What are conventional loans? Are you curious about how they stack up against FHA, VA, and USDA loans? If you’re thinking about buying a home, understanding conventional loans is key to making informed decisions. In this blog post, we’ll break down the basics, including what makes them different from government-backed loans, eligibility requirements, and the pros and cons. By the end, you’ll know if a conventional loan could be the right fit for your home-buying journey.
So.
What Are Conventional Loans?
So, you’re thinking about buying a home, and you’ve probably heard the term conventional loan thrown around a lot. But what does that really mean? Why should you care about it? Well, in this post, we’re diving deep into conventional loans, explaining how they work, their pros and cons, and how they compare to other types of loans. Whether you’re a first-time homebuyer or just trying to understand your options, we’ve got you covered.
What Makes A Loan “Conventional”?
A conventional loan is a type of mortgage that isn’t backed or insured by the government. This contrasts with government-backed loans like FHA, VA, or USDA loans, which are supported by federal agencies.
So, if you get a conventional loan, you’re borrowing money from a bank or lender, and the government is not guaranteeing that loan for the lender. In other words, if you default on your loan, the government won’t step in to help the lender out. Because of this, conventional loans tend to have stricter requirements than government-backed loans, but they can also offer some serious perks.
For example, if you’ve got good credit and a stable income, a conventional loan could be a great choice. It’s more flexible than some of the other loan types and might come with lower interest rates in some cases. But more on that later!
Types of Conventional Loans: Understanding the Key Differences
When it comes to conventional loans, it’s important to know that there are two main types, each with its own set of guidelines. Let’s dive into what sets them apart, and why it matters for your home financing.
Conforming Loans: A Clear Path to Homeownership
Conforming loans are those that meet the criteria set by Fannie Mae and Freddie Mac—two key players in the mortgage world. The most crucial requirement? The loan amount must stay within the conforming loan limit, which changes based on where you live. For example, in 2025, the limit for a single-family home in most of the U.S. is $726,200. But if you’re in a high-cost area like San Francisco, the limit can soar to over $1 million.
Wondering how these loans work in your area? Explore the ins and outs of a conforming loan to see if they fit your needs.
Non-Conforming Loans: When Your Dream Home Exceeds the Limit
Non-conforming loans are those that don’t follow the rules set by Fannie Mae and Freddie Mac. A prime example of this is the jumbo loan, often used for high-priced properties that exceed the conforming loan limits. These loans are common in cities like New York or Los Angeles, where homes can easily surpass the standard limits.
Curious about how non-conforming loans differ and whether they’re the right choice for you? Learn more about non-conforming loans and their potential benefits and challenges.
In short, whether you’re dealing with a conforming loan or a non-conforming one depends on the price of the property you’re eyeing. The good news is, understanding the differences between these loan types can help you make a smarter, more informed decision when it comes time to secure financing.
Eligibility Requirements for Conventional Loans
Now that you’ve got the basic idea of what conventional loans are, let’s talk about what you need to qualify for one.
Credit Score
Typically, lenders prefer borrowers to have a credit score of at least 620 for a conventional loan. But if your score is higher, say in the 700s, you’ll likely get better interest rates. The higher your score, the less risk you represent to the lender.
Example: Imagine you’ve been working hard to boost your credit score. You’ve got a score of 720, which puts you in a great position for securing a lower interest rate. If you were comparing two loans—one with a 620 credit score and one with a 720—you’d pay significantly less in interest over the life of the loan with the higher score.
Down Payment
While conventional loans often require a down payment of around 20%, there are options available for as little as 3% down, especially for first-time homebuyers. However, putting down less than 20% typically means you’ll have to pay for Private Mortgage Insurance (PMI), which protects the lender if you default on the loan.
Example: You’re buying a $300,000 home. If you put down 3% (just $9,000), your monthly payments might be a bit higher, thanks to PMI. But with 20% down (that’s $60,000), you’d avoid PMI altogether and lower your monthly payment.
Income and Debt-to-Income (DTI) Ratio
Lenders will also look at your income and DTI ratio (which is the percentage of your income that goes toward paying debts). Typically, they like to see a DTI ratio below 43%. So, if you’re already carrying a lot of debt (like car loans or student loans), you might have to pay down some of that debt before qualifying for a conventional loan.
Pros of Conventional Loans
Now, let’s talk about why you might want to go the conventional loan route. There are some definite perks here!
Lower Interest Rates
If you’ve got a good credit score, conventional loans tend to offer lower interest rates than FHA or VA loans. Lower rates mean you’ll pay less in the long run, which can be a big deal, especially when you’re talking about a 30-year mortgage.
No PMI with 20% Down
As mentioned, if you’re able to put down 20% or more, you won’t have to worry about PMI. This can save you hundreds of dollars a month. With a lower interest rate and no PMI, conventional loans can be pretty cost-effective.
Flexible Loan Terms
Conventional loans come with flexible terms, from 10-year loans to 30-year loans, and even adjustable-rate options. So, you can choose what fits your financial situation best.
Cons of Conventional Loans
Of course, nothing’s perfect, and there are some downsides to conventional loans.
Higher Credit Score Requirements
If your credit score is on the lower end (below 620), you might struggle to qualify for a conventional loan, or you could be stuck with a higher interest rate. This is why some buyers with lower credit scores opt for FHA loans, which have more lenient requirements.
Stricter Down Payment Requirements
While you can get a conventional loan with a small down payment (as low as 3%), you’ll need to have a strong financial position to make it work. If you don’t have a 20% down payment, you’ll likely face PMI charges.
Mortgage Insurance (PMI)
If you’re not able to make a 20% down payment, you’ll have to pay for PMI, which can increase your monthly payments. PMI costs vary, but they can range from 0.3% to 1.5% of the original loan amount annually, depending on the size of the down payment.
How to Apply for a Conventional Loan
So, how do you actually go about getting one of these loans? It’s pretty straightforward!
Choose the Right Lender
Start by shopping around for lenders who offer conventional loans. Banks, credit unions, and online lenders all offer these types of loans. Compare their rates, fees, and terms to find the best deal for you.
Prepare Your Documents
To apply for a conventional loan, you’ll need to gather some financial documents. Be prepared to show your credit report, income verification (pay stubs or tax returns), and details about your debts and assets.
Get Pre-Approved
Before you start house hunting, getting pre-approved for a loan can give you a better idea of how much you can afford. Pre-approval is a good indicator to sellers that you’re serious about buying and financially capable of following through.
Is a Conventional Loan Right for You?
By now, you should have a good understanding of what conventional loans are and whether they might be a good fit for your home-buying journey. If you’ve got a strong credit score, a decent down payment, and you don’t mind paying a bit more upfront, a conventional loan could be a great choice for you.
FAQ’s
What Is A Conventional Loan?
A conventional loan is a mortgage not backed by the government, such as FHA or VA loans. It’s offered by private lenders and often requires higher credit scores and down payments. Conventional loans are popular for their flexibility, offering options like fixed or adjustable rates and competitive terms.
How Does A Conventional Loan Work?
Conventional loans work by borrowing money from private lenders to purchase a home. You’ll repay the loan through monthly payments, including principal and interest. These loans typically require meeting lender criteria like credit score, income, and debt-to-income ratio, with terms ranging from 15 to 30 years.
What Are The Types Of Conventional Loans?
Conventional loans come in two main types: conforming and non-conforming. Conforming loans meet Fannie Mae and Freddie Mac guidelines, while non-conforming loans, like jumbo loans, exceed those limits. Borrowers can also choose between fixed-rate and adjustable-rate mortgages based on their financial goals.
What Is A Conforming Loan?
A conforming loan adheres to guidelines set by Fannie Mae and Freddie Mac, including limits on loan amounts ($806,500 in most areas for 2025). These loans are ideal for borrowers with good credit who need financing within these limits, offering competitive rates and terms.
What Is A Non-Conforming Loan?
Non-conforming loans don’t meet Fannie Mae or Freddie Mac guidelines. Examples include jumbo loans, which exceed conforming loan limits. These loans often require higher credit scores, larger down payments, and stricter qualifications but can be helpful for borrowers needing larger financing.
What Is A Jumbo Loan?
A jumbo loan is a type of non-conforming loan that exceeds the conforming loan limit set by the Federal Housing Finance Agency (FHFA). It’s designed for high-value properties but typically requires excellent credit, a low debt-to-income ratio, and a substantial down payment.
What Are The Eligibility Requirements For A Conventional Loan?
Eligibility for a conventional loan includes a minimum credit score of 620, a stable income source, a debt-to-income ratio below 43%, and the ability to make at least a 3% down payment. Requirements may vary depending on the lender and loan type.
What Credit Score Do I Need For A Conventional Loan?
Most lenders require a minimum credit score of 620 for conventional loans. However, higher scores (700 or above) can help you secure better interest rates and terms. Borrowers with lower scores may need to explore other financing options like FHA loans.
What Is The Minimum Down Payment For A Conventional Loan?
The minimum down payment for a conventional loan is typically 3% for first-time homebuyers or those with strong credit profiles. However, putting down more—like 10% or 20%—can help avoid private mortgage insurance (PMI) and reduce monthly payments.
How Does The Debt-To-Income Ratio Affect A Conventional Loan?
The debt-to-income (DTI) ratio measures your monthly debt payments against your income. For conventional loans, lenders prefer a DTI below 43%. A lower DTI improves your chances of approval and may qualify you for better interest rates.
Are There Income Limits For Conventional Loans?
Unlike government-backed programs like USDA or FHA loans, conventional loans generally do not have income limits. However, your income must support the required debt-to-income ratio to qualify for the loan amount you’re seeking.
What Documentation Do I Need For A Conventional Loan Application?
To apply for a conventional loan, you’ll need documents like proof of income (pay stubs or tax returns), bank statements, identification (driver’s license or Social Security card), credit history, and details about your assets and debts.
Can I Get A Conventional Loan With Bad Credit?
While it’s possible to get a conventional loan with bad credit (minimum of 620), it may come with higher interest rates or stricter terms. Improving your credit score before applying can help secure better options.
How Long Does It Take To Get Approved For A Conventional Loan?
Approval for a conventional loan typically takes 30 to 45 days but can vary based on factors like lender efficiency and document submission. Pre-approval speeds up the process by confirming your eligibility before house hunting.
What Are The Interest Rates For Conventional Loans?
Interest rates for conventional loans vary based on market conditions, credit score, loan term, and down payment size. As of early 2025, rates range from approximately 6% to 7% for fixed-rate mortgages but may fluctuate daily.
How Do Fixed-Rate And Adjustable-Rate Mortgages Differ In Conventional Loans?
Fixed-rate mortgages maintain the same interest rate throughout the term, ensuring consistent payments. Adjustable-rate mortgages (ARMs) start with lower rates that adjust periodically based on market conditions, making them riskier but potentially cheaper initially.
What Are The Pros And Cons Of A Conventional Loan?
Pros include competitive interest rates, no upfront mortgage insurance fees (if you put down at least 20%), and flexible terms. Cons involve stricter credit requirements, higher down payments compared to FHA loans, and mandatory PMI if your down payment is less than 20%.
Is Private Mortgage Insurance (PMI) Required For Conventional Loans?
PMI is required if your down payment is less than 20%. It protects lenders in case of default but increases monthly costs. Once you reach 20% equity in your home, you can request PMI cancellation.
When Can I Cancel PMI On A Conventional Loan?
You can cancel PMI once your home equity reaches at least 20%, either through paying off part of the principal or an increase in property value. Lenders are required to cancel PMI automatically when equity reaches 22%.
How Do I Compare Conventional Loans From Different Lenders?
To compare lenders offering conventional loans, evaluate factors like interest rates, closing costs, lender fees, customer reviews, and special programs for first-time buyers or low-income borrowers. Getting multiple quotes helps ensure you find the best deal.
Can I Refinance My Existing Mortgage Into A Conventional Loan?
Yes! Refinancing into a conventional loan can lower your interest rate or eliminate PMI if you’ve built enough equity. Ensure your financial profile meets lender requirements before applying to maximize savings.
What Is The Process For Applying For A Conventional Loan?
The process involves pre-approval by submitting financial documents to determine eligibility. Once approved, you’ll shop for homes within your budget. After choosing a property, you’ll complete underwriting before closing on the loan.
Are There Closing Costs Associated With Conventional Loans?
Yes! Closing costs typically range from 2% to 5% of the home’s purchase price and include fees like appraisal charges, title insurance, lender fees, and taxes. Some lenders offer assistance programs to offset these costs.
Can First-Time Homebuyers Qualify For A Conventional Loan?
Absolutely! First-time buyers can qualify with as little as a 3% down payment if they meet credit score requirements. Many lenders offer special programs tailored to first-time buyers with competitive terms.
Do I Need To Be A U.S. Citizen To Get A Conventional Loan?
No! Non-citizens can qualify for conventional loans if they have legal residency status in the U.S., such as permanent residency or valid work visas. Documentation proving residency will be required during the application process.
Can I Use Gift Funds For The Down Payment On A Conventional Loan?
Yes! Gift funds from family members are allowed for down payments on conventional loans but must be documented with a gift letter stating that repayment isn’t required.
What Are The Advantages Of Choosing A Conventional Loan Over FHA Or VA Loans?
Conventional loans often offer lower interest rates and no upfront mortgage insurance fees compared to FHA or VA loans. They also provide more flexibility in property types and fewer restrictions on loan amounts, making them a great option for borrowers with good credit and stable income.
Can I Use A Co-Signer For My Conventional Loan Application?
Yes, you can use a co-signer for your conventional loan application. The co-signer must have a good credit score and financial stability, but they don’t need to be on the title of the home. Their income and credit history can strengthen your application.
How Does My Employment History Impact My Chances Of Getting A Conventional Loan?
Your employment history is crucial when applying for a conventional loan. Lenders prefer a stable work history, typically requiring at least two years in the same field. Gaps in employment or frequent job changes may raise concerns about your ability to repay the loan.
Are There Special Programs Available For Low-Income Borrowers Seeking Conventional Loans?
Yes, there are special programs for low-income borrowers seeking conventional loans. Options like Fannie Mae’s HomeReady and Freddie Mac’s Home Possible offer lower down payment requirements and flexible underwriting standards, making homeownership more accessible for those with limited income.
What Is The Maximum Amount I Can Borrow With A Conventional Loan?
The maximum amount you can borrow with a conventional loan varies by location but typically aligns with conforming loan limits set by Fannie Mae and Freddie Mac. As of 2025, the limit is generally around $726,200 in most areas, but it can be higher in high-cost regions.
How Do Lenders Determine The Value Of My Property For A Conventional Loan?
Lenders determine your property’s value through an appraisal process. An appraiser evaluates the home’s condition, location, and comparable sales in the area to establish its market value. This ensures that the property is worth the amount you’re borrowing.
Can I Use An Online Lender For My Conventional Mortgage Needs?
Absolutely! Many online lenders offer conventional mortgage options with competitive rates and streamlined processes. Just ensure you research their reputation and customer service before committing, as experiences can vary widely between lenders.
What Should I Look Out For When Choosing Between Fixed And Adjustable-Rate Mortgages In A Conventional Loan?
When choosing between fixed and adjustable-rate mortgages (ARMs), consider your financial situation and how long you plan to stay in the home. Fixed rates provide stability, while ARMs may start lower but can increase over time, impacting future payments significantly.
How Often Can Interest Rates Change On An Adjustable-Rate Mortgage (ARM)?
Interest rates on an adjustable-rate mortgage (ARM) typically change at predetermined intervals, such as annually or every six months, after an initial fixed period. The frequency of adjustments depends on the specific terms outlined in your loan agreement.
Are There Specific Lenders Known For Offering Favorable Terms On Conventional Loans?
Yes, some lenders are known for offering favorable terms on conventional loans, often including local banks and credit unions that provide personalized service. It’s wise to shop around and compare offers from multiple lenders to find the best deal for your needs.
How Can I Improve My Credit Score Before Applying For A Conventional Loan?
To improve your credit score before applying for a conventional loan, pay down existing debts, make all payments on time, avoid new credit inquiries, and check your credit report for errors. These steps can enhance your score and increase your chances of approval.
Is It Possible To Negotiate Terms On My Conventional Mortgage Offer?
Yes! It’s possible to negotiate terms on your conventional mortgage offer. You can discuss interest rates, closing costs, or even down payment requirements with lenders. Being informed about market conditions can strengthen your position during negotiations.
What Role Does The Federal Housing Finance Agency (FHFA) Play In Regulating Conventional Loans?
The Federal Housing Finance Agency (FHFA) oversees Fannie Mae and Freddie Mac, which set guidelines for conventional loans. They regulate loan limits, ensure market stability, and promote access to affordable housing while ensuring that these government-sponsored enterprises operate efficiently.
Can I Switch From An Adjustable-Rate Mortgage To A Fixed-Rate Mortgage Later On In The Term Of My Loan?
Yes, you can switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage later in the term. This process typically involves refinancing your loan, allowing you to secure a stable interest rate if you feel uncomfortable with potential rate increases.
What Are Some Common Misconceptions About Conventional Loans That Borrowers Should Be Aware Of?
Common misconceptions include the belief that only high-income earners qualify or that large down payments are always necessary. In reality, many programs exist for low-income borrowers with lower down payment options available based on creditworthiness.
Are There Any Restrictions On Property Types When Applying For A Conventional Mortgage?
Yes, there are restrictions on property types for conventional mortgages. Typically eligible properties include single-family homes, condos, and multi-family units up to four units. However, properties like co-ops or vacation homes may have different requirements depending on lender policies.
Can I Use My 401(K) Funds As Part Of My Down Payment On A Conventional Loan?
Yes! You can use funds from your 401(k) for a down payment on a conventional loan. However, be mindful of potential penalties or tax implications if you withdraw funds before retirement age; consider taking a loan against your 401(k) instead if possible.
How Do Interest Rates Fluctuate Based On Market Conditions For Conventional Loans?
Interest rates for conventional loans fluctuate based on various market conditions such as inflation rates, economic indicators, and Federal Reserve policies. Keeping an eye on these factors can help you determine the best time to lock in a favorable rate.
Is It Advisable To Shop Around Before Settling On One Lender For My Mortgage Needs?
Absolutely! Shopping around is crucial when looking for a mortgage lender. Comparing offers from multiple lenders helps you find better interest rates and terms while ensuring you choose one that fits your financial situation best.
What Are The Common Reasons Applications For Conventional Loans Get Denied?
Common reasons for denial include low credit scores, high debt-to-income ratios, insufficient income documentation, or issues with the property appraisal. Addressing these factors before applying can improve your chances of approval.
How Can I Find Out If I’m Eligible For Fannie Mae Or Freddie Mac Financing Through A Conventional Loan?
You can check eligibility for Fannie Mae or Freddie Mac financing by reviewing their specific guidelines online or consulting with a lender familiar with these programs. They will assess factors like income limits and credit scores to determine eligibility.
Do Lenders Offer Any Incentives Or Discounts For First-Time Homebuyers Applying For A Conventional Mortgage?
Yes! Many lenders offer incentives or discounts specifically for first-time homebuyers applying for conventional mortgages. These may include reduced fees or special programs designed to make homeownership more affordable for those entering the market for the first time.
How Does Inflation Impact Interest Rates On New And Existing Conventional Loans Over Time?
Inflation generally leads to higher interest rates as lenders seek to maintain their profit margins amid rising costs. This means new loans may have higher rates during inflationary periods while existing fixed-rate loans remain unaffected until maturity unless refinanced.
What Is The Impact Of Student Debt On Qualifying For A Conventional Mortgage?
Student debt can impact qualifying for a conventional mortgage by affecting your debt-to-income ratio. Lenders consider all monthly debts when assessing eligibility; thus, managing student loans effectively is crucial to improving your chances of approval.
Are There Specific Benefits To Using Local Banks Versus National Lenders When Applying For A Conventional Mortgage?
Using local banks often provides personalized service and knowledge of community-specific programs that national lenders may not offer. Local banks might also have more flexibility in underwriting decisions compared to larger institutions focused on standardized processes.
What Should Be Included In My Budget When Considering Monthly Payments On A New Home With A Conventional Mortgage?
When budgeting for monthly payments on a new home with a conventional mortgage, include principal and interest payments, property taxes, homeowner’s insurance costs, PMI (if applicable), maintenance expenses, and utilities to get an accurate picture of overall housing costs.
How Do Property Taxes Factor Into Monthly Payments On A Conventional Home Loan?
Property taxes are typically included in monthly mortgage payments through an escrow account managed by the lender. This ensures taxes are paid on time while spreading costs over monthly installments rather than requiring lump-sum payments annually.
Is It Possible To Refinance From An FHA Or VA Loan Into A Conventional One?
Yes, you can refinance from an FHA or VA loan into a conventional loan if you meet the lender’s criteria. This often includes having a higher credit score, lower debt-to-income ratio, and sufficient equity in your home. Refinancing can help reduce monthly payments and eliminate mortgage insurance.
Can I Use Rental Income To Qualify For Additional Borrowing Under A New Or Existing Mortgage?
Yes, you can use rental income to qualify for additional borrowing on a new or existing mortgage. Lenders typically require documentation, such as lease agreements and tax returns, to verify rental income. This additional income can enhance your debt-to-income ratio, improving your chances of approval.
Are There Any State-Specific Programs That Assist With Down Payments On Traditional Mortgages?
Yes, many states offer programs to assist with down payments on traditional mortgages. These programs may provide grants, low-interest loans, or tax credits to eligible homebuyers. Check with your state housing agency or local lenders for available options tailored to first-time buyers or low-income households.
What Resources Are Available To Help Me Understand More About Managing My Mortgage After Closing?
After closing, resources like online mortgage calculators, budgeting tools, and financial education websites can help you manage your mortgage. Additionally, many lenders offer customer service support and educational materials to assist you in understanding payment schedules and managing escrow accounts.
How Does Having Multiple Credit Inquiries Affect My Ability To Secure Favorable Terms On My Next Mortgage?
Multiple credit inquiries can negatively impact your credit score, which lenders consider when determining mortgage terms. However, if inquiries occur within a short period (usually 30 days), they may be treated as a single inquiry. It’s best to limit inquiries before applying for a mortgage.
Will Taking Out Personal Loans Impact My Eligibility Or Terms When Applying For Another Mortgage?
Yes, taking out personal loans can impact your eligibility for another mortgage. New debt increases your debt-to-income ratio, which lenders evaluate when assessing your application. It’s advisable to minimize existing debts before applying for a mortgage to improve your chances of favorable terms.
Are There Specific Times During The Year That Are Better To Apply For Mortgages Due To Interest Rate Trends?
Yes, certain times of the year may offer better mortgage rates due to seasonal trends in the housing market. Typically, late winter or early spring can present lower rates as lenders compete for business. Monitoring market trends and economic indicators can help you identify optimal times.
How Can Homeowners Leverage Equity From Their Properties Through Refinancing Into Another Type Of Mortgage?
Homeowners can leverage equity by refinancing into another type of mortgage, such as a cash-out refinance. This allows them to access cash based on their home’s equity while potentially securing better interest rates or terms. The funds can be used for home improvements or paying off debt.
Do Lenders Consider Alternative Credit Scoring Models When Evaluating Applicants For Traditional Mortgages?
Some lenders do consider alternative credit scoring models when evaluating applicants for traditional mortgages. These models may include factors like rent payment history and utility bills to assess creditworthiness. This approach helps borrowers with limited credit histories secure financing more easily.
Is It Possible To Convert An Existing Home Equity Line Of Credit (HELOC) Into Part Of My New Mortgage Structure?
Yes, it is possible to convert an existing HELOC into part of your new mortgage structure through refinancing. This process allows you to consolidate debts and potentially secure a lower interest rate on the combined loan amount while simplifying monthly payments.
How Do Changes In Employment Status During The Application Process Affect Approval Chances And Terms Offered By Lenders?
Changes in employment status during the application process can significantly affect approval chances and terms offered by lenders. A job loss or change to a lower-paying position may raise concerns about income stability, leading to potential denial or less favorable loan terms.
Are There Any Legal Protections Against Discrimination When Applying For Any Type Of Home Financing, Including Traditional Mortgages?
Yes, there are legal protections against discrimination in home financing under the Fair Housing Act and Equal Credit Opportunity Act. These laws prohibit lenders from discriminating based on race, color, religion, sex, national origin, disability, or familial status during the lending process.
Conclusion
To wrap it all up, conventional loans are a solid option for many homebuyers in the U.S. They come with plenty of perks, like lower interest rates and flexibility, but they do require a higher credit score and larger down payment than other types of loans. As always, it’s important to consider all your options and talk to a mortgage professional to find the best fit for your situation. Happy homebuying!