Conventional Loans

The Ultimate Guide to Conventional Loans: Everything You Need to Know

When shopping for a mortgage, one of the most common options you'll come across is a conventional loan. These loans are widely available and offer various benefits, but they also come with certain requirements. Understanding how they work can help you determine if a conventional loan is the right choice for you.

What is a Conventional Loan?

A conventional loan is a mortgage that is not backed or insured by the U.S. government. These loans are offered by banks, credit unions, and online lenders, making them the most popular type of mortgage in the market.

Unlike government-backed loans such as FHA, VA, or USDA loans, conventional loans typically have stricter qualification requirements, including a higher credit score and a larger down payment. However, they also provide greater flexibility, such as allowing lower down payments and accommodating larger loan amounts.

How Does a Conventional Mortgage Work?

To qualify for a conventional loan, borrowers must meet certain financial and credit requirements, including:

• Minimum Credit Score: 620
• Debt-to-Income (DTI) Ratio: 45% (exceptions up to 50%)
• Minimum Down Payment: 3% for fixed-rate loans, 5% for adjustable-rate loans
• Loan Limit: $806,500 for most of the U.S.; up to $1,209,750 in high-cost areas

If you put down less than 20%, you will be required to pay private mortgage insurance (PMI), which typically costs between 0.46% and 1.5% of the loan amount per year. The good news? PMI payments can be canceled once your loan-to-value (LTV) ratio reaches 80%.

Types of Conventional Loans

Conventional loans are divided into two main categories:

1. Conforming Loans

These loans adhere to the Federal Housing Finance Agency (FHFA) guidelines, meaning they meet specific credit, loan size, and other requirements. The loan limit for a conforming loan is $806,500 in most parts of the country. If a loan meets these standards, it can be purchased by Fannie Mae or Freddie Mac, which helps keep mortgage rates competitive.

2. Nonconforming Loans

If a loan does not meet the FHFA’s requirements, it is classified as a nonconforming loan. One example is a jumbo loan, which exceeds the conforming loan limits and is typically used for high-value properties.

Another type of nonconforming loan is a non-qualified mortgage (non-QM). These loans cater to borrowers who may not meet traditional lending criteria, such as those with irregular income streams or lower credit scores.

Comparing Conventional Loans to Government Loans

Minimum Credit Score

• Conventional Loan: 620
• FHA Loan: 580 (or 500 with 10% down)
• VA Loan: No set minimum
• USDA Loan: No set minimum

Minimum Down Payment

• Conventional Loan: 3%
• FHA Loan: 3.5%
• VA Loan: 0%
• USDA Loan: 0%

Mortgage Insurance

• Conventional Loan: Required if less than 20% down (can be canceled)
• FHA Loan: Required (cannot be canceled unless refinanced)
• VA Loan: No mortgage insurance required
• USDA Loan: Requires guarantee and annual fees

Loan Purpose

• Conventional Loan: Primary, secondary, investment
• FHA Loan: Primary only
• VA Loan: Primary only

Pros and Cons of Conventional Loans

Pros:

✅ Lower Down Payment Requirement – You can qualify with as little as 3% down, using savings, gifts, or grants. ✅ PMI Can Be Canceled – Unlike FHA loans, you can eliminate PMI once you reach 80% loan-to-value. ✅ Flexibility – Use it for a primary residence, second home, or investment property with either a fixed or adjustable rate.

Cons:

❌ Higher Credit Score Required – You’ll need at least 620 to qualify. ❌ Potentially Higher Interest Rates – Some borrowers may find slightly better rates with government-backed loans. ❌ Stricter Financial History Review – If you’ve had a bankruptcy (2-4 year wait) or foreclosure (3-7 year wait), you’ll face stricter approval requirements.

Is a Conventional Loan Right for You?

A conventional loan is a great choice if you have good credit, stable income, and a reasonable down payment. It offers flexibility, lower costs in the long run, and no mortgage insurance requirements once you reach 20% equity. However, if you have a lower credit score or minimal savings, an FHA, VA, or USDA loan may be a better fit.

Before deciding, it’s always a good idea to compare loan options.
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