Conventional Loan Requirements: What Lenders Want

What Exactly Is a Conventional Loan?

A conventional loan is basically any mortgage that isn’t backed by a government agency like the FHA, VA, or USDA. These loans are offered by private lenders — think banks, credit unions, and online mortgage companies. They follow guidelines set by Fannie Mae and Freddie Mac, which are the two big government-sponsored enterprises that buy most mortgages on the secondary market.

I remember thinking “government-sponsored” meant it was a government loan. Nope. Totally different thing. That little misunderstanding cost me about two weeks of going down the wrong research rabbit hole.

Credit Score Requirements

Let’s start with the big one. Most lenders want a minimum credit score of 620 for a conventional loan, though some might go a bit lower. But here’s what nobody told me — having a 620 gets you in the door, but your interest rate is going to be significantly higher than someone sitting at 740 or above.

I was at a 655 when I first applied, and the rate difference was honestly painful. I ended up waiting three months, paid down some credit card balances, and bumped my score up to 701. That small jump saved me thousands over the life of the loan. Totally worth the wait.

Down Payment — It’s Not Always 20%

This is probably the biggest myth out there. You do NOT need 20% down for a conventional loan. The minimum down payment is actually just 3% for qualified first-time homebuyers, and 5% is pretty standard for everyone else.

Now here’s the catch. If you put down less than 20%, you’ll be stuck paying private mortgage insurance, or PMI. PMI was being added to my monthly payment and it drove me nuts — felt like throwing money away. But the good news is that PMI on a conventional loan can be removed once you hit 20% equity, unlike FHA loans where that mortgage insurance premium can hang around for the life of the loan.

Down Payment Quick Breakdown

3% minimum for first-time buyers (conventional 97 program)
5% minimum for most other borrowers
20% to avoid PMI entirely
Gift funds from family are usually allowed — just get proper documentation

Debt-to-Income Ratio

Your debt-to-income ratio, or DTI, is another huge factor that lenders scrutinize. Generally, they want your total monthly debts (including your new mortgage payment) to be no more than 45% of your gross monthly income. Some lenders will stretch to 50% with strong compensating factors, but don’t count on it.

I almost got disqualified because of a car payment I’d totally forgotten to factor in. Rookie mistake. Add up every single monthly obligation — student loans, car notes, minimum credit card payments, all of it — before you even start shopping.

Employment and Income Verification

Lenders typically want to see at least two years of steady employment history. You’ll need W-2s, recent pay stubs, and possibly tax returns. Self-employed borrowers have it a bit rougher — expect to provide two years of tax returns and possibly a profit and loss statement.

One thing that caught me off guard was that my lender re-verified my employment literally three days before closing. So whatever you do, don’t switch jobs or make any major financial moves during the process!

Your Next Step Starts Here

Conventional loan requirements might seem overwhelming at first, but once you break them down they’re pretty manageable. Every borrower’s situation is different though, so make sure you tailor this information to your own financial picture. Always be honest with your lender about your finances — seriously, hiding stuff only backfires.