What is a Conventional loan? Everything you need to know about America's most common mortgage

To secure approval for a mortgage, you must align with the lender's specific criteria, encompassing aspects such as your credit score, debt-to-income ratio, income level, and more. Notably, conventional loan prerequisites tend to be more stringent compared to those of government-backed loans.

1. Credit Score: Mortgage lenders typically mandate a minimum credit score of 620 to qualify for a conventional loan. However, it's essential to note that this is merely the baseline requirement. To access the most favorable interest rates and loan terms, it is advisable to aim for a substantially higher score, typically around 740 or above.

2. Debt-to-Income (DTI) Ratio: Your DTI ratio considers your existing monthly financial obligations, including auto loans, student loans, and credit card debts. In general, most lenders prefer the DTI ratio to remain below 45 percent, although some may grant exceptions up to 50 percent, while others may impose stricter limits at around 36 percent.

3. Down Payment: Unlike certain government-insured loans, conventional mortgages necessitate a down payment. A standard down payment is typically 20 percent of the home's purchase price. However, for fixed-rate conventional loans intended for primary residences (excluding second homes or investment properties), some lenders permit down payments as low as 3 percent or 5 percent. For instance, if you opt for a 3-percent conventional loan to purchase a $350,000 house, you would be required to make a minimum down payment of $10,500.

4. Private Mortgage Insurance (PMI): While the prospect of a minimal down payment is enticing, it does come with a trade-off: private mortgage insurance (PMI). PMI serves as protection for the lender in case of default, as you did not contribute a 20 percent down payment. Until you accumulate at least 20 percent equity in your home, either by making mortgage payments or witnessing an increase in your property's value, you'll be responsible for the additional cost of PMI.

5. Loan Size: Most conventional loans are classified as conforming loans, meaning they adhere to Federal Housing Finance Agency (FHFA) limits dictating the maximum loan amount you can obtain. These limits are contingent on the property's location. In the majority of the United States, the FHFA limit for 2023 is set at $726,200. However, specific states like Alaska and Hawaii, as well as higher-priced regions such as parts of California, have elevated limits of $1,089,300. Check Maximum Baseline Loan Amounts