Maximum debt to income ratio for conventional mortgage

Calculating your DTI is a fairly simple process, as long as you know the right numbers. In the simplest terms, you can calculate your DTI by dividing your total debt each month by your total income. But what expenses actually count toward your total debts? Let’s break down what you should include when estimating your DTI.

While you can calculate this manually, you can also use the debt-to-income calculator in this article to calculate your DTI ratio quickly.

Add Up All Your Monthly Debt

When lenders add up your total debts, they typically do it one of two ways; these two methods of determining your DTI are called front-end and back-end ratios.

Your front-end ratio only takes into consideration your housing related debts, such as rent payments, monthly mortgage payments, real estate taxes, homeowner’s association (HOA) fees, etc.

Your back-end ratio, however, includes those monthly payments as well as other debts that might show up on your credit report, such as credit card payments, personal loans, auto loans, student loans, child support, etc.

Your lender might calculate your front-end or back-end ratio when determining your DTI – and sometimes they may look at both to get a better idea of your financial situation. When calculating your own DTI, it’s a good idea to add all these expenses up as part of your monthly debt to be prepared. Keep in mind that when tallying up your debts, lenders typically only look at things that appear on your credit report – so things like utility payments may not actually count toward your total.

Divide That Total By Your Gross Monthly Income

Once you have an idea of what your monthly debt total is, divide it by your gross monthly income to determine your DTI ratio. Your gross monthly income is the amount of money you make each month before taxes. You can usually find your gross income on your paystubs – or you can calculate it.

If you are a salaried employee, you can divide your yearly salary by 12 to find your gross monthly income. If you are paid hourly, multiply your hourly rate by the number of hours you work in a week and then multiply that number by 52 to get your yearly income, which you can divide by 12 to get your monthly gross income.

Once you know your monthly gross income, you should be able to use it to find your DTI. If you make $4,000 a month as your gross income and your total debts amount to $1,200, the formula to calculate your DTI would look like this:

( $1,200 ÷ $4,000 ) = 0.3, or 30% (DTI)

Use Our Debt-To-Income Ratio Calculator To Find Your DTI

Most conventional loans are what’s known as “conforming loans,” which “conform” to a set of standards set by Fannie Mae and Freddie Mac. Conventional loans boast great rates, lower costs, and home buying flexibility. So, it’s no surprise that it’s the loan option of choice for more than 60% of all mortgage applicants.

Highlights of the conventional loan program:

• Can be used to buy a primary residence, second home or rental property
• Down payments as low as 3%
• No monthly private mortgage insurance (PMI) with a down payment of at least 20%
• Lower mortgage insurance costs than FHA loans
• Mortgage insurance is cancelable when home equity reaches 20% (unlike with the federal government-backed FHA loans)

Click here to check today's conforming loan rates (Nov 12th, 2022)

In this article:

• Conventional mortgage down payment
• Private mortgage insurance (PMI) requirements
• Credit score minimums
• Conventional loans and bankruptcy
• Loan limits for 2022
• Eligible properties for conventional financing

Conventional loan requirements for 2022

Conventional conforming loans — the most common type of mortgage — need to meet lending standards set by Fannie Mae, Freddie Mac, and the Federal Housing Finance Agency (FHFA). Basic conventional loan requirements are as follows:

Conventional mortgage down payment

Conventional loans require as little as 3% down (this is even lower than FHA loans). For down payments lower than 20% though, private mortgage insurance (PMI) is required. (PMI can be removed after 20% equity is earned in the home.)

The more you put down, the lower your overall loan costs. Your down payment amount helps determine your PMI rate and interest rate, which affects your monthly payment amount and overall interest costs.
Bottom line: the higher your down payment, the less you’ll spend monthly and over the life of the loan.
You may also use gift funds from a parent or eligible non-profit agency to pay for your entire down payment and loan closing costs. Learn more about gift funds here.

Related: Conventional 97% LTV loan program

Check your conventional loan eligibility here (Nov 12th, 2022)

How down payment affects loan costs

*The scenarios are calculated based on a 30-year fixed rate loan at 4% interest for $200,000. 

**Assumes a 720-739 credit score.

Source: CFPB.

Private mortgage insurance (PMI)

PMI is required any time you put less than 20% down on a conventional loan. Once you reach 20% equity in your home, it can be removed though, unlike FHA mortgage insurance which is required for the life of the loan, in most cases.

For those with good credit, private mortgage insurance on conventional loans can cost less than FHA mortgage insurance premiums. Why? PMI is risk-based insurance, like auto insurance, meaning the better your credit history, the lower your premiums. The lower your premiums, the lower your monthly mortgage payment. So you benefit if you have a clean history.

Each private mortgage insurance company has varying rates for different down payment and credit score scenarios. Make sure your lender shops around for the best PMI cost for you.

For an in-depth comparison of PMI and FHA mortgage insurance, see our post that compares FHA to the Conventional 97 loan.

Can a second mortgage eliminate PMI?

A loan option that is rising in popularity is the piggyback mortgage, also called the 80-10-10 or 80-5-15 mortgage.

This loan structure uses a conventional loan as the first mortgage (80% of the purchase price), a simultaneous second mortgage (10% of the purchase price), and a 10% homebuyer down payment. The combination of both loans can help you avoid PMI, because the lender considers the second loan as part of your down payment. A piggyback loan can make homeownership accessible for those who may not yet have saved a down payment.

For an in-depth look at these loans, see our piggyback loan blog post.

Conventional loan credit scores

In general, conventional loans are best suited for those with a credit score of 680 or higher. If you have a higher credit score, it’s possible that a conventional loan will offer the lowest mortgage rate. Applicants with lower scores may still qualify, but they can expect to pay higher interest rates.

Buyers with lower credit scores might benefit from a different type of mortgage, perhaps one backed by a government agency. Some other loan programs may cost less overall. For example, Fannie Mae and Freddie Mac impose Loan Level Price Adjustments (LLPA) to lenders who then pass those costs to the consumer. This fee costs more the lower your credit score.

For instance, someone with a 740 score putting 20% down on a home has 0.25% added to their loan fee. But, someone with a 660 score putting the same amount down would have a 2.75% fee added. These fees are not paid upfront but rather, translate to higher interest rates for homeowners.

See the complete matrix of LLPAs.

Conventional loan debt-to-income (DTI) ratios

The maximum debt-to-income ratio (DTI) for a conventional loan is 45%. Exceptions can be made for DTIs as high as 49.9% with strong compensating factors like a high credit score and/or lots of cash reserves.

If you have dings on your credit or don’t have a lot of cash reserves, your maximum DTI may be much lower than 45%. In general, the lower your DTI, the higher your chance of loan approval.

The best way to check the maximum home price for your debt-to-income level is to get a pre-approval from a conventional loan lender.

Click here to check your maximum home price (Nov 12th, 2022)

Income and asset documentation

Like with most other mortgage loan types, you’ll be required to provide documentation proving your income and assets. Here’s a list of some of the documentation you may need:

• 60 days of bank statements (all pages)
• 30 days of pay stubs
• 2 years of tax returns if self-employed, have rental properties, or non-salary income (retirement, pension, etc.)
• 2 years W2s
• Social security, retirement and/or pension award letters, and 2 years’ 1099s
• Rental agreements for any investment properties currently owned

Apply for a conventional loan in one minute (Nov 12th, 2022)

Conventional loans and recent bankruptcy

It is possible to be approved for a conventional loan after bankruptcy. There are required waiting periods though, and you must demonstrate you’ve re-established your credit.
The lender must determine the cause and significance of the derogatory information, verify that sufficient time has elapsed since the date of the last derogatory information, and confirm that the borrower has re-established acceptable credit history.

Fannie Mae Guidelines

Required waiting periods after bankruptcy:

• Chapter 7 or Chapter 11: A four-year waiting period, measured from the discharge or dismissal date is required. A waiting period of two years is possible if extenuating circumstances can be documented, such as job loss that is not expected to recur.
• Chapter 13: Two years from the discharge date or four years from the dismissal date. With extenuating circumstances, a waiting period of two years is possible from the dismissal date.

Bankruptcy is never a good thing on your credit report, but it doesn’t necessarily disqualify you from ever getting another mortgage.

Related: Buying a House After a Foreclosure or Short Sale

See if you are eligible for a conventional loan here (Nov 12th, 2022)

What if you don’t qualify for a conventional loan?

After reviewing the qualifications above, you might realize that you don’t qualify for a conventional loan. That shouldn’t dash your homeownership dreams.

Instead, it’s time to consider alternative loan options. If you are a veteran, take a look at the VA loan. If you don’t have a big down payment saved up, consider an FHA loan through the Federal Housing Administration. Or if you live in a rural area, consider a USDA loan.

The right type of loan is out there. If a conventional loan isn’t a great fit, that’s okay!

Conventional loan guidelines 2022

2022 conventional loan limits

The conventional loan limit for 2022 is $647,200 for a single-family home. Though, Fannie Mae and Freddie Mac have designated high-cost areas where limits are higher. For example, a single-family home in Seattle, Washington could have a maximum loan of $592,250. The same home located in Los Angeles, California would be eligible for a loan amount up to $636,150.

Increased loan amounts are also available for 2-, 3-, and 4-unit homes. For multi-unit homes located in high-cost areas, loan limits are even higher. For example, a 4-unit home in Honolulu, Hawaii can be financed up to $1.2 million.

Baseline conventional loan limits:

• 1-unit home: $647,200
• 2-unit home: $828,700
• 3-unit home: $1,001,650
• 4-unit home: $1,244,850

For homes that exceed the conforming loan limit, borrowers may be able to purchase with a jumbo loan.

Check your conforming loan eligibility and today's rates here (Nov 12th, 2022)

Eligible properties for conventional financing

• Single-family homes (detached homes)
• Planned Unit Developments (PUDs), which typically consist of detached homes within a homeowners’ association
• Condominiums
• 2-, 3-, and 4-unit properties
• Some co-op properties
• Manufactured homes (although few lenders offer this program)

Conventional loans for condominiums

Many condo projects across the country are eligible for conventional financing. There are some specific guidelines that must be met, though. For newly built or converted condo projects, there may be some additional exceptions. If you are unsure if a unit in a condo project you are interested in meets these guidelines, ask your real estate agent or loan officer.

Here are some of the conventional loan requirements a condo must meet to be eligible:

• All common areas must be complete and owned by the unit owners or HOA
• At least 51% of the total units in the project must be owner-occupied or second homes
• The HOA must have an adequate budget
• At least 90% of the units must be sold and currently owned by unit owners (existing projects)
• No single entity may own more than 10% of the units in the project
• The project must be adequately covered by insurance

Second homes and investment/rental properties

Unlike government loan programs, conventional loans can be used to purchase a second home or a rental property. Interest rates and down payment requirements are higher when financing a rental home, but the conventional loan remains one of the few loan programs available to purchase rental properties.

Click here for today's rental property and second home interest rates (Nov 12th, 2022)

Conventional loan guidelines FAQ

What is a conforming loan?

A conforming loan has a dollar amount at or below the limits set by the Federal Housing Finance Agency (FHFA). Additionally, conforming loans must meet the funding criteria set by Fannie Mae and Freddie Mae.

On the lender’s side, this allows them to sell conforming loans on the secondary mortgage market, which frees up capital for lenders to continue making home loans to other borrowers.

What is a mortgage loan limit?

A mortgage loan limit represents the maximum loan amount that Fannie Mae and Freddie Mac will purchase or guarantee for mortgage lenders.

With that, mortgage lenders are able to lend more than this dollar amount. But if a lender extends a mortgage for more than the conforming loan limits, the lender cannot sell the mortgage to Fannie Mae or Freddie Mac.

Why do loan limits matter?

Loan limits matter because many lenders want to sell their home loans on the secondary mortgage market. As a result, borrowers can be hard-pressed to find a lender that’s willing to offer a loan over the predetermined limit.

When shopping for a home, buyers should keep the conforming loan limits in mind. Although it’s possible to get a larger loan, conventional loans that meet these standard limits are much easier to come by.

What if my loan is over the conventional loan limit?

If your loan is over the conventional loan limit, that makes it a non-conforming loan. As a borrower, this means that you’ll face higher monthly payments based on the high dollar amount of your loan. Additionally, the lender won’t be able to sell your loan on the secondary mortgage market.

What’s the jumbo loan limit for 2022?

A home loan that exceeds the conforming loan limits is considered a jumbo mortgage.

As of 2022, that means a home loan for more than $647,200 for a single-family home in most of the country. But the median home value around the country varies dramatically. With that, the conforming loan limits are higher in places like Washington D.C., San Francisco, Guam, the U.S. Virgin Islands, New York and more.

The FHFA accounts for higher cost of living areas by raising the conforming loan limit for single-family homes to $970,800. With that, single-family home loans must exceed $970,800 in high-cost areas to be considered a jumbo loan.

What are the conventional loan limits for 2022?

The conventional loan limit for 2022 is $647,200 for a single-family home. However, in high cost of living areas, the conventional loan limit expands to $970,800 for single-family homes.

The conventional loan limit for a two-unit property in 2022 is $828,700. But in high-cost areas, the limit for two-unit homes expands up to $1,243,050.

What is considered a jumbo loan in 2022?

A jumbo loan is a loan that exceeds the conforming loan limits. With that, a loan of over $647,200 in 2022 for a single-family home in most of the country would be considered a jumbo loan. However, in high-cost areas, a single-family home loan would need to exceed $970,800 to be considered a jumbo loan.

What are the Fannie Mae loan limits for 2022?

The Federal Housing Finance Agency (FHFA) set the conforming loan limit baseline at $647,200 for 2022. With that, Fannie Mae is only willing to acquire mortgages of less than $647,200 for single-family homes in 2022 in low-cost areas.

However, in higher cost of living areas, Fannie Mae loan limits rise up to $970,800 for single-family homes.

Are FHA limits increasing in 2022?

Yes, FHA loan limits increased in 2022. Currently, the new baseline limit is $420,680. That’s an increase of almost $65,000 from 2021’s FHA loan limit of $356,360.

The rising loan limits can be partially attributed to a hot housing market.

Want to learn more about your FHA loan options? Check out our free resources.

I’m ready to apply for a conventional loan

Conventional loans are a great mortgage option for qualifying homebuyers. Depending on your financial situation, it’s likely a conventional loan will offer lower rates than other types of mortgages. Down payment requirements are as low as 3%, and private mortgage insurance (PMI) is cancelable when home equity reaches 20%.

Click here to check today's conventional loan rates (Nov 12th, 2022)

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