What Is a Conventional Loan? And Other Common Questions About This Popular Mortgage Type

What is a conventional loan? Simply put, a conventional loan is a type of mortgage offered by private lenders, such as banks, credit unions, and mortgage companies. Unlike FHA, VA, and USDA loans, a conventional loan is not insured or guaranteed by a government agency. It’s also the most popular home loan type in the United States, likely due to its widespread availability from a variety of lenders and the greater flexibility it can offer compared to government-backed options.

Purchasing a home is a big decision, and each loan type (including conventional mortgages) comes with its own considerations. When researching your financing options, it’s natural to have some questions—and important that you have the right answers. In this article, we’ll answer some of the most common questions you may have about conventional loans and explore what you should know before making your decision.

What are the different types of conventional loans?

First, it’s important to know that there are two primary types of conventional loans: conforming and non-conforming. Let’s dive into the differences between the two options.

Conforming

Conforming loans are the most common type of conventional mortgage. They’re called “conforming” because they must conform to lending guidelines established by the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. These guidelines typically involve maximum loan limits, as well as eligibility requirements such as minimum credit scores and maximum debt-to-income ratios. Please note that loan limits vary by county and may be higher in designated high-cost areas. Government-established conforming loan limits are released annually and this year’s can be found on the U.S. Federal Housing website.

Non-conforming (AKA “jumbo” loans)

When a conventional loan exceeds the GSEs’ conforming loan limits, it becomes a non-conforming or jumbo loan. Because jumbo loans may be riskier for the lender (given the larger loan amount), you’ll likely need a higher credit score—and possibly a larger down payment—to get approved for this kind of loan. Though non-conforming conventional loans may have a more stringent qualification process than conforming options, they also provide the opportunity to borrow more than standard loan limits permit, making them a great option for luxury homes or properties in high-cost-of-living areas.

How do I qualify for a conventional loan?

Two people going over financial paperwork

Every lender has its own requirements, but there are several common factors most lenders review when evaluating a conventional loan application. These include:

Credit score: Your credit score helps lenders assess how you’ve managed debt in the past. Typically, a conventional loan requires a score of at least 620, although higher scores may yield greater loan benefits such as better interest rates or lower down payment requirements.
Debt-to-income (DTI) ratio: Your DTI represents the amount of your gross monthly income that goes toward debt payments. A lower DTI percentage is seen as desirable to lenders, and many look for a number that is no more than 36% to 45%, although exceptions may occur based on the loan program and your financial situation. Online calculators such as this one can help you determine your own DTI.
Down payment: One of the most common misconceptions around conventional loans is that they require a 20% down payment. While putting that much down can certainly provide benefits, many qualified borrowers can purchase a home with as little as 3% down through conventional loan programs. However, required down payment amounts can vary depending on credit score, DTI, property type, loan size, and other factors.
Employment and income. Lenders also want to ensure you have stable, reliable income to support your mortgage payments. Generally, you should expect to provide pay stubs, W-2s, tax returns, bank statements, and other relevant documentation to verify your information.

While the numbers above serve as a good starting point for conventional loan qualification, it’s always best to speak directly with your lender regarding their specific requirements.

What are the benefits of a conventional loan?

A woman using a calculator and looking at paperwork

As mentioned previously, conventional loans are the most popular mortgage type in the country, and for good reason. They offer several advantages that make them attractive to a variety of homebuyers.

Gift funds may be allowed: Depending on the loan program and down payment amount, gift funds from loved ones may be used toward your home purchase. You may even be able to use gift funds to cover the entire down payment, if you put 20% or more down.
Less upfront cash required: A down payment as low as 3% may reduce the amount of upfront funds needed at the closing table. This benefit can make homeownership more accessible to first-time buyers and individuals with varying financial situations.
Zero or temporary mortgage insurance requirements: Private mortgage insurance (PMI) is generally not required if you put at least 20% down. Even when you have to pay PMI, it’s usually temporary. In many situations, PMI can be removed once the loan-to-value (LTV) ratio reaches 80%, helping reduce your monthly payment over time.
No first-time homebuyer requirement: Unlike some government-backed programs, conventional loans are available to both first-time and repeat homebuyers. Whether you’re purchasing your first home, moving up to a larger property, or downsizing for retirement, a conventional mortgage could be an option for you.

How does a conventional loan differ from an FHA loan?

You may be wondering if you should choose a conventional loan or an FHA loan. The answer to that question depends largely on your financial profile, credit history, available down payment, and long-term goals. While both loan types can help you purchase a home, they serve somewhat different borrower needs.

In order to select the best loan type for your individual situation, it’s helpful to understand the key differences between these two mortgage options.

Conventional loans vs. FHA loans: the basics

An FHA loan is insured by the Federal Housing Administration. Because the government provides this insurance, lenders may have less stringent requirements for borrowers to qualify. A conventional loan, on the other hand, is not government-insured and is provided by private lenders. Since the lenders in this case assume more of the risk, qualification standards may be higher. As a result, FHA loans are often viewed as a pathway to homeownership for buyers who may not meet conventional loan requirements.

Credit score requirements

One of the most significant differences between these two loan types involves credit scores. FHA loans generally offer more flexibility for borrowers with less-established or lower credit histories. Conventional loans typically require stronger credit profiles and may offer their best terms to borrowers with higher scores. For homebuyers who have worked hard to build strong credit, a conventional loan can provide access to lower interest rates and reduced monthly premiums. For buyers whose credit still needs improvement, an FHA loan may provide a more attainable path to purchasing a home.

Down payments

Both loan types offer relatively low down payment options. Conventional loans may allow qualified borrowers to purchase with as little as 3% down. FHA loans typically require a minimum down payment of 3.5% for borrowers who meet their requirements. At first glance, these numbers appear very similar. However, the overall cost of the loan may differ significantly, particularly when interest rates and mortgage insurance enter the equation.

Mortgage insurance

Mortgage insurance is another key area in which conventional and FHA loans differ. The presence or absence of PMI can have a noticeable impact on your monthly home payments, so it’s important to understand what that might look like with these two loan types.

With a conventional loan, PMI is generally required when the down payment is less than 20%. However, you can cancel it once you build enough equity in your home. Also, borrowers with strong credit tend to enjoy lower PMI rates.

Buyers with an FHA loan, on the other hand, typically pay both an upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (MIP). Depending on the loan terms and down payment amount, this insurance could remain in place for many years, or even for the life of the loan.

Loan limits and property requirements

Both FHA and conventional loans have borrowing limits, though the maximum loan amount varies by location and program rules. The appraisal process can differ as well. FHA appraisals typically include stricter requirements for a home’s condition, evaluating factors related to health, safety, and construction standards, in addition to determining market value. Conventional appraisals place greater emphasis on assessing the home’s value, helping lenders confirm that the property is worth the amount being financed.

So, which loan is better?

That answer really depends on your own individual situation. Your financial health, available funds, and homeownership goals, among other factors, all play a role in determining the best mortgage fit for you. For instance, a conventional loan may be a strong choice if you:

Have good to excellent credit
Have a stable income history
Want the possibility of removing mortgage insurance later
Are seeking competitive interest rates

Meanwhile, an FHA loan may be worth considering if you:

Have a lower credit score
Need more flexible qualification standards
Have experienced previous credit challenges
Are working with limited funds for a down payment

The best mortgage is ultimately the one that aligns with your current financial situation and your long-term goals. A loan officer can help compare available programs and determine which option may offer the greatest overall benefit.

Is a conventional loan right for me?

An older homebuyer couple shaking hands with a loan officer

A conventional loan can be an excellent financing solution for many homebuyers. With low down payment options, competitive rates, and the potential to eliminate mortgage insurance in the future, it’s easy to see why conventional mortgages remain the most popular loan type in the country. However, every buyer’s situation is unique. Credit history, income, assets, debt obligations, and homeownership goals all play an important role in determining the right mortgage solution for you.

Taking time to understand your options before applying for a loan can help position you for a smoother and more successful homebuying experience.

How can I learn more?

Loan officers will typically be your best resource for any mortgage-related questions. We invite you to reach out to an experienced professional at HomeAmerican Mortgage Corporation (NMLS ID 130767; see their licensing info here) for additional information on loan types, current programs, and the qualification process. Pre-qualification is free, and it can help you get a better idea of what kind of loan you may be looking for!

Additionally, check out these other articles on our blog: