A conventional loan is one of the most popular mortgage options in the U.S., with good reason. A few reasons, actually: Conventional loans are a straightforward, flexible go-to for borrowers with good credit and steady income.
But here’s the big Q: is a conventional loan the right choice for you? We can help you figure that out. Whether you’re buying your first home or looking to refinance, this guide covers everything you need to know about conventional loans, from the minimum down payment for a conventional loan to the pros and cons you’ll encounter depending on your own situation.
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What is a conventional loan?
A conventional loan is a mortgage that’s not insured or guaranteed by any government agency like the FHA, VA, or USDA. Instead, it’s offered by private lenders, such as banks and credit unions. Because these loans don’t have government backing, they often come with stricter requirements, but they also offer more flexibility and fewer restrictions — both bigtime pluses when you’re buying a home: 🏡
- Conventional home loans are versatile and can be used for primary residences, second homes, and investment properties.
- They’re favored for their competitive terms and ability to finance higher-value properties.
- Borrowers who qualify for a conventional mortgage often enjoy lower interest rates and long-term savings.
How does a conventional mortgage or loan work?
A conventional mortgage loan is categorized into these two types, most broadly:
- Conforming loans: Conforming loans meet the guidelines set by Fannie Mae and Freddie Mac, including loan limits, credit requirements, and property standards. For 2024, the maximum conventional loan amount for conforming loans is $766,550 in most areas, with higher limits in certain regions with a greater cost of living.
- Nonconforming loans: These don’t meet Fannie Mae and Freddie Mac guidelines. Examples include jumbo loans, which exceed the conforming loan limit, and subprime loans for borrowers with less-than-ideal credit.
The loan structure is straightforward: you borrow money to buy your home and repay it with interest, either at a fixed or adjustable rate, over a set period. It doesn’t get much simpler than that.
Conventional loans vs. government-backed loans
When comparing conventional loans to government-backed options like FHA loans, there are some clear differences:
- Credit score requirements: Conventional loans generally require a higher credit score, at least 620, whereas FHA loans are more forgiving, often accepting scores as low as 580.
- Loan limits: FHA loans have strict limits based on location, while conventional loans can go much higher, especially with nonconforming options like jumbo loans.
Need a deeper dive? Learn the difference between FHA and conventional loans.
Types of conventional loans
You now know about conforming vs nonconforming conventional loans — but that’s not where things stop. Here’s a further breakdown of conventional loan types:
- Jumbo loans: Jumbo loans are nonconforming because they exceed the conforming loan limits set by Fannie Mae and Freddie Mac. These loans are ideal for high-value properties, but they come with stricter qualification standards and higher conventional loan rates due to the increased risk for lenders.
- Amortized conventional loans: These loans are structured with fixed payments over a specific term, such as 15 or 30 years. Borrowers benefit from predictable payments, making it easier to budget for the long term. These can be conforming or nonconforming, depending on the loan amount and adherence to Fannie Mae and Freddie Mac guidelines.
- Adjustable-rate loans: ARMs feature an initial fixed-rate period (e.g., 5 or 7 years) followed by periodic rate adjustments. They offer lower initial interest rates but can increase later based on market conditions and can be conforming or nonconforming, depending on loan size and other factors.
- Subprime loans: A nonconforming loan designed for borrowers with low credit scores or higher debt-to-income ratios, subprime loans provide access to homeownership but come with higher interest rates and stricter terms to offset the increased risk.
- Portfolio loans: Portfolio loans are kept on the lender’s books rather than sold to secondary markets so they’re considered nonconforming. Because they aren’t subject to Fannie Mae or Freddie Mac guidelines, they offer flexibility in terms and approvals.
Pros and cons of conventional mortgages
Like any financial decision, choosing a conventional mortgage comes with its advantages and drawbacks; it’s never a one-size-fits-all situation. These loans are favored for their flexibility and competitive terms, but they also require stronger financial credentials to qualify.
| Pros | Cons |
| Unlike FHA loans, you can eliminate PMI on conventional loans once you reach 20% equity. | You’ll need a higher credit score, often 620 or above. |
| Higher loan limits, great for buying in expensive areas. | The minimum down payment for a conventional loan is typically 3%, but higher percentages are common. |
| Borrowers with strong credit benefit from lower conventional loan rates. | If you put down less than 20%, PMI can add to your monthly costs. |
How to qualify for a conventional loan
To meet conventional mortgage loan requirements, you’ll need to check several boxes. Here’s what lenders typically look for.
- Credit score: Meeting conventional loan credit requirements often means having a minimum credit score of 620, but borrowers with scores of 700 or higher can enjoy better interest rates and terms.
- Down payment: The conventional loan down payment starts at 3% for first-time buyers, but putting down 20% eliminates having to get private mortgage insurance (PMI).
- Debt-to-income (DTI) ratio: Most lenders require a DTI of 43% or less to qualify.
- Employment history: Lenders want a steady job history, typically 2 years or more.
- Income verification: Proof of stable income through pay stubs, tax returns, and bank statements is essential.
- Asset documentation: Lenders may ask for proof of savings or other assets to ensure you can cover closing costs and reserves.
- Property appraisal: The home must meet the lender’s appraisal standards to qualify.
Flexible financing with clear benefits
A conventional mortgage loan offers flexibility, competitive rates, and broad property eligibility, making it a solid choice for qualified borrowers. While they require stronger credit and higher down payments than government-backed loans, the long-term savings, especially with the option to avoid PMI, make them worthwhile. If you’re financially stable and looking for versatility, conventional home loans are hard to beat.
FAQs
What is the interest rate on a conventional loan?
Interest rates vary based on market conditions and your credit profile, but they’re typically competitive for borrowers with good credit.
What credit score do you need for a conventional loan?
A minimum score of 620 is usually required for a conventional loan, though higher scores can secure better terms.
How much do you have to put down on a conventional loan?
The minimum down payment for a conventional loan is 3%, but putting down 20% helps you avoid having to get private mortgage insurance (PMI).
What will fail a conventional loan appraisal?
Issues like major structural damage, safety hazards, or property not meeting local zoning codes can fail an appraisal.
Is a conventional loan better than FHA?
It depends on your situation. Conventional loans are better for borrowers with strong credit, while FHA loans work well for those with lower scores or smaller down payments.
Can you get down payment assistance with a conventional loan?
Yes, many programs offer assistance for first-time home buyers using conventional loans.
