Conventional loans can be either “conforming” or “non-conforming”, although conventional loan requirements generally refer to mortgage guidelines that ‘conform’ to government sponsored enterprises (GSE’s) like Fannie Mae or Freddie Mac. Therefore, when you’re searching for more information on ‘conventional loans’, ‘conforming loans’ or ‘conventional conforming loans’, you’re likely referring to the same thing.
What is a Conventional Conforming Loan?
Conventional conforming loans follow the guidelines set forth by Fannie Mae, Freddie Mac and the Federal Housing Finance Agency (FHFA). In the overall sphere of mortgage requirements, conventional conforming loans are the most straightforward. Good borrower credit history, skin-in-the-game down payments, and full documentation of income and assets are the standard for conforming loan approval. These requirements have made them a pillar of the housing market for decades.
What are Conventional Conforming Loan Requirements?
To decide if you qualify for a conventional mortgage, various aspects of your financial history will be looked at. How does that happen? Fannie Mae provides a powerful application called “Desktop Underwriter” that helps conventional loan lenders quickly evaluate mortgage applicants. “DU” software instantly analyzes the borrower’s finances, assets, employment history, and credit profile. Freddie Mac also provides a similar program called “Loan Prospector“.
These helpful “Automated Underwriting System” (AUS) programs speed up the mortgage approval process by leaps and bounds. Modern AUS software follows strict guidelines that are important to understand before loan submission. These requirements will be evaluated.
1. Income and Debt Requirements
Income and monthly expenses are important. Conventional mortgages qualify applicants using fractions and percentages that weigh their income and their ability to repay their mortgage on time. Debt-to-income ratios are used (DTI) to evaluate applicant earnings and expenses. Conventional debt-to-income ratios are known as the ‘Front Ratio’, and the ‘Back Ratio’. Standard conforming loan debt-to-income ratio limits are percent. These DTI limits may be exceeded with compensating factors.
Conventional Loan Debt-to-Income Ratio Limits
To be eligible for an 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% favorable link 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.
- 28% Front End Debt-to-Income Ratio – The new housing payment may not exceed 28 percent of the applicants combined monthly income.
- 36% Back End Debt-to-Income Ratio – The new total monthly debt amount, including new home payment, may not exceed 45 percent of the applicant’s combined monthly income. Flexibility up to 50% DTI may be offered for certain applicants with strong compensating factors.
- 43% “Qualified Mortgage” Debt-to-Income Limit – Although not always required, the back/bottom debt-to-income ratio for the new home loan can’t exceed 43% to be considered a “Qualified Mortgage“.
- You must adhere to conventional loan debt-to-income ratio requirements through documented income.
- You must have a history of reliable income for at least two years.
2. Credit Requirements
Your credit history is vital to getting approved for a conventional mortgage. The minimum credit score for conventional loan programs is usually a 620 FICO or above. Conventional loan qualifications are risk-based with a heavy emphasis placed on a borrowers credit profile. The lender will pull the borrower’s credit report from the three major credit bureaus and their credit scores and credit history will be examined thoroughly.
Conventional loan guidelines require borrowers to have a minimum middle FICO score of 620-680 for approval. Applicants must have made all housing payments on time for at least 12 months. Conventional mortgage requirements contain significant waiting periods after a bankruptcy or foreclosure. Conforming loans adhere to the following credit guidelines for approval: