If you’re looking to buy a home soon, knowing what the basic mortgage requirements are can help you find a loan that’s suited to your needs. Read on to know what the most common requirements are for conventional mortgage loans.
Down Payment
A minimum down payment of 3% is required to qualify for conventional loans. The funds for the down payment can be from your own money or a gift from your family. While the minimum requirement is 3%, we recommend you make a down payment of at least 20% since it will help you get a lower rate on the loan and avoid private mortgage insurance.
Mortgage Insurance
A conventional mortgage loan for which you paid a down payment of less than 20% will require private mortgage insurance – this coverage protects the lender in case you default on your payments. The higher your credit score and down payment, the lower your private mortgage insurance will be.
Employment
Lenders will require you to provide proof of steady income. So, it’s a good idea to ensure you have employment history and documents in order for the last 2 years at least.
Credit Score
The minimum credit score that a prospective borrower should have to qualify for a conventional loan is 620. If you have a higher credit score, you’ll get a better rate on your loan.
Income
Conventional loans typically don’t have income limits, with the exception of Freddie Mac’s Home Possible® and Fannie Mae’s HomeReady®. For these programs, prospective borrowers will need to fall within the set limits.
Occupancy
Prospective borrowers can get a conventional loan, regardless of whether the home they are purchasing will be used as a primary residence, a rental property, or a second home.
Additional Cash Reserves
In addition to the down payment, borrowers will need some additional cash reserve to make the monthly payments in case of an emergency. Based on what your credit score is, you may need to provide the lender proof of up to 6 months of cash reserve.
Home Appraisal
The lender will schedule a home appraisal to assess the actual value of the home you are purchasing before your application is withdrawn. Some borrowers, who make a large down payment or purchase a one-unit home, may be able to skip this appraisal.