Is a Home Inspection Required for a Conventional Loan?

When diving into the world of home buying, there are many details and terms to keep track of. You’ve probably heard of home inspections and conventional loans, but how are the two related? Specifically, is a home inspection required for a conventional loan?

Is a Home Inspection a Requirement for a Conventional Loan?

For a conventional loan, the answer is generally no. Most lenders don’t require a home inspection for you to get a conventional mortgage. 

However, while a home inspection may not be mandatory, an appraisal often is. 

An appraisal determines the home’s value for the sake of the loan, while an inspection determines the home's condition for the sake of the buyer. They're different processes with different purposes.

Even if it's not required, getting a home inspection is almost always a good idea. It’s a relatively small investment that can save you from unforeseen expenses and give you peace of mind about your new home.

If the home inspection reveals any issues, you might be able to negotiate with the seller for a lower price or for them to fix the problems before you finalize the purchase.

Here are some terms you’ll want to be familiar with during the homebuying process.

What Is a Home Inspection?

A home inspection involves a professional evaluator giving the home a thorough look to determine its condition. The inspector will look at the foundation, the roof, plumbing, electrical systems, and more. 

Safety and Functionality

The home must be safe and functional. If there's anything that's considered a safety hazard, such as faulty wiring or an unstable foundation, a conventional loan lender might ask for those issues to be fixed before the loan is approved.

Structural Integrity

The house must be structurally sound. This means no serious cracks in the foundation, no sagging roofs, and no other structural problems that could decrease the property's value or pose a hazard in the future.

Roofing

The roof of the home usually needs to be in good condition with no significant leaks or damages. Some lenders might even have specific requirements on the remaining lifespan of a roof.

Infestations

The home should be free from major pest infestations, especially termites, which can severely damage the structure of a house. This is where a pest inspection can be essential.

Working Systems

The home's systems, including heating, plumbing, and electrical, should all be in working order. A malfunctioning system decreases the property’s value and can also pose safety risks.

Inspections are a crucial step for potential homeowners because they can reveal hidden problems that might turn into significant costs down the road. No one wants to buy a house and then immediately have to shell out thousands for a repair they didn’t know about!

Remember, there isn't just one standard home inspection. For example, some home inspectors will offer radon testing, but some will not.

What Is a Conventional Loan?

Understanding the type of loan you’re getting is helpful as you make decisions regarding your home purchase.

A conventional loan is a type of mortgage loan that is not insured or guaranteed by the government. Instead, conventional loans are backed by private lenders, and their insurance is usually paid by the borrower. They are often considered more challenging to qualify for than government-backed loans (e.g., FHA, VA, or USDA loans), but they have more flexible terms and fewer restrictions. 

While specific requirements can vary by lender and loan type, common criteria for conventional loans include the following. 

Credit Score

Borrowers typically need a credit score of at least 620, though many lenders may look for a score of 640 or higher. The higher your credit score, the better the interest rates you'll qualify for.

Down Payment

Conventional loans can require as little as 3% down for first-time buyers or those with excellent credit, but more commonly, they'll require a down payment of 5-20%. If you put down less than 20%, you'll likely need to pay for private mortgage insurance (PMI).

Debt-to-Income Ratio (DTI)

Lenders typically want to see a DTI ratio of 43% or lower, meaning that no more than 43% of your income goes towards paying off debts each month. Some lenders might accept higher DTIs if you have excellent credit or other compensating factors.

Private Mortgage Insurance (PMI)

If your down payment is less than 20% of the home's purchase price, you'll typically need to pay PMI. This insurance protects the lender if you default on the loan. Once you've built 20% equity in your home, you can often request to have PMI removed.

Appraisal Value

For a conventional loan, the home’s appraisal value needs to match or exceed the loan amount. This ensures that the lender isn't lending more money than the property is worth. If a house is in poor condition, its value might be affected, which could complicate the loan process.

Why Do Lenders Typically Recommend Home Inspections?

When you're in the process of buying a home, your lender might suggest (or even insist on) a home inspection. If you're thinking, "Wait, I'm going for a conventional loan, and I'm not a high-risk homebuyer," you might wonder why they're recommending this step. The primary reason is lenders want to protect their investment.

Whether it's a small cottage or a grand mansion, buying a home is a major financial undertaking. Your lender is loaning you a sizable sum of money, and they want to make sure it's going into a property that's worth it.

From cracked foundations to leaky roofs, a home inspection can spotlight big problems that might reduce the property's value. If you, as the borrower, can't afford to fix these issues and decide to walk away from the house, the lender doesn't want to be stuck with a damaged property they can't sell for what they loaned out. A property in good condition with no substantial defects is easier to sell and is likely to maintain its value over time.

Recommending a home inspection also builds trust between you and the lender. It shows that they're not just thinking of their interests but yours as well. They want you to be happy and secure in your purchase, free from unexpected repair bills and concerns.

In the end, a home inspection is like a safety net. While you might be a lower-risk borrower with a conventional loan, life is unpredictable. Both you and your lender benefit from the peace of mind that comes from knowing the home you're buying is in good shape. 

Is a Home Inspection With a Conventional Loan Right for You?

While a home inspection is not typically required for a conventional loan, it's a step you might not want to skip. It's less about satisfying your lender and more about ensuring you’re making a sound investment. A house is likely one of the most important purchases you'll ever make. It's wise to have as much information as possible before making your decision. 

To learn more about whether FHA or conventional loans are right for you, check out our homebuying guide.