Income Requirements

Debt-to-income ratios (DTI’s) are used to evaluate a borrower’s earnings and expenses. Conventional DTI ratios are known as the ‘Front Ratio’, and the ‘Back Ratio’.

What are the Conventional Loan Debt-to-Income Ratio Limits?

To be eligible for a Conventional Mortgage, your monthly housing costs (mortgage principal and interest, property taxes and insurance) must meet a specified percentage of your gross monthly income (28% front ratio). You must also have enough income to pay your housing costs plus all additional monthly debt (36% back ratio). These percentages may be exceeded with compensating factors.

Components of the conforming conventional loan DTI ratio formula include:

• 28% front-end DTI ratio – The housing payment may not exceed 28% of the borrower’s combined monthly income.
• 36% back-end DTI ratio – The total monthly debt amount, including the mortgage payment, may not exceed 45% of the borrower’s combined monthly income. (Flexibility up to 50% DTI may be offered for certain borrowers with strong compensating factors).
• 43% “Qualified Mortgage” DTI Limit – Although not always required, the back/bottom debt-to-income ratio for the mortgage loan cannot exceed 43% to be considered a “Qualified Mortgage”.
• Borrowers must adhere to conventional loan DTI ratio requirements by means of documented income.
• Borrowers must have a history of reliable income for at least two years.

Credit Requirements

Conventional loan qualifications are risk-based with a heavy emphasis placed on a borrower’s credit profile. The lender will pull the borrower’s credit report from the three major credit bureaus (Experian, Equifax, and TransUnion) and their credit scores and credit history will be evaluated thoroughly.

Conventional loan guidelines require borrowers to have a minimum middle FICO score of 620-680 for approval. Borrowers must have made all housing payments on time for at least 12 months. Conventional mortgage requirements contain significant waiting periods after bankruptcy, or foreclosure. 

Conforming loans adhere to the following credit guidelines for approval:

• The minimum credit FICO score is 620 - 680+ depending on the loan program.
• Interest rates are based on credit scores (740+ score has the best rate pricing).
• LTV requirements are based on credit score (Better scores have higher LTV limits).
• Mortgage insurance requirements are driven by credit score and LTV.
• Borrowers cannot have any overdue payments in the last year.
• Borrowers cannot have any outstanding judgments in the last year.
• At least two years must pass after Chapter 13 bankruptcy.
• At least four years must pass after Chapter 7 bankruptcy.
• At least four years must pass after foreclosure.
• At least two years must pass after short-sale with 20% down payment (four years with 10%, and seven years with less than 10%).

Can I get an Conventional Mortgage Loan after bankruptcy?

Conventional mortgage loan requirements state that if you have been discharged from a Chapter 7 bankruptcy for four years or more, you’re eligible to apply. If you’ve had a Chapter 13 bankruptcy, you must document that your credit reputation has been re-established for at least two years.

Property Requirements

Property requirements for conventional financing are pretty straight forward compared to other programs such as an  FHA loan. For a property to be eligible, it must have a home appraisal performed by a licensed appraiser from the area.

Conforming appraisal standards adhere to standards set forth by the Uniform Standards of Professional Appraisal Practice (USPAP)

Conforming appraisal requirements are also strictly regulated by the Home Value Code of Conduct (HVCC), which prohibits lenders or Realtors from selecting or influencing appraisers in any way. Under HVCC rules, the appraiser is selected at random. Once selected, they perform a full appraisal of the subject property to determine its condition and its value.

The appraised value of a home is determined by using a combination of the assessment of the property itself and by the recent value of comparable properties (comps) in the same area. Conventional mortgage loan requirements call for at least three comps to the subject property. For the property to qualify, the appraised value must return greater than or equal to the minimum loan-to-value requirements for the desired conforming loan program. Minimum LTV requirements for conforming loans are between 80% and 97%, depending on the program and mortgage insurance requirements.

What types of properties are eligible?

Depending on the specific program, conventional mortgage guidelines allow you to purchase warrantable condos, planned unit developments (PUD’s), modular homes, manufactured homes, and 1-4 family residences. Conventional loans can be used to finance primary residences, second homes and investment property.

Conventional Loan Limits

What is the maximum mortgage loan amount that I can borrow?

The maximum mortgage amount for Conventional mortgage loans are determined by a maximum loan limit and a loan-to-value ratio (LTV ratio) based upon the home’s appraised value. 

Maximum loan amount: varies from county to county.

See: Conforming Loan Limits

Maximum financing: Depending on the state where the property is located, the maximum loan-to-value ratio will be 80% – 97% of the official appraised value of the home or the selling price – whichever is lower.

Conventional Loan Down Payment Requirements

Most people are under the impression that a 20% down payment is required in order to meet the conventional loan down payment requirements. However, this is no longer the case. 

The conventional mortgage down payment amount can be as low as 3% for qualified applicants.

For a primary residence, conventional home loans require home buyers to invest at least 3% – 20% of the sales price towards down payment and closing costs.

Example: If the sales price is $500,000, the home buyer must invest at least $15,000 – $100,000 down payment in order to meet the conventional loan down payment requirements.

What will my Interest Rate be?

Conventional loan rates are determined by the program you qualify for and your credit score. You might be asking yourself what is the formula to calculate interest rates? Interest rates are driven by Mortgage-Backed Securities (MBS) which are commonly referred to “mortgage bonds”. The value of these bonds determines whether the interest rates rise or fall. Your final rate will determine your payment using the standard calculate mortgage payment formula.

What is a Non-Conforming Loan?

A non-conforming loan is a loan that does not meet Fannie Mae and Freddie Mac’s standards for purchase and contain risky features such as: high interest rates, allow for minimal income documentation, and allow borrowers to only pay the interest or allow the loan balance to increase. 

And can include pre-payment penalties.

Prior to 2008, non-conforming loan programs included sub-prime, stated income, no income verification (NI), no asset verification (NA), and even no documentation mortgage products (NINA).

Lending regulations tightened after the financial crisis; therefore, the surviving non-conforming mortgage loans and non-conforming loan lenders are now required to document applicant income and credit history. As a result, today’s non-conforming home loans are less risky. Jumbo non-conforming loans are a popular example. Non-conforming jumbo loan requirements are not much different than conventional conforming loans.

Non-Conforming Loan Requirements

Non-conforming loan requirements can vary greatly between lending institutions and this is exactly what makes them non-conforming. 

The qualifications can vary from program to program and include: maximum loan amounts, minimum credit scores, employment history, property loan-to-value requirements, bankruptcy wait times, and countless other requirements.

One consistent thing among non-conforming loans is that new regulations now mandate supporting documentation to be included with new applications.

Conventional Conforming Loans vs. Non-Conforming Loans

Conforming loans are mortgages that meet Fannie Mae and Freddie Mac (Government-sponsored enterprises that invest in mortgage loans) guidelines. 

Conforming lenders underwrite and fund the loans and then sell them to investors like Fannie Mae and Freddie Mac. Once securitized, the loans are sold to investors on the open markets. Because of their liquidity and the government regulations, conforming loans often have lower interest rates than non-conforming loans.

A non-conforming loan is a loan that does not meet Fannie Mae and Freddie Mac’s standards for purchase and contain risky features such as: high interest rates, allow for minimal income documentation, and allow borrowers to only pay the interest or allow the loan balance to increase. 

And can include pre-payment penalties.

The rules for what types of mortgages Fannie Mae and Freddie Mac can buy come from the Federal Housing Finance Agency (FHFA). There are two main reasons why a loan might not conform: it does not meet a requirement set by the FHFA, or the loan is too large to be considered a conforming loan.

Conforming vs. non-conforming conventional loan requirements are related to a borrower’s credit score and history, debt-to-income ratio, and Loan-To-Value (LTV) ratio.

What types of Conventional Loan Programs are available?

Fixed-Rate Loans – Most Conventional Mortgages are fixed-rate mortgages. In a fixed rate mortgage, your interest rate stays the same for the entire loan term. With a fixed rate Conventional Mortgage, you always know exactly how much your monthly payment will be.

Adjustable-Rate Loans – With a conventional Adjustable-Rate Mortgage (ARM), the initial interest rate and monthly payments are low, but these may change during the life of the loan. 

Conventional Loans mainly use an “Index” to calculate the changes in interest rates. The Index is a benchmark interest rate that reflects general market conditions. The Index changes based on the market. Changes in the Index, along with your loan’s “Margin”, determine the changes to the interest rate for an adjustable-rate mortgage loan.

The Margin is the number of percentage points added to the index by the mortgage lender to set your interest rate on an adjustable-rate mortgage (ARM) after the initial rate period ends. The margin is set in your loan agreement and won't change after closing. The margin amount depends on the particular lender and loan.

Conventional ARM loans are offered with initial fixed rate periods of 3, 5, 7, and 10 years.

30-Year Conventional Loans – The most popular home loan historically is the conventional 30-year mortgage. No mortgage insurance requirement (with 20% equity) but higher credit FICO scores and solid borrower qualifications are required.

15-Year Conventional Loans – A popular alternative to the 30-year fixed is the 15-year fixed-rate mortgage. People with a 15-year term pay more per month than those with a 30-year term. In exchange, they are given a lower interest rate. This means that borrowers with a 15-year term pay their debt in half the time and possibly save thousands of dollars over the life of their mortgage.

A 15-year fixed-rate mortgage, with its lower interest rate and higher payment amount, builds home equity faster because you pay down the principal balance quicker.

Why choose a Conventional Loan?

• Ideal for borrowers with excellent credit and a substantial down payment.
• Qualifications are based on expanded income debt-to-income ratios with compensating factors.
• There are no prepayment penalties.
• Can be used for the purchase of a Primary Residence, Second Home, or Investment Property.
• Available in all areas of the country, provided a market exists for the property and that the home meets minimum property standards.
• May be used to purchase or refinance a new or existing one to four family home in urban and rural areas, including manufactured homes on permanent foundations.
• If offers terms of 10, 15, 20, 25, 30 and 40 years. (terms of 15 and 30 years often have lower interest rates).