Conventional Loan
What is a Conventional Loan?
A Conventional Loan is a home loan that is not insured or guaranteed by a federal government agency like the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA).
Origin: Conventional loans are offered by private lenders, which include banks, credit unions, and mortgage companies.
Role in the Market: They are the most common type of mortgage and form the backbone of the U.S. housing market.
Conforming vs. Non-conforming: Conventional loans are categorized based on whether they meet the standards set by Fannie Mae and Freddie Mac:
- Conforming Loans meet the size limits and underwriting guidelines established by the Federal Housing Finance Agency (FHFA), Fannie Mae, and Freddie Mac. Because these loans can be sold easily on the secondary market, they generally offer more favorable terms for the borrower.
- Non-conforming Loans do not meet these standards. The most common example is a jumbo loan, which is a mortgage that exceeds the conforming loan limits for a specific area.
Who is Generally Eligible to Borrow under Conventional Loan Borrower Eligibility Guidelines?
Borrower eligibility is assessed on three core pillars: credit history, income stability, and available assets.
| Eligibility Component | General Requirement | Specific Details |
| Minimum Credit Score | 620 for most loans underwritten through Desktop Underwriter (DU). | Manually underwritten Adjustable-Rate Mortgages (ARMs) require a minimum score of 640. Borrowers financing seven to ten properties must have a minimum representative credit score of 720. |
| Debt-to-Income (DTI) Ratio | Varies based on underwriting method. | DU Loans: Maximum generally 50%. Manually Underwritten Loans: Standard maximum is 36%, which can extend up to 45% if the borrower meets specific credit score and financial reserve requirements. |
| Down Payment/LTV | Minimum can be as low as 3%. | For first-time homebuyers purchasing a principal residence, the down payment can be 3% (e.g., through the HomeReady or Conventional 97 programs). Repeat homebuyers purchasing a primary residence typically need 5% down. |
| Financial Reserves | Required reserves vary by property type. | Generally, two months’ reserves are required for a second home, and six months’ reserves are required for investment properties, two- to four-unit principal residences, and cash-out refinances with a DTI ratio greater than 45%. |
| Credit History Alternatives | Acceptable for manual underwriting if no traditional score exists. | A borrower must provide documentation of a nontraditional credit history (e.g., rental payments, utility bills) and the maximum DTI is limited to 36%. The property must be a one-unit principal residence. |
Get More In-Dept Details About Conventional Loans
Articles that give you more information about this loan and explain how mortgages work.
What are the Primary Conventional Loan Income Documentation Methods?
Lenders evaluate the stability, continuity, and amount of your income to assess your capacity to repay the debt.
- Income Stability: Income must be stable and predictable. Documentation proving a minimum 3-year continuance is required only for income sources with a defined expiration date, such as alimony, child support, or certain distributions from retirement accounts.
- Self-Employed Borrowers: If you have 25% or more ownership in a business, the lender must perform a business cash flow analysis (using Form 1084 or similar principles). The standard requirement is two years of the most recent signed personal and business federal income tax returns. However, only one year of tax returns may be used if the business has existed for at least five years and the borrower has maintained their ownership interest for that period.
- Rental Income Calculation: When using lease agreements or market rents, the qualifying rental income is calculated by multiplying the gross monthly rent(s) by 75% to account for vacancy and maintenance losses.
- Ineligible Income: Any income paid to or earned by the borrower in the form of virtual currency, such as cryptocurrencies, is not eligible to be used to qualify for the loan.
- Temporary Leave Income: If you are on temporary leave (e.g., maternity leave), the lender must verify both the temporary leave income and the regular employment income received before the leave. The lender must use the regular employment income for qualifying purposes.
What are the Conventional Loan Eligibility Requirements After Bankruptcy or Foreclosure?
Borrowers who have experienced significant derogatory credit events must meet specific waiting periods measured from the completion, discharge, or dismissal date of the event to the disbursement date of the new loan. Regardless of the waiting period, you must have re-established traditional credit before being eligible.
Derogatory Event | Standard Waiting Period | Reduced Waiting Period (with Extenuating Circumstances) |
Foreclosure | 7 years from completion. | 2 years. |
Deed-in-Lieu/Preforeclosure Sale | 4 years from completion. | 2 years. |
Bankruptcy (Chapter 7 or 11) | 4 years from discharge or dismissal date. | 2 years from dismissal (or discharge). |
Bankruptcy (Chapter 13) | 2 years from discharge date or 4 years from dismissal date. | 2 years from dismissal (or discharge). |
Multiple Bankruptcy Filings | 5 years from the most recent discharge or dismissal date. | N/A (Reduced period not specified for multiple filings). |
Note on Extenuating Circumstances: These are nonrecurring events beyond the borrower’s control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.
Who Qualifies for a Conventional Loan and How Does It Work?
Qualification is based on the borrower successfully meeting the underwriting requirements for credit, income, and assets, and ensuring the property is eligible.
- Borrower Capacity: Lenders verify the source and amount of income, assets, and liabilities to assess your capacity to repay the debt by its final maturity.
- Willingness to Repay: Lenders evaluate your credit history and scores to assess your willingness to manage debt.
- Underwriting: Many loans are underwritten using Fannie Mae’s automated system, Desktop Underwriter (DU). DU performs a comprehensive analysis of credit data, including utilization and payment history, rather than relying solely on credit scores.
- Property Eligibility: The property must be an eligible residential type (one- to four-units) located in the U.S., structurally sound, and suitable for year-round use. Manufactured homes are eligible if they are built on a permanent chassis, attached to a permanent foundation, and legally classified as real property.
How It Works (Specifically Regarding Insurance):
If a down payment of less than 20% is made, Private Mortgage Insurance (PMI) is required. A key benefit of conventional PMI is that it is not permanent; it can be canceled once the loan-to-value (LTV) ratio reaches 80%, meaning the borrower has 20% equity in the home.
What are the Pros and Cons of a Conventional Loan?
While the guides do not provide a direct “Pros and Cons” list, the various features of the loan programs highlight distinct advantages and limitations:
Pros (Advantages):
- Lower Down Payments are Possible: Conventional loans offer programs, such as the Conventional 97 and HomeReady, which allow down payments as low as 3% for qualifying borrowers.
- PMI is Cancellable: Unlike some government-backed loans, the required Private Mortgage Insurance (PMI) on conventional loans automatically cancels once you have built 20% equity in your home, saving you money over the long term.
- Flexible Asset Sources: Gift funds from relatives, fiancés, or domestic partners are acceptable for the down payment and closing costs, and for a one-unit principal residence, no minimum contribution from the borrower’s own funds is required.
- Flexible Debt Treatment: For a one-unit principal residence, borrowers are not required to pay off outstanding collection accounts or non-mortgage charge-offs, regardless of the amount.
- Variety of Use: Conventional financing supports purchasing one- to four-unit properties, and specialized programs like HomeStyle® allow financing for renovations and repairs within a single loan.
Cons (Limitations):
- Stricter Derogatory Credit Rules: The standard waiting periods after major derogatory events like foreclosure (7 years) are generally longer compared to some other loan types.
- Higher Credit Requirement for Best Terms: While the minimum score is 620, a much higher score (typically 720 or above) is needed to qualify for the most competitive interest rates.
- Strict Rules for Non-Conforming Loans (Jumbo): Jumbo loans typically require a higher down payment (10–20%), a higher minimum credit score (700 or higher), and more required cash reserves (up to 12 months) than conforming loans.
- Ineligible Assets and Income: Income earned in virtual currency or virtual currency assets that have not been converted to U.S. dollars and held in a regulated financial institution are ineligible for qualification or closing.
What is different about Conventional Loan from Shining Star Funding?
Conventional Loan is a product defined by its adherence to specific underwriting standards (often set by Fannie Mae), whereas Shining Star Funding (SSF) is a direct mortgage lender that offers a range of specific programs, some of which fall outside the standard conventional guidelines.
Here is a comprehensive breakdown of what is different about a Conventional Loan compared to the specialized offerings available through Shining Star Funding:
Loan Scope and Underwriting Flexibility
Standard Conventional Loans (specifically Conforming loans) must adhere strictly to the guidelines set by Fannie Mae and Freddie Mac. Shining Star Funding, as a direct lender, offers specialized programs that bypass some of these traditional guidelines:
| Feature | Conventional Loan (Fannie Mae/Conforming Standard) | Shining Star Funding (Specialty Offerings) |
| Income Documentation | Income must be verified through traditional methods, assuming a fully amortizing repayment schedule. The standard requirement for self-employed borrowers is two years of tax returns. Income paid in virtual currency is not eligible. | Offers Alternative Documentation (Alt Doc) Loans. Offers loans with No W2, Paystubs, or Taxes required. Offers Bank Statement Loans. Offers Reverse Mortgages that may require No Income Docs for borrowers aged 55+. |
| Investor Qualification | Rental income from a borrower’s owned properties must typically be documented using federal income tax returns (Schedule E). | Offers DSCR Loans. (DSCR, or Debt Service Coverage Ratio, loans often qualify based on the property’s rental income potential rather than the borrower’s personal income/DTI ratio.) |
| Asset Eligibility | Virtual currency is not an eligible asset in its original form. Funds must be converted to U.S. dollars and held in a regulated financial institution. | The guides do not specify SSF’s acceptance of virtual currency, but their offering of Alt Doc Loans and DSCR Loans suggests a broader, more flexible approach to qualification methods compared to the strict requirements of Fannie Mae. |
Loan Type and Funding Source
The difference between the two can also be viewed by where the loan originates and is backed:
- Conventional Loans (Conforming): These loans meet the size limits and underwriting guidelines set by the Federal Housing Finance Agency (FHFA). They are generally less risky for lenders because they can be sold on the secondary market to Fannie Mae or Freddie Mac.
- Shining Star Funding (Lender): SSF offers a wide menu of products, including not just conventional loans, but also Government-Backed Loans such as FHA Loans and VA Loans, which are explicitly defined as not conventional (since conventional loans are not insured or guaranteed by a federal government agency). SSF also offers Jumbo Loans, which are a type of conventional loan, but are considered non-conforming because they exceed FHFA loan limits.
Program Specialties
Both the Conventional Loan guides and Shining Star Funding mention specialized programs, though SSF’s list is focused on their direct offerings:
- Renovation/Fixer-Upper: Both offer solutions for properties needing work. Fannie Mae offers the HomeStyle® Renovation mortgage, which allows financing for repairs, remodeling, or ADU construction. Shining Star Funding also offers loans for Renovate, Rehab, and Fixer-Upper projects, including options for Adding Space/ADUs.
- Refinance Options: The conventional guidelines detail specific options like the Limited Cash-Out Refinance (cash back limited to $2,000 or 1% of the loan amount) and the Cash-Out Refinance. Shining Star Funding offers refinance options specifically to Consolidate Debt, Lower Payments, Get Cash Out, or Change to Fixed Rate.
- Home Construction: Shining Star Funding explicitly offers Construction Financing under “BUILD A HOME”. The conventional guides primarily focus on established residential properties, though the HomeStyle Renovation loan allows extensive renovations.
How Do I Apply for a Conventional Loan?
Identify Your Lender and Initiate the Process
The first step in applying is engaging with a mortgage provider. Shining Star Funding (SSF), for example, is a direct mortgage lender that offers various programs, including those that meet conventional loan requirements.
To begin your application journey, you can typically use the following methods:
- Schedule a Call or Connect with an Expert to speak with a loan advisor.
- Get a Quote or Shop Rates to explore initial pricing.
- Click “Start Your Home Buying Journey” or “Ready to Apply”.
- You may also use online tools like financial calculators or a “Pre-Qualify Now” option to get a better financial picture before formally applying.
The Modern Digital Application Experience
Lenders like Shining Star Funding often utilize technology to make the application process seamless. Through their next-level app, you have the ability to apply from anywhere.
During this digital application process, you can expect to:
- Safely upload and eSign loan documents.
- Track your loan with real-time notifications.
- Compare various loans to find your best option.
- Easily stay in touch with your loan officer.
- View your application from your PC or phone.
Underwriting and Qualification (What the Lender Reviews)
Once your application is submitted, the lender (or seller) must analyze your capacity to repay the debt. This involves a detailed evaluation of three core pillars: credit, income, and assets.
A. Credit Evaluation
The lender will assess your willingness to repay debt through your credit history and scores.
- Minimum Credit Score: The general minimum required credit score for most conventional loans underwritten through Desktop Underwriter (DU) is 620.
- Credit Analysis: DU performs a comprehensive analysis of the credit report data, including utilization and payment history.
- Past Derogatory Events: If you have had a past foreclosure, the standard waiting period for a manually underwritten loan is 7 years, though this can be reduced to 2 or 3 years if extenuating circumstances are documented.
- No Traditional Score: If you have no traditional credit score, you may still be eligible for a manually underwritten loan if you can document a nontraditional credit history and the maximum Debt-to-Income (DTI) ratio is limited to 36%.
B. Income Evaluation
The lender must verify that your income is stable, predictable, and sufficient to cover the mortgage payment.
- DTI Ratio: Your Debt-to-Income (DTI) ratio is a key risk factor. For loans underwritten through DU, the maximum allowable DTI is generally 50%. For manually underwritten loans, the general limit is 36% (which can extend up to 45% with compensating factors).
- Income Documentation: The seller/lender must analyze your ability to repay assuming a fully amortizing repayment schedule, verifying the source and amount of income.
- Self-Employed Borrowers: If you have 25% or more ownership in a business, the standard requirement is two years of the most recent signed personal and business federal income tax returns.
- Ineligible Income: Any income paid in virtual currency (cryptocurrencies) is not eligible to be used to qualify for the loan.
C. Asset Evaluation
You must demonstrate sufficient assets to cover the down payment, closing costs, and required financial reserves.
- Statement Coverage: Bank or investment statements for purchase transactions must cover the most recent full two-month period (60 days).
- Down Payment: The minimum down payment can be as low as 3% for a one-unit principal residence. For a one-unit principal residence, a minimum contribution from your own funds is not required; all funds can come from an eligible gift or grant.
- Gift Funds: Gift funds are acceptable for the down payment and closing costs on principal residences and second homes, provided the gift comes from an Acceptable Donor (relative, fiancé, fiancée, or domestic partner).
- Virtual Currency Assets: Virtual currency is not an eligible asset. However, funds that have been exchanged into U.S. dollars and are held in a U.S. or state-regulated financial institution are acceptable.
- Reserves: Liquid financial reserves (cash or near-liquid assets) are measured in months of the qualifying payment amount (PITIA). For a principal residence (one financed property), 0 months of reserves may be required, but investment properties typically require 6 months.
FAQ's
A Conventional Loan is a home loan that is not insured or guaranteed by a federal government agency, such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA), and is typically offered by private lenders. These loans, which form the backbone of the U.S. housing market, are categorized as either conforming (meeting the size and underwriting guidelines of Fannie Mae and Freddie Mac) or non-conforming (such as a jumbo loan, which exceeds size limits)
The primary conventional loan income documentation methods depend heavily on the source of the borrower’s earnings. For self-employed borrowers (those with 25% or more business ownership), the standard requirement is typically two years of the most recent signed personal and business federal income tax returns, accompanied by a business cash flow analysis. When assessing rental income from other owned properties, lenders must document the gross and net income using the borrower’s most recent signed federal income tax return, including Schedule 1 and Schedule E; this qualifying rental income is then calculated at 75% of the gross monthly rent to account for potential vacancy and maintenance losses
Conventional loans require borrowers to observe specific waiting periods following major derogatory credit events like bankruptcy or foreclosure to re-establish a positive credit history. The standard waiting period is 7 years after a foreclosure and 4 years after a Chapter 7 bankruptcy discharge or a Deed-in-Lieu/Short Sale. However, these waiting periods may be significantly reduced to as little as 2 years if the event resulted from documented extenuating circumstances (nonrecurring events beyond the borrower’s control)
A conventional loan works by securing mortgages on one- to four-unit residential properties and is not insured or guaranteed by a federal government agency. Borrowers generally qualify with a minimum credit score of 620 and a maximum Debt-to-Income (DTI) ratio of up to 50% (for automated underwriting), with down payments sometimes as low as 3% for a primary residence. If the down payment is less than 20%, the loan requires Private Mortgage Insurance (PMI), which can be canceled once the borrower reaches 20% equity in the home
A significant advantage of a conventional loan is that Private Mortgage Insurance (PMI) is not permanent and can be canceled once the borrower reaches 20% equity, offering long-term savings. Conversely, conventional loans typically impose stricter qualification standards, generally requiring a minimum credit score of 620, and demanding mandatory waiting periods, such as 7 years after a foreclosure or 4 years after a Chapter 7 bankruptcy discharge, to re-establish eligibility
A conventional loan, being a mortgage not insured or guaranteed by a federal agency, is generally offered by various private lenders across the country. These originators include a range of financial institutions, such as banks, credit unions, and mortgage companies. However, the sources provided detail the underwriting and eligibility rules set by Fannie Mae, but do not contain a directory or list of specific local lenders to identify which ones are available in your immediate area.
A borrower initiates the conventional loan process with a private lender (such as a bank, credit union, or mortgage company) who must analyze the borrower’s capacity to repay the debt by verifying the source and amount of income, assets, and liabilities. This application proceeds through underwriting, often utilizing the automated Desktop Underwriter (DU) system, where the lender assesses the borrower’s qualifications, which requires a minimum credit score of 620 for most loans. Key documentation required for this process includes providing bank or investment statements covering the most recent full two-month period for purchase transactions to verify assets needed for the down payment, closing costs, and financial reserves
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