What Is a Conventional Loan?

What Is a Conventional Loan?

A conventional loan is a type of mortgage that isn't guaranteed or insured by the government. In other words, conventional loans are originated, backed and serviced by private mortgage lenders like banks, credit unions and other financial institutions.

Conventional loans are broken down into conforming and non-conforming loans:

• Conforming loans: Mortgages that conform to guidelines set by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac), the two government-backed mortgage companies that own many mortgages in the U.S.
• Non-conforming loans: Mortgages that don't meet the standards set by Fannie Mae and Freddie Mac. These are often jumbo loans, portfolio loans or loans that exceed the maximum amount set by the Federal Housing Finance Agency (FHFA) based on the average home price in a given market.

Broadly speaking, it may be more difficult to qualify for a conventional loan than a government-backed mortgage. You may need to meet higher credit score or down payment requirements, for example. More on that next.

Learn more: What Type of Mortgage Loan Is Best?

How a Conventional Loan Works

Conventional loans are backed by private lenders. To understand more about how they work, here are some general characteristics to know:

• Credit score requirement: It's possible to get approved for a conforming conventional loan with a credit score as low as 620, although some lenders may look for a score of 660 or better.
• Debt-to-income requirement: Your debt-to-income ratio, or DTI, measures what percent of your income goes toward paying your debts each month. In general, a conventional loan may require that applicants have a DTI below 43%, though some lenders may allow for as high as 49%, depending on other pieces of a borrower's application.
• Down payment requirement: You can find conventional mortgage loans with a down payment requirement as low as 3%, and some lenders have special programs that offer up to 100% financing. However, if you don't put down 20% or more, the lender typically requires you to pay private mortgage insurance.
• Loan amounts: Conforming conventional loans go as high as $806,500 for single-family homes in 2025 ($1,209,750 if you live in a designated high-cost area). If you want a bigger loan than that, you'll need a jumbo loan.
• Loan terms: Conventional loans are typically repaid over a 30-year term, but it's possible to qualify for a 15- or 20-year conventional mortgage loan. Opting for a shorter loan term can help you save significant money on interest over the life of the loan.
• Interest rates: You can get a fixed-rate loan or an adjustable-rate loan. Your interest rate will largely depend on your credit score and overall credit history. The better your credit is, the less you'll pay in interest over the life of the loan.

Learn more: The Complete Guide on How to Get a Mortgage

How Is a Conventional Loan Different From a Government-Backed Loan?

Government-insured mortgage loans have special features that can make them a good fit for certain homebuyers. Here's a quick summary of each option and who might consider it:

• FHA loans: An FHA loan is guaranteed by the Federal Housing Administration and is open to applicants with credit scores as low as 500 if you have a 10% down payment, or 580 if you have a 3.5% down payment.
• VA loans: A VA loan backed by the U.S. Department of Veterans Affairs doesn't require a down payment or mortgage insurance, but is designed only for select members of the military community, their spouses and other beneficiaries.
• USDA loans: USDA loans backed by the U.S. Department of Agriculture have no down payment requirement and can help low- to moderate-income homebuyers who want to purchase a home in an eligible rural area.

Note that while these loans are insured by various government agencies, in most cases it's private lenders that offer them to borrowers—the same lenders that also offer conventional loans.

If you're trying to decide between a conventional loan and a government-insured loan, the right one for you depends on your financial situation. While government-backed loans offer perks if you don't have great credit or a sizable down payment, qualifying for one is not always easy. Additionally, you may save more money with a conventional loan if you have good credit or can put more money down. Compare the different options and their benefits and drawbacks to find the right loan program for you.

Types of Conventional Loans

There are several types of conventional loans that you may come across as you compare lenders and mortgage options. Here's a breakdown of some of the most common ones and how they work.

What Are the Advantages of a Conventional Loan?

There's no right mortgage loan for everyone, so it's important to know both the benefits and drawbacks of each of your options before you choose. Here are some of the benefits you'll get from a conventional loan:

• Low costs: A high credit score can help you qualify for a low interest rate. Plus, you can request to have the insurance requirement removed once your loan-to-value ratio (LTV) reaches 80%. In contrast, the mortgage insurance premium that comes with an FHA loan may remain for the life of the loan.
• Higher loan limits: While conforming loans do have limits, you can go even higher with jumbo conventional loans if you need to. You may not get that kind of flexibility with government-insured loans.
• Flexibility for some: Private mortgage lenders have more flexibility with conventional loans than they do with government-insured loans, primarily because they don't need to follow the guidelines set by those government agencies.

What Are the Downsides of a Conventional Loan?

Along with some of the benefits of getting a conventional loan over a government-backed one, there are also some disadvantages to consider:

• Higher credit score requirements: You typically need credit scores of at least 620 to qualify for a conforming conventional loan, which is higher than what some government-backed loans require.
• Higher down payment requirements: Some conventional loan programs allow you to put down 3% or even nothing at all if you're a first-time homebuyer, but expect to pay 5% after that. In contrast, FHA loans require a minimum down payment of 3.5%, and USDA loans and VA loans have no down payment requirement at all.
• Stricter qualifying guidelines: Government-insured mortgage loans place less risk on the mortgage lender, so it may be easier to qualify for one of those, as long as you meet the agency's eligibility requirements. With a conventional loan, on the other hand, your personal financial situation may be scrutinized more closely because the lender is taking on more risk by originating the loan.

How to Qualify for a Conventional Loan

If you've decided that a conventional loan is right for you, here are steps to qualifying for one:

1. Check your credit score. Before you do anything else, it's important to know where your credit stands. You can check your FICO^® Score^☉ for free with Experian to learn where your credit lands now. If your credit score is 620 or higher, you'll have a chance to get approved for a conforming conventional loan. And if it's in the mid- to upper-700s, you'll have a better chance of qualifying for favorable terms on your new loan.
2. Save for a down payment. While many conventional loans don't require a big down payment, the more money you put down, the better your chances of qualifying for a lower interest rate.
3. Check your debt-to-income ratio. In addition to reviewing your credit score, lenders will look at your DTI. Lenders typically want to see that your total monthly debts are no more than 36% of your monthly gross income. Lenders may stretch their required DTI to 43% or higher in some cases, but the maximum Fannie Mae and Freddie Mac will allow for conforming loans is 50%. If you have time, take steps to reduce your DTI, such as paying down credit cards.
4. Research mortgage lenders. Take some time to look at different mortgage lenders, including what rates they're offering, how the application process works and whether you can do it online. Try to find at least three to five lenders you like before applying.
5. Get preapproved. A mortgage preapproval is a letter from a mortgage lender effectively agreeing to lend you up to a certain amount of money to buy a home, as long as you meet certain conditions. During this process, the lender or broker will let you know whether you need to make other changes to improve your eligibility to buy a home.

Learn more: How to Get Preapproved for a Mortgage

Next Steps

Once you have a preapproval letter in hand, start the house-hunting process. And keep in mind that you're not married to the mortgage lender that provided your preapproval letter. In fact, it's a good idea to apply with multiple lenders to compare rates and terms.

When you are shopping for the best rates and submit mortgage applications at several lenders, do so within a short time period—typically 15 to 45 days. That way the credit scoring models will roll those applications into one credit inquiry on your credit report, which minimizes damage to your credit score.

The mortgage process can take a long time from start to finish, but taking each step carefully can help you get the best deal for your situation.