CONVENTIONAL
Borrower Eligibility

Borrower eligibility for a conventional loan depends on a variety of factors, each designed to ensure the borrower can repay the loan comfortably and responsibly. Conventional loans, which are not insured or guaranteed by the government, typically have stricter criteria than other loan types like FHA or VA loans. Here are the key factors that lenders consider when determining eligibility for a conventional loan:

Credit Score: One of the most important factors for conventional loan eligibility is a strong credit score. Most lenders require a minimum credit score of 620, though a higher score—typically above 740—will give borrowers access to better interest rates and loan terms. Lenders view a higher credit score as an indicator of responsible financial behavior, making the borrower a lower risk.

Debt-to-Income Ratio (DTI): Lenders also closely examine a borrower’s debt-to-income ratio, which measures how much of the borrower’s monthly income goes toward paying existing debts. Typically, conventional loan programs prefer a DTI ratio of 43% or lower, although some lenders may accept a higher DTI if the borrower’s other qualifications, such as a strong credit score, compensate for it. A lower DTI ratio indicates that a borrower has sufficient income to comfortably manage their mortgage payments.

Down Payment: Conventional loans generally require a down payment, with most lenders expecting at least 3% to 5% of the home’s purchase price. However, a down payment of 20% or more is ideal because it eliminates the need for private mortgage insurance (PMI), a monthly expense added to the mortgage payment to protect the lender in case of default. Borrowers who put down less than 20% will need to pay PMI until they have accumulated at least 20% equity in the home.

Employment and Income: Lenders need to verify that the borrower has a stable source of income to ensure the mortgage can be repaid over time. Conventional loans usually require proof of at least two years of consistent employment and income. This can include W-2 forms, tax returns, and pay stubs. Self-employed borrowers may need to provide additional documentation, such as profit and loss statements, to demonstrate reliable income.

Assets and Reserves: In addition to income, lenders like to see that borrowers have sufficient financial reserves to cover several months of mortgage payments in case of unexpected expenses or loss of income. These reserves may include savings accounts, retirement funds, or other liquid assets that can be easily accessed if needed.

Property Requirements: For a borrower to qualify for a conventional loan, the property being purchased must meet certain requirements. It must be a primary residence, second home, or investment property that is in good condition. Lenders may require an appraisal to ensure the home’s value aligns with the purchase price and that it meets any necessary standards for safety and livability.

Meeting these eligibility criteria can help a borrower secure a conventional loan with favorable terms. Borrowers with a strong financial profile, including a good credit score, low DTI ratio, and sufficient income, are more likely to be approved and receive competitive interest rates, making conventional loans an attractive option for many homebuyers.