What is a Conventional Loan?

Conventional loans are mortgage loans offered by private lenders, banks, and institutions that are not backed by the government. Unlike FHA, USDA, or VA loans, which are backed by government programs, conventional loans usually require larger down payments and better credit scores to qualify.
Types Of Conventional Loans
Conventional loan rates and terms vary based on the lender you choose to borrow from, but there are two basic categories: conforming and non-conforming.
Conforming
Conforming loans are regulated by Fannie Mae and Freddie Mac, which are mortgage investing companies created by the federal government to create stability and liquidity in the U.S. housing market.
Fannie Mae and Freddie Mac place restrictions on the amount of money you can borrow and on the property’s eligibility for the loan. In 2020, for example, the conforming conventional loan limit for an Illinois single-family loan is $510,400.
Non-Conforming
There are several types of non-conforming loans, including government-backed loans and portfolio loans.
- Government-backed options include the FHA, VA, and USDA loans. These loans have unique benefits and advantages that incentivize and support home-buyers.
- Other non-conforming loans are decided on by private lenders willing to grant loans that don’t fall Fannie Mae or Freddie Mac regulations. These loans might exceed the conventional loan limit (called jumbo loans) or allow borrowers to get a mortgage for a property that doesn’t meet conventional qualifications.
Government-backed loans have strict eligibility requirements. Other non-conforming loan options are determined by private lenders and vary based on their risk tolerance and on your financial history.
Qualifications For Conventional Loans
Since the housing crisis in 2008, lenders have tightened restrictions on qualifying for conventional loans. Here’s how to qualify for a conventional loan:
Credit Score
You will most likely need a credit score of at least 620 to qualify for a conventional loan. The better your credit (often at 740 or higher), the less money you’ll have to put down.
What is the minimum down payment on a conventional loan?
The minimum down payment requirement for conventional loans is around 3% but can be as high as 20%. Down payment requirements vary based on your financial history and the type of property you want to buy. If you’re buying a second home or a property with more than one unit, for example, your down payment will be higher.
Does a conventional loan require PMI (private mortgage insurance)?
If you put down less than 20% as a down payment, you’ll be paying private mortgage insurance, which protects the lender if you default on your loan. PMI rates vary from .55% to 2.25% of the total home cost but take your credit and financial history into consideration as well.
Debt-to-Income
To ensure that you can make your monthly mortgage payments, lenders look for a maximum debt-to-income (DTI) ratio. For conventional loans, the DTI can’t be any more than 50%, which means that your total debt can only be half the amount of your total income or less.
Documentation
- Proof of Income: A lender will ask to see all the necessary documents to show your financial health and history. This includes pay stubs, tax documents, proof of income and assets, and employment verification. This documentation helps them determine the risk associated with lending you money, demonstrates your debt-to-income ratio, and verifies that you can pay for a down payment and closing costs.
- Credit and Background Checks: Prepare to have documents on hand necessary for credit and background checks, including your driver’s license, Social Security number, and other forms of identification.
Conventional Loans Rates
Conventional loan interest rates change every day, but they are consistently lower than interest rates for FHA loans. Lenders also determine your interest rates based on your credit history and financial situation.
How long does it take to close on a house with a conventional loan?
On average, it takes between 35 and 47 days to close on a house with a conventional loan. Keep in mind that closing times vary depending on other factors like price negotiation and inspections conducted by the buyer and lending company.
Benefits Of Conventional Loans
Choosing a conventional loan depends primarily on your financial situation and the type of property you want to buy. Here are some of the key benefits to consider:
Mortgage Insurance Control
Conventional loans allow you to avoid the additional monthly PMI costs, whether it’s by making a down payment greater than 20% or by asking your lender to remove PMI once you’ve paid down more than 20% of the house. By contrast, the FHA loan requires mortgage insurance throughout the duration of the loan. If you want to get out of mortgage insurance, you will have to refinance out of the FHA loan, which will cost thousands of dollars in fees.
Choice Of Loan Terms
The most common loan terms are for either 15 or 30 years for both conventional and government-backed options. However, if you’re taking out a conventional loan, lenders might consider alternate terms, such as 10-year or 20-year loans.
Property Types
Conventional loans are available for property types that aren’t covered by other loan options, such as vacation homes or properties in need of major rehab.
Conventional Loans vs. Government Loans
Whether you choose a conventional or government-backed loan depends on what works best for you. While conventional loans offer more variety in loan terms and property types, each government option has unique benefits to consider.
Conventional vs. FHA: Which Is Better?
While conventional down payment requirements run as low as 3%, that rate is only offered to borrowers with excellent credit scores and high savings. The FHA loan allows a 3.5% down payment to buyers with lower credit scores.
One drawback to the FHA is the mandatory mortgage insurance that lasts the lifetime of the loan. With a conventional loan, you can avoid PMI by putting 20% or opt out of it once you have substantial equity in the property.
Conventional vs. VA Loans for Veterans
VA loans are offered to veterans and active-duty military by the U.S. Department of Veteran Affairs. Even if you qualify, a VA loan only applies to property that will serve as your primary residence, so you can’t use it for a vacation home or investment property.
One benefit to the VA loan is that it doesn’t require mortgage insurance. Although there is a VA funding fee required before closing, you’ll save money compared with the PMI payments on conventional loans.
Considering Conventional vs. USDA Loan
The USDA offers loans that come with low interest rates and don’t require down payments. However, they only apply to designated properties in “rural” areas and don’t cover second homes or investment properties. If you fall in a low or moderate-income bracket, the USDA loan can offer you lower payments than conventional loans on a property you plan to use as your primary residence.
Choosing a Conventional Loan
Conventional loans require higher credit scores and higher down payments than government-backed options like the FHA or VA loan. However, they allow you to opt out of mortgage insurance and can apply to properties that wouldn’t qualify for government options. If you’re willing to make a higher down payment, the conventional loan offers you a higher degree of flexibility for your loan terms and financial planning.
Lock in a Great Low Rate Today!
This page last updated: March 21, 2022
Read more on this topic below.

Mortgage insurance is something millions of homeowners pay for each year. However, this type of insurance does not protect the...

When you first set out to buy a home, it can feel like you’re taking an exam you forgot to study for. You have to make quick...

Buying a home can be a challenge for a lot of people. Between the credit score requirements, debt to income ratios, and down...

Modular homes, also known as prefabricated homes, have come a long way in recent years. As technology continues to...

Interested in buying a new construction home? Good for you! The ability to influence the final outcome of the home is a...

If you’re preparing to buy a home, you have likely already read up on what kind of documentation is needed to...

When looking to buy or refinance a house, the pre-qualified vs pre-approved mortgage debate can be...

Some homebuyers refuse to purchase a property if it is part of a property owner association. On the...

If you are falling behind on your monthly mortgage payments or are concerned that you may not be able to make...

REO, or real estate owned, properties can be a great investment. The value of REO foreclosures makes these...

Rental properties are one of the best and prevalent investments in the real estate world. From providing stellar tax...

Buying a foreclosed home can be a great opportunity when it’s done correctly. You could end up with a...

When it comes to property ownership, there are several ways that people can hold titles. Tenancy in common (TIC) is...

Research indicates that 58% of homeowners in HOA communities and single-family homes pay an average monthly fee of $250....

People buy their homes for a number of reasons. Affordability, stability, and comfort are some of the most...

Many people choose to purchase an existing home to live in, but maybe your dream is slightly different. Perhaps your...

Loan originators are the people who help you find a loan that suits your financial needs. They work for banks,...

What is a 5/1 ARM loan? When it comes to different financing types, you can score for buying or refinancing homes....

A home doesn’t just fall into foreclosure status. There are stages and processes that take place behind the scenes before...

It’s very likely that your mortgage loan will be the largest loan you have during your lifetime. Mortgages are not a one...

Seller concessions, sometimes referred to as seller contributions, are made during the purchase of a home. They are...

Realizing you might not be able to pay your upcoming mortgage payments can be stressful. Whether your source of income has...

For many people, owning a home is part of the American dream. To make this dream a reality, most people will need to take...

Whenever you’re looking to buy a house, you’ll quickly realize there are a lot of fees associated with obtaining a mortgage....

Have you decided this is the year to buy a new home? Good for you! When you begin your research for the right mortgage loan for you, you’re...

A bridge loan is a short-term loan a borrower may use while a more long-term financing contract is finalized. Bridge...

Just imagine how life-changing it would be if there were a friendly, knowledgeable professional on your side...

There’s a lot of expenses to keep in mind when you’re thinking about buying a home. Between the price of the home, property taxes, your mortgage...

Most of us are aware of the difference between single-family homes and large apartment buildings, but what...

A home equity loan is a loan option that enables homeowners to borrow money based on how much equity they have built up in their home. If you...

For homeowners and prospective homebuyers alike, few documents carry as much legal weight as the house deed. But if you’re...

In the mortgage community, the term “jumbo loan” is used to describe a mortgage that exceeds the limit established by the Federal Housing Authority...

A loan estimate gives you the opportunity to know the details of the mortgage before you accept and compare offers from different lenders to...

There are many moving parts and various people you’ll deal with throughout the process of purchasing a...

If you’re looking to buy a house, and do not have a mountain of cash saved up, you’ll need to consider getting a mortgage to help you finance this...

Of all the moving pieces of the puzzle that makes up the home-buying process, the mortgagee clause is one that’s often easy to forget,...

If you’ve been thinking of selling your house or buying a new property recently, odds are you’ve probably heard the...

Considering the complexities of today’s real estate market, many potential buyers are asking themselves,...

With low-interest rates and minimal upfront payments, the USDA loan is an excellent option for low- and moderate-income buyers interested in rural...

What is an ARM, and how does it work? Here, we’ll discuss the ins and outs of adjustable-rate mortgage options and see if an...

Your Debt-To-Income ratio, or “DTI” for short, is essentially all of your monthly debt payments divided by your monthly gross income. DTI is...

If you find a property that you’re highly interested in buying but are concerned that the seller might choose...

If you’re buying a home, it’s nearly impossible to avoid hearing someone talk about escrow. This may be a foreign word as it’s...

Fannie Mae is a government sponsored enterprise (GSE) that makes homeownership possible for millions of Americans. If you’re interested in buying a...

In times of economic hardship, like the present economic events caused by the COVID-19 pandemic, many homeowners...

Freddie Mac is a government-sponsored enterprise (GSE), which the congress created in 1970. The original...

When you’re in the process of buying a home, you’ll often work with a single real estate agent who will...

You finally found your dream home. You’re already envisioning what color to paint the kitchen and turning that room on the main floor into...

Private Mortgage Insurance, or “PMI” for short, is the type of insurance that you may be required to pay with a mortgage loan.

Insurance offers financial protection, helping you in times of need. One excellent and necessary type of insurance is property and...

Buying a home? You’ll likely need to get it appraised before you receive the clear to close. If you’re wondering...

The vast majority of mortgage loans require you to put down a certain percentage of the selling price upfront....

If you’re an active service member, a veteran, or the spouse of a veteran, and you want to purchase a home...

In today's day and age, there are a lot of reasons why homeowners are looking for new mortgage...

Purchasing a condominium is a home purchase; however, condo financing differs from conventional...

There’s no doubt, COVID-19 changed the world in countless ways and took us all by surprise. From an...

Whenever you are borrowing money, whether it’s for a mortgage, credit card, or car loan, you’ll hear the terms...

When purchasing your dream home, the first question you should ask yourself is, “How much can I afford?” From there, it’s also wise...

If you have gone through the preapproval process but need to take a deeper dive into how much house to buy,...

Buying a house is one of the most important investments you will ever make. Your home will be your safe place and your sanctuary from...

Owning a home is an investment. Like any investment, a house has an opportunity to appreciate or...

Buying a home can be more difficult if you have a low yearly income or have trouble saving up the money...

Whenever you apply for a new mortgage, you’ll be required to provide the lender with what seems like an...

One of the most important parts of preparing to buy a home is having a solid credit score. Building up your credit over time...

Whether you’re a first-time buyer or you’ve purchased a home before, you’ve likely heard of a homeowner’s association....

Shopping for a mortgage is one of the most challenging and arduous parts of purchasing your home. During this...

While it’s exciting to put in an offer on a home and have it accepted, it’s by no means the end of the...


Owning a home has always been part of the American dream. The desire to purchase a home has been exacerbated by COVID-19...

If you’re new to buying a home, you probably have quickly realized the overwhelming amount of options there...

No one ever buys a home expecting to go delinquent on their mortgage payment. However, various economic and financial...

If you’ve already gone through the lengthy process of writing offers, securing financing, and arranging inspections for your...

One of the most important steps to buying a home is deciding on a mortgage loan and deciding on a loan involves settling on a good...

FHA and conventional loans are the two most popular loan options available to nearly every buyer. While it’s...

One of the biggest challenges of purchasing a home is saving up enough money for the down payment. Despite...

First time home buyers are often surprised when they learn about all of the expenses that are associated with ...

In addition to other costs associated with homeownership, property taxes have to be paid to state and/or...

Purchasing real estate is not as simple as finding the right home, submitting an offer, and signing the closing paperwork; many...