance hits 78% of the original home value, regardless of current market value. Most borrowers remove PMI within 5-10 years.
Q4: Can I use gift money for the entire down payment on a conventional loan?
Yes, you can use gift money from family members for your entire down payment on a primary residence with some programs. The donor must provide a gift letter stating the money doesn’t need to be repaid. You’ll need to show the money transferred from their account to yours. Some lenders require you to contribute at least 5% of your own funds for down payments under 20%.
Q5: What happens if my DTI is 51% but I have excellent credit?
Most lenders cap DTI at 50% even with perfect credit, though some portfolio lenders go higher. Your best options are paying down debts to lower your DTI, increasing your down payment to reduce the monthly payment, or finding a less expensive home. Some lenders approve 51-55% DTI if you have 12+ months of reserves and 760+ credit, but these are rare exceptions