What are conventional loan home requirements?
We spend a lot of time thinking about mortgage lenders’ requirements for borrowers: whether you personally qualify for a loan.
But the home you want to buy must also qualify. The lender wants to know it’s making a sound investment.
Here’s what you should know about conventional loan home requirements if you hope to qualify for a conventional mortgage.
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Conventional vs government loan requirements
Below we describe home condition requirements for conforming mortgage loans.
Remember, ‘conforming loans’ are a type of conventional mortgage that follow guidelines set by Fannie Mae and Freddie Mac. These loan programs are not backed by the federal government.
Government loan programs, including FHA loans, VA loans, and USDA loans, enforce their own home condition requirements.
In addition, rules for non-conforming conventional mortgages — like a jumbo loan — may be slightly different.
But the following home requirements will apply to the majority of conventional mortgages.
Conventional loan home requirements
Conventional loan home requirements are pretty lenient. In-depth home inspections are typically not required. But there are a few basic property standards.
Fannie Mae’s rules for conventional, conforming loans state the home must be:
- A single-family dwelling or multifamily dwelling with no more than four units
- After your down payment, can be purchased using a loan amount within current conforming loan limits
- Located in the U.S., Guam, Puerto Rico, or the U.S. Virgin Islands
- Residential in nature
- Securable as real estate with a good title
- “Safe, sound, and structurally secure”
- Insurable for flood and home risks
- Easily accessible by roads that meet local standards
- Connected to utilities that meet local standards
- Appropriate for year-round use
In addition, a home appraisal is typically required to verify the property’s value.
The home appraiser will look at the property’s general condition and compare it to similar, recently sold homes in the neighborhood to arrive at its current market value.
Keep in mind, a home appraiser will not inspect the home’s condition in detail looking for structural issues or defects in its systems. That’s a home inspector’s job.
With a conventional loan, lenders typically won’t require a home inspection; it’s up to the buyer whether or not to get one. But they should, and we explain why below.
Although an inspection isn’t required, lenders may have unwritten requirements about the condition of the home.
For instance, few lenders will let you purchase a home that’s clearly unsafe — unless you have thorough plans to repair the home and financing in place to do so.
In addition, conventional loan lenders may have rules regarding features like:
- Wells and septic tanks — If those are shared, you must have a right of access to them. And you need an enforceable maintenance arrangement with the neighbors who share them
- Environmental hazards — Things such as buried oil storage tanks could affect the home’s value
- Solar panels that are financed and collateralized — They’re a debt secured on the home, which can complicate things
- Properties that comprise multiple parcels of land — There are rules over their location and usage
You can also expect issues if the home you’re planning to buy has termites or another pest infestation; contains materials with asbestos or lead-based paint; or has moisture intrusion or the presence of radon gas.
In such circumstances, you or the seller will typically have to eradicate the problem as a condition of your mortgage approval.
Will the lender find out about potential issues?
As a buyer or refinancing homeowner, you might hope the lender doesn’t notice an issue. Maybe you will fix it after closing. While this isn’t recommended, it’s a common occurrence. So how will the lender find out about issues?
As explained below, there’s a good chance the appraiser will note obvious deficiencies on the appraisal. That will trigger the lender to ask for an inspection by a specialist for that issue. The lender will review the specialist’s report and determine how the issue should be remedied.
The lender won’t allow the loan to close until you or the seller complete the fix.
Conventional loan home requirements are rarely an issue
Relatively few properties are tripped up by conventional loan home requirements since they’re so lenient.
If you want to buy somewhere especially remote or seriously out of the ordinary, your pool of willing lenders might be small.
But the vast majority of homes sail through appraisals and inspections with minimum fuss and only minor defects detected.
Conventional loan appraisal requirements
One of the main requirements for a conventional loan is that the home must be appraised. The appraiser’s job is to work out the property’s actual market value.
Usually, they do this by comparing the property with other, similar homes in the neighborhood that have sold recently.
An appraiser’s principal task is to protect the lender by making sure they’re not financing more than the home is worth. But in doing so, the appraiser protects the buyer, too.
Sellers can set asking prices at any level they want. And many ask for more than the home is truly worth on the open market.
So the appraised value protects you from paying too much for a home. And it protects the lender by assuring that it could make its money back by selling the home in the event of a foreclosure.
This protection is the reason your mortgage lender will always require an appraisal for a conventional loan.
Occasionally, an appraisal leads to an inspection
Over the years, an experienced appraiser might acquire some knowledge of construction techniques and structural issues. If they spot a major issue with the home, they may list it in their report.
In this case, your lender might require a specialist to check out that issue. For instance, chipping paint on the exterior of an older home might trigger a note from the appraiser that area should be checked out by a lead paint specialist.
But it’s not the appraiser’s job to explore such flaw or even necessarily to report them. Their only role is to appraise the home’s value.
This means buyers should not rely on an appraiser to notice structural problems or any other defects with the home. For their own peace of mind, buyers should order an independent, third-party home inspection to make sure they’re not purchasing a surprise fixer-upper.
Conventional loan home inspections
Although conventional loans don’t require a home inspection, it’s in the buyer’s best interest to get one. A home inspection report can turn up valuable information that won’t show up on a home appraisal.
For instance, a home inspector might find:
- Problems with the foundation or structure of the home
- Roofing or flooring that needs to be repaired
- Heating, cooling, plumbing, or electrical systems that are faulty or will need to be replaced soon
- Insulation that needs replacing
- Hidden termite damage or other pest infestation
Any of these issues could cost thousands of dollars to fix. A home inspection gives the buyer a chance to negotiate repairs with the seller before they become the new owner.
Without a home inspection, the buyer will have to pay out of pocket for any repairs they discover as a new homeowner.
The lender doesn’t need to see a home inspection because it won’t have to pay for home renovations. That’s why they’re not required.
But as a buyer, you’ll want to know about any potential problems — and the likely cost to fix them — before you close on the purchase.
Home inspection costs
The only real downside of a home inspection is its cost, although home inspection fees are not astronomical.
HomeAdvisor reckons the nationwide average cost for a 2,000-square-foot home in 2020 was between $279 and $399, though bills of $500+ arose occasionally. And it suggests you add $25 for each additional 500 square feet of floor space.
For many homebuyers, that’s a small price to pay for the peace of mind such an inspection brings. Imagine spending $350 to save $10,000. That’s not an uncommon occurrence. You’ll know that the crack in an internal wall or in the foundations you noticed isn’t a sign of a serious problem. Or that it is, and you should find somewhere else to buy.
Plus, you may well be able to use your home inspection report as leverage to drive down the sale price, or to get the seller to pay for repairs before you move in.
Home inspection checklist
If you do opt to get a home inspection, your first task is to pick a good inspector.
Consumer Reports (CR) suggests you start with recommendations from local friends and family. And then move onto the internet to check out your candidates.
The American Society of Home Inspectors (ASHI), the International Association of Certified Home Inspectors (InterNACHI), and the National Academy of Building Inspection Engineers are professional bodies that might help, according to CR.
What a home inspection typically covers
A home inspection typically covers the property’s:
- Heating system
- Central air conditioning system (temperature permitting)
- Interior plumbing and electrical systems
- Attic, including visible insulation
- Windows and doors
- Structural components
It’s important to note that home inspectors can’t check every inch of the home and won’t normally dig earth, penetrate walls and ceilings, or generally access inaccessible areas.
So be realistic about your expectations. For a few hundred bucks, you can’t expect a full demolition job to track down a leaky pipe. But you can expect its consequent damp patch to be highlighted.
Talk to your home inspector before and after the inspection
It’s good to talk things through with your home inspector before and after your inspection. Beforehand, describe anything that bothers you and that you’d like checked especially carefully.
For example, suppose you noticed a crack in the brickwork of the foundations. That could be a very costly fault. Or perhaps you’re concerned the wiring is dated and may not be up to code.
You can expect them to pay particular attention to these and either provide reassurance or raise the alarm. But don’t be surprised if they suggest calling in a specialist to investigate specific issues further.
What if my inspection report shows a lot of defects?
Most homes (even some new ones) will have a list of defects. So go through them with your inspector to judge how serious they are.
Should you be asking $300 off the asking price to deal with some minor quibbles? Or $30,000 to have the foundations underpinned?
Your home inspector can take a lot of the worry out of the homebuying process. Yes, you’ll still have the stress of real estate agents, loan officers, paperwork, and endless questions. But your inspector can calm your biggest fear: that you’re buying a money pit.
What if my home needs major renovations?
What if you want to buy a house that doesn’t meet basic conventional loan home requirements?
Many lenders are okay with you buying a property that doesn’t meet all their guidelines at first. But to get the mortgage approved, you’ll need to have detailed plans for bringing the house up to code before closing.
Here’s where things get tricky.
In most cases, you can’t just ‘promise’ to fix the house after closing. The lender knows some buyers won’t follow through. Even if you have additional financing set up and detailed repair plans, the lender will require fixes done prior to closing.
However, the seller is often unwilling to make costly and time-consuming repairs. They want to sell the home now.
The buyer is often willing to do the work or front the expense for repairs if they really like the house. But this would be unwise: the seller could end up selling the home to someone else, profiting from your work.
But there are ways around these situations.
For example, the Federal Housing Administration has the FHA 203(k) rehab loan to finance a home purchase and renovations with a single mortgage. Fannie May also has a HomeStyle renovation loan while Freddie Mac offers CHOICERenovation mortgages, both of which are conforming loans.
If you plan to buy a fixer-upper, you’ll likely need one of these specialized rehabilitation loans rather than a standard conventional mortgage. And these types of loans will come with their own home condition and renovation requirements.
Other conventional loan guidelines
Conventional loans don’t enforce many home condition requirements. But they do enforce strict guidelines about which borrowers qualify for a home loan.
In addition to choosing an approved property, you — the borrower — typically need to meet the following guidelines to qualify for a conventional mortgage:
- Credit score of at least 620 and a clean credit report
- Steady, two-year history of employment and income, in most cases
- A down payment of at least 3% (though a 20% down payment lets you avoid private mortgage insurance)
- A debt-to-income (DTI) ratio below 45%, in most cases
- A loan amount within conforming loan limits
- Cash reserves in the bank
The stronger your personal finances are, the more easily you’ll qualify for a mortgage loan.
These factors will also affect your interest rate.
If you have an excellent credit score or make a big down payment, for example, you can bring down your mortgage interest rate and save a lot of money in the long run.
Any lender can tell you whether or not you and the home meet conventional loan requirements. But you should get quotes from at least 3 mortgage lenders to make sure you’re getting the best rate possible.