Mortgage Basics - Getting Approved

What Determines Eligibility for a Conventional Loan — and How Layered Risk Comes Into Play

When applying for a conventional loan, lenders evaluate several factors to determine your eligibility. Meeting the minimum requirements is just the start; how these factors combine can create something called layered risk, which could affect your chances of approval. Here’s what you need to know:

Key Factors in Conventional Loan Eligibility

1. Credit Score

   • Minimum score: 620.

   • Higher scores (740+) unlock better rates and terms.

2. Debt-to-Income Ratio (DTI)

   • A DTI of 43% or less is preferred.

   • Higher DTIs are riskier, especially when paired with other weak areas.

3. Down Payment

   • Minimum: 3% to 5%, but 20% or more eliminates private mortgage insurance (PMI).

4. Private Mortgage Insurance (PMI)

   • Required if your down payment is less than 20%.

5. Loan Limits

   • 2025 conforming loan limits for one-unit properties start at $806,500, with higher limits in certain high-cost areas.

6. Employment and Income

   • A stable 2-year history of income and employment is essential.

7. Assets and Reserves

   • Some lenders require 2-6 months of reserves to ensure you can cover payments if needed.

8. Property Requirements

   • The property must meet lender standards and be used as a primary residence, second home, or investment property.

How Layered Risk Impacts Eligibility

Layered risk occurs when multiple high-risk factors stack up, increasing the lender’s perception of risk. For example:

• A borrower with a low credit score and a high DTI is seen as riskier than one with just one of these factors.

• Adding a small down payment to this mix compounds the risk.

Why it Matters: Lenders analyze the full picture. One risk factor may be manageable, but multiple risks combined could result in:

• Higher interest rates.

• Stricter loan terms.

• Denial of the loan application.

Tips to Mitigate Layered Risk

To improve your chances of approval and secure better terms, consider these strategies:

1. Boost Your Credit Score: Pay down debts and resolve any inaccuracies on your credit report.

2. Lower Your DTI: Reduce outstanding debt or increase your income before applying.

3. Save for a Larger Down Payment: Aim for at least 20% to avoid PMI and show financial strength.

4. Maintain Income Stability: Avoid job changes and ensure detailed documentation of your income sources.

Ready to Take the Next Step?

Navigating the world of conventional loans can feel overwhelming, but you don’t have to do it alone. By understanding the factors that impact eligibility and addressing layered risks, you can position yourself for success.

Take action today!

• Contact a mortgage professional to explore your options.

• Use our Mortgage Eligibility Checklist to assess your readiness.

• Schedule a free consultation to create a personalized plan.

Your dream home is within reach—let’s make it happen!