Understanding Conventional Loans

A guide to one of the most common mortgage options in the United States.

Conventional loans are among the most widely used mortgage products for purchasing or refinancing a home. This guide explains who is eligible, how much down payment is required, and the documentation commonly required during the mortgage application process.

Who Is Eligible?

Although requirements vary by lender, conventional loans generally consider the following factors:

Credit History

A credit score of approximately 620 or higher is commonly required, although higher scores may qualify for better interest rates.

Stable Income

Lenders evaluate employment history and income to determine repayment ability.

Debt-to-Income Ratio

Most lenders prefer a debt-to-income (DTI) ratio below 43%, although exceptions may apply.

How Much Down Payment Is Required?

Down payment requirements vary based on the loan program, borrower qualifications, and property type, but most borrowers can expect the following:

Minimum Down Payment

Qualified borrowers may be eligible for down payments starting as low as 3%, depending on the loan program.

Avoiding PMI

Putting down at least 20% lets you avoid Private Mortgage Insurance (PMI), which is generally required when the down payment is less than 20%.

Down Payment Sources

Down payments can come from personal savings, investments, or gifted funds from a family member or eligible donor.

Required Documentation

To evaluate your mortgage application, lenders require documentation that helps verify your financial stability, income, assets, and identity. While requirements may vary, most conventional mortgage applications require the following documents.

Proof of Income

Lenders need to verify that you have a stable and sufficient source of income to repay the loan.

Common documents include:

  • Recent pay stubs (typically the last 30 days)
  • W-2 forms from the past two years
  • Federal tax returns for the previous two years
  • Documentation of additional income, such as bonuses, commissions, rental income, or alimony (if applicable)

Self-employed borrowers may be required to provide additional business and income documentation.

Assets & Down Payment Verification

Lenders review your available assets to confirm that you can cover the required down payment, closing costs, and reserve funds.

You may be asked to provide:

  • Recent checking and savings account statements
  • Investment account statements
  • Retirement account statements (if applicable)
  • Documentation for gifted funds, including a signed Gift Letter when part of the down payment is provided by a family member or eligible donor

Employment Verification

Stable employment is an important factor in the mortgage approval process.

Your lender may verify:

  • Current employer information
  • Employment history
  • Position and length of employment
  • Current salary or hourly income

In some cases, lenders may contact your employer directly to confirm your employment status.

Advantages

  • Competitive interest rates for qualified borrowers
  • Flexible financing options
  • Available for primary, secondary, and investment properties
  • Private Mortgage Insurance (PMI) may be removed after sufficient equity is reached
  • Multiple repayment terms available
  • Widely accepted by lenders across the United States

Things to Consider

While conventional loans offer many advantages, borrowers should also keep the following in mind:

  • Higher credit scores generally qualify for better loan terms.
  • A larger down payment may reduce monthly payments and borrowing costs.
  • PMI is generally required when the down payment is less than 20%.
  • Qualification requirements may vary between lenders.