What Is a Conventional Loan?

If you’re shopping around for a mortgage, you’ll probably hear words like “conventional” and “conforming” and acronyms like “VA” and “FHA” thrown around by mortgage lenders and loan officers.

It can feel a bit overwhelming – but we’re here to translate. 

The most common type of home loan is a conventional loan. This mortgage is used for the largest percentage of home financing in the U.S.^[1]

But what is a conventional loan? We’ve created a guide to help you understand what a conventional loan is and how you can qualify for one.

What Is a Conventional Loan?

A conventional loan is any mortgage loan that isn’t backed by a federal agency like the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA) or the U.S. Department of Agriculture (USDA). Conventional loans can either conform or not conform to the guidelines set by Fannie Mae or Freddie Mac. Although the vast majority of conventional loans do conform to these guidelines.

You can get a conventional mortgage from most lenders, including banks, credit unions and other mortgage lenders and mortgage brokers. 

The terms you’re offered on a conventional loan and your ability to repay it is between you and your lender. Because the loan isn’t backed by the government, Uncle Sam doesn’t have a direct stake in the loan terms you’re offered and doesn’t directly need to worry about you making your monthly mortgage payments on time.

Conventional loans are the most common type of mortgage loan available. According to 2022 census data, new home purchases were financed through^[1]:

• Conventional mortgage loans: 77%
• FHA loans: 7%
• VA loans: 5%
• Cash: 10%

Conventional Loan Requirements

Getting a conventional loan starts with submitting a mortgage application. You can apply through a local, brick-and-mortar bank, an online mortgage lender or a credit union.

No matter where you get your conventional loan, the lender will verify that you meet their criteria.

Credit score

To qualify for a conventional loan, most conventional lenders require a credit score of 620 or higher. The better your credit score, the more favorable rates you’ll get.

Debt-to-income (DTI) ratio

Lenders will look at your debt-to-income (DTI) ratio to see how much you owe compared to how much you earn. To qualify for a conventional loan, most lenders prefer a DTI of 50% or less, though some lenders may offer some flexibility.

Down payment

Back in the day, a 20% down payment was standard. 

With the growth of the housing market and lower interest rates on savings accounts, today, lenders are willing to accept as little as 3% down on conventional loans.

Private mortgage insurance (PMI)

With a conventional loan, if you pay less than 20% down, lenders are likely to charge you more in interest and require you to pay private mortgage insurance (PMI). 

PMI protects lenders in case borrowers default on their loans. It’s typically paid as part of your monthly mortgage payment, but you can pay it upfront with your closing costs.

Once you reach 20% equity in your home, you can remove PMI from your mortgage.

Proof of income and employment

Lenders will verify that you earn enough to make your regular monthly mortgage payments. To confirm, they’ll need proof of income. Lenders will typically request recent pay stubs and W-2 forms.

Loan limits

For conforming conventional loan borrowers, the property you’re financing must fall within current conforming loan limits. 

In 2023, the limit for 1-unit properties is $726,200, an increase of $79,000 from $647,200 in 2022.​^[2]

Types of Conventional Loans

Now that you know what a conventional loan is, it’s time to look at the different types of conventional loans that are out there.

Conforming loans

Conforming conventional loans meet standards set by Fannie Mae and Freddie Mac, which are publicly traded government-sponsored enterprises (GSEs) managed by the Federal Housing Finance Agency (FHFA).

Fannie Mae and Freddie Mac aren’t federal regulators – and they can’t tell lenders what to do (although they can refuse to buy loans from lenders if the loans don’t meet their requirements) – but they have enormous power because they back trillions of dollars in mortgage loans.

It can be easy to get conventional and conforming loans mixed up, so let’s get two things clear:

• When anyone talks about a conforming loan, they’re talking about a conventional loan that meets the guidelines of Fannie Mae or Freddie Mac.
• The vast majority of conventional loans are conforming loans.

Fixed-rate mortgage loans

Thanks to their long-term stability, fixed-rate mortgages are the most popular type of conventional mortgage loans. Specifically the 30-year fixed mortgage, which has been the most popular mortgage in the U.S. for decades.

With a fixed-rate mortgage, you always know what you pay each month. The interest rate stays the same over the life of the loan. You borrow a predetermined amount of money from a lender and pay it back at a fixed interest rate over a fixed period of time. 

Adjustable-rate mortgage loans

With an adjustable-rate mortgage, the interest rate is variable, which means it can go up or down over the life of the loan.

Adjustable-rate mortgages usually offer a lower-than-average, fixed interest rate for the first 3 – 10 years. After that, the rate adjusts based on terms you and your lender agreed to in advance.

Jumbo loans

Jumbo loans are a type of conventional loan for borrowers who want to borrow more money than the limits set by Fannie Mae and Freddie Mac in the area where they are purchasing the property.

For 2023, the highest-value area ceiling loan limit for 1-unit properties is $1,089,300.^[2]If you want a loan above this amount, you’ll need to get a jumbo loan.

How Are Conventional Loans Different From Other Types of Loans?

Conventional loans are different from government-backed loans in a few different ways. The biggest difference is that conventional loans aren’t directly insured by any government programs. 

Conventional conforming loans also have specific loan limits they must follow and more stringent credit and financial requirements than government home loans.

Take a look at the chart to see how requirements differ for each type of loan.

	Conventional	FHA	VA	USDA
Minimum Down Payment	3% and up	3.5% or 10%	0%	0%
Minimum Credit Score	620	580 (for 3.5% down); 500 (for 10% down)	No VA requirement; varies by lender	No USDA requirement; varies by lender
Maximum DTI	43% or less	50% or less	No VA requirement; varies by lender	41% or less
Mortgage Insurance	Not required with a 20% down payment or can be canceled when a borrower reaches 20% equity in their home	Pay mortgage insurance premium (MIP) for the life of the loan with less than 10% down payment or pay MIP for 11 years with 10% down payment or higher	One-time VA funding fee that ranges from 1.4% to 3.6%	1% upfront guarantee fee and a 0.35% annual fee

Conventional loans and government-backed loans are set apart by other requirements. 

For example, FHA and VA loans require the property to be your primary residence. Homes purchased with a USDA loan must be located in a qualifying rural area.

What Are the Benefits of Conventional Loans?

While the use of government-backed loans has grown since 2008,^[3] there are lots of reasons why conventional loans are more popular.

Flexible terms

While FHA loans tend to have 30-year or 15-year terms, conventional mortgage loans allow greater flexibility with the length of a loan.
Borrowers can borrow for any term from 8 – 30 years – they can choose the term that best fits their financial needs.

Mortgage insurance can be canceled

Conventional loans (with less than a 20% down payment) and FHA loans require mortgage insurance, but only conventional mortgages allow you to cancel private mortgage insurance (PMI) once you’ve reached at least 20% equity in your home.

Available for many property types 

You can use a conventional mortgage for many types of property, including second homes, vacation homes or rental properties.

One of the limits of FHA is that they can only be used for primary residences or other properties that meet FHA requirements, such as FHA-approved condominiums or FHA-approved multifamily units.

Higher borrowing limits

In 2023, the FHA loan limit for most areas is $472,030^[4], while the conforming conventional mortgage limit is $726,200^[2]

You’re on the Road to Homeownership

If you qualify for a conventional mortgage, you should be able to get preapproved and begin your homeownership journey.

If you don’t qualify, your mortgage lender can help you figure out if you qualify for a different mortgage that better fits your needs.

Where there’s a will, there’s a way to finance it!