What Is A Conventional Loan?

A conventional mortgage loan is not directly insured by a government program. Most conventional loans are also “conforming” loans, which simply means that they meet the requirements for Fannie Mae or Freddie Mac. Both are government-sponsored enterprises that purchase mortgages from lenders and sell them to investors.

Conventional mortgages are available with several different term options with most people choosing between 15-year and 30-year terms. Before choosing this loan type, make sure you meet common lender requirements and review the pros and cons.

How Does A Conventional Loan Work?

Conventional loans work like most mortgages. A borrower applies to a lender for a specific loan amount. The lender then reviews the borrower's qualifications and approves the loan. After the loan is finalized and the borrower closes on their new home, they’ll repay the loan with monthly installments.

Because there are several different sets of guidelines that fall under the umbrella of “conventional loans,” there’s no single set of requirements for borrowers. However, in general, conventional loans have stricter credit requirements than government-backed loans like Federal Housing Administration (FHA) loans.

Types Of Conventional Loans

As mentioned above, different types of conventional mortgages are available to meet different needs for borrowers. Some of the common types of conventional mortgages include:

• Fixed-rate loan: Interest rates stay the same over the life of the loan.
• Adjustable-rate mortgage (ARM): Interest rates can change over the life of the loan.
• Conforming loan: The loan amount must stay within the loan limits set by Fannie Mae and Freddie Mac.
• Non-conforming or jumbo loan: Those who need to borrow more than the conforming loan limit can use a jumbo conventional loan.

If you’re considering a conventional mortgage, consult with your mortgage lender to determine which type of conventional loan is right for your financial situation.

Conventional Loan Requirements

As with any type of mortgage loan, you’ll need to meet certain qualification requirements if you want to buy a home with a conventional loan. Let’s take a look at what you’ll generally need to qualify for this type of home loan.

Down Payment

It’s possible for first-time home buyers to get a conventional mortgage with a down payment as low as 3%. However, the conventional loan down payment requirement can vary based on your personal situation and the type of loan or property you’re getting:

• If you’re not a first-time home buyer or making no more than 80% of the median income in your area, the down payment requirement is 5%.
• If the house you’re buying is not a single-family home (meaning it has more than one unit), you may need to put down 15%.
• If you’re buying a second home, you’ll need to put at least 10% down.
• If you’re getting an adjustable-rate mortgage, the minimum down payment requirement is 5%.

A mortgage calculator can help you figure out how your down payment amount will affect your future monthly payments.

Private Mortgage Insurance

If you put down less than 20% on a conventional loan, you’ll be required to pay for private mortgage insurance (PMI). PMI protects mortgage investors in case of a loan default. The cost for PMI varies based on your loan type, your credit score and the size of your down payment.

PMI is usually paid as part of your monthly mortgage payment, but there are other ways to cover the cost as well. Some buyers pay it as an upfront fee included in their closing costs. Others pay it in the form of a slightly higher interest rate. Choosing how to pay for PMI is a matter of running the numbers to figure out which option is the cheapest for you.

The nice thing about PMI is that it won’t be part of your loan forever – that is, you won’t have to refinance to get rid of it. When you reach 20% equity in the home on your regular mortgage payment schedule, you can ask your lender to remove the PMI from your mortgage payments.

If you reach 20% equity as a result of your home increasing in value, you can contact your lender for a new appraisal so they can use the new value to recalculate your PMI requirement. Once you reach 22% equity in the home, your lender will automatically remove PMI from your loan.

Other Requirements

A conventional lender will also have the following requirements.

Conventional Loan Minimum Credit Score 

In most cases, you’ll need a credit score of at least 620 to qualify for a conventional loan. When you apply, your lender will check your credit history to determine if you have qualifying credit. If you don’t, you might not get approved for the loan.

Conventional Loan Maximum Debt-To-Income Ratio

Your debt-to-income ratio (DTI) is a percentage that represents how much of your monthly income goes to pay off debts. You can calculate your DTI by adding up the minimum monthly payments on all your debts (like student loans, auto loans and credit cards) and dividing it by your gross monthly income. For most conventional loans, you can be approved up to 50% DTI, however a lower DTI increases your likelihood of approval.

Conventional Loan Limits

For a conforming conventional loan, your loan must fall within the loan limits set by Fannie Mae and Freddie Mac.

For 2024, the conforming loan limit for a single-family home is $766,550. There are exceptions, however. Alaska, Hawaii and other high-cost areas of the country have higher loan limits, ranging up to $1,149,825. To see loan limits for your area, visit the Federal Housing Finance Agency website.

How Is A Conventional Mortgage Different From Other Loan Types?

Let’s take a look at how conventional loans compare to some other popular loan options.

Conventional Loans Vs. VA Loans

While conventional loans are available to anyone who can meet the requirements, Department of Veterans Affairs (VA) loans are a benefit of military service and are only available to veterans, active-duty service members and their surviving spouses.

The requirements for VA loans are similar to that of conventional loans. VA loans, however, come with a few additional benefits. First, VA loans don’t require a down payment. Second, VA loans never require you to pay mortgage insurance.

If you’re thinking about getting a VA loan instead of a conventional loan, here are a few things to consider:

• You can’t use a VA loan to buy a second home. The Department of Veterans Affairs requires that VA loan holders occupy the home they purchased with a VA loan. Second homes and vacation homes are not allowed through VA loans.
• You may have to pay a funding fee. The VA funding fee offsets the cost to taxpayers of getting the VA loan. The funding fee ranges from 1.25% – 3.3% of the loan amount and varies based on your down payment, whether you’re buying a home or refinancing and how many times you’ve used your VA loan benefit.

Conventional Loans Vs. FHA Loans

Conventional loans have stricter credit requirements than FHA loans. FHA loans, which are backed by the Federal Housing Administration (FHA), offer the ability to get approved with a credit score as low as 500 with a 10% minimum down payment.

Credit scores above 580 (which many lenders require as your minimum qualifying score – including Rocket Mortgage^®) only require a minimum down payment of 3.5%. While conventional loans allow you to make a slightly smaller down payment of 3%, you must have a credit score of at least 620 to qualify.

When you’re deciding between a conventional loan versus an FHA loan, it’s important to consider the cost of mortgage insurance. If you put less than 10% down on an FHA loan, you’ll have to pay a mortgage insurance premium for the life of the loan – regardless of how much equity you have.

Conventional Loans Vs. USDA Loans

While conventional loans are available in all areas of the country, United States Department of Agriculture (USDA) loans* can only be used to purchase properties in qualifying rural areas.

Those who qualify for a USDA loan may find that it’s a very affordable loan compared to other loan options. Although Rocket Mortgage doesn’t offer USDA loans currently, we’re providing this information to you to help you understand all of your choices for mortgages.

There’s no maximum income for a conventional loan, but USDA loans have income limits that vary based on the city and state where you’re buying the home. When evaluating your eligibility for a USDA loan, your lender will consider the incomes of everyone in the household – not just the people on the loan.

USDA loans don’t require borrowers to pay private mortgage insurance (PMI), but they do require borrowers to pay a guarantee fee, which is similar to PMI. This fee helps continue the USDA loan program and operating costs.

If you pay the guarantee fee upfront, the fee is 1% of the total loan amount. You also have the option to pay the guarantee fee as part of your monthly payment. The guarantee fee is usually more affordable than PMI.

Pros And Cons Of A Conventional Loan

Here are some advantages and disadvantages potential home buyers should consider before applying for a conventional mortgage.

Pros

• Flexible loan options: There are a variety of loan terms available such as a 30-year or 15-year mortgage. This allows you to choose loan terms that best fit your budget.
• Less property restrictions: Conventional loans can be used for second homes or investment properties unlike government-backed loans.
• Competitive interest rates and terms: The better your credit score, the better your chance at lower interest rates.
• Option to remove private mortgage insurance: If you make a down payment of at least 20% or reach 20% equity in your home, you can cancel your private mortgage insurance. PMI is often less expensive compared to FHA mortgage insurance.

Cons

• Stricter credit requirements: In order to get the most attractive interest rate and terms, you have to meet the higher credit score requirements.
• Higher down payment amounts: If you’re not a first-time home buyer, you may be expected to put down 5%. Whereas down payments for FHA loans typically don’t change whether you’re a first-time buyer or not.
• Down payment affects private mortgage insurance: With a down payment of less than 20%, you’re required to pay for private mortgage insurance, which increases the overall cost of your loan.

Conventional Loan FAQs

Learn more about conventional loans by reading the most common questions that potential homeowners have about this type of mortgage.

What are interest rates for a conventional mortgage?

Interest rates for conventional mortgages change daily. In 2023, average rates for a 30-year mortgage were at 6.81% but were as low as 2.96% in 2021. Your credit score, down payment size and other personal factors will also affect the interest rate you receive.

Are conventional loans assumable?

No, typically conventional loans are not assumable. An assumable mortgage is when a buyer takes over the seller's mortgage. Most government-backed mortgages are assumable such as VA, FHA and USDA loans.

Can I get down payment assistance with a conventional loan?

Yes, you may be able to qualify for down payment assistance with a conventional home loan. Government agencies and community programs offer assistance to buyers who are struggling with difficult financial situations, no matter what type of financing they’re using.

How many conventional loans can I have at one time?

The obvious answer to this question is as many as you can reasonably afford, but you can technically have up to ten conventional mortgages in your name. If you’re interested in real estate investing, you may be able to use alternative financing methods to purchase several properties without having to apply for multiple conventional loans.

Is a pest inspection required for a conventional loan?

In most cases, your lender won’t require a pest inspection for the home you’re buying. If there is evidence of an infestation or termite damage, your appraiser or home inspector may recommend having a pest expert complete an assessment prior to closing on the loan.

The Bottom Line

Conventional loans generally offer lower costs than other loan types, and if you meet credit score requirements and want a down payment of as low as 3%, a conventional mortgage might be the best solution for you.

To find out what types of financing you qualify for, start the mortgage application process today.

*As of July 6, 2020, Rocket Mortgage^® is no longer accepting USDA loan applications.