What is a Conventional Loan?

What Is a Conventional Loan?

• Conventional loans are mortgages not backed by government agencies, like FHA or VA loans.
• These loans require at least a 620 credit score and offer adjustable terms with competitive interest rates for strong-credit borrowers.
• Down payments can be as low as 3%, but private mortgage insurance (PMI) is required if less than 20% is put down.
• Loan amounts are capped by Fannie Mae and Freddie Mac, with most counties limited to $806,500 for single-family homes in 2025.
• Conventional loans work for primary homes, second homes, and investment properties, with options for fixed-rate or adjustable-rate mortgages.

Introduction

A conventional loan is a home loan from a private lender that is not backed by any government agency. Most U.S. homebuyers choose this loan type. In 2023, about 73% of homebuyers selected conventional loans, according to Census data. These loans offer varied terms and can be used for primary or secondary residences. Understanding how conventional loans operate helps borrowers make informed financial decisions.

Conventional Loans In The United States

Conventional loans are home loans issued by banks or lenders without government backing. The rules governing these loans come from the lenders rather than government bodies. They are popular in the U.S. but typically require excellent credit and sufficient savings. Conventional loans offer more options and fewer restrictions than government-backed loans. Two main categories exist:

• Conforming Loans: Follow Fannie Mae and Freddie Mac guidelines, including loan limits.
• Non-Conforming Loans: Such as jumbo loans, exceed standard limits and have stricter requirements.

Definition And Key Features Of Conventional Loans

Conventional loans come from private lenders and do not receive government support. Borrowers generally need a credit score of 620 or higher. Loan terms typically range from 15 to 30 years. Down payments can start at 3%, but PMI is required until 20% equity is reached. The Federal Housing Finance Agency sets loan limits, with $806,500 being typical for most single-family homes in 2025. Higher limits apply in certain areas with expensive housing markets. Conventional loans can finance primary homes, second homes, or investment properties. Qualifying requires meeting credit, income, and down payment standards.

Unlike government-backed mortgages (FHA, VA, USDA), conventional loans require stronger credit and larger down payments but offer better interest rates and the ability to remove PMI after building equity.

Differences From Government-Backed Loans

• FHA Loans: Lower credit scores accepted (as low as 500) with a minimum 3.5% down payment; require mortgage insurance for the loan’s life unless refinanced.
• VA Loans: Available for military personnel and spouses; no down payment or mortgage insurance required.
• USDA Loans: For rural buyers with income limits.

Conventional loans have no geographic restrictions but require higher credit scores and stricter debt limits.

Types Of Conventional Loans Available

Conventional loans include:

• Conforming Loans: Follow Fannie Mae and Freddie Mac rules; loan limits apply ($806,500 in 2025 for most single-family homes).
• Non-Conforming Loans: Include jumbo loans that exceed conforming limits and require higher credit scores and down payments. Portfolio loans are also non-conforming and offer lenders more discretion.

Consulting a mortgage lender helps determine the best loan type based on personal financial situations.

Conforming vs. Non-Conforming Loans

• Conforming Loans: Comply with FHFA rules and loan limits.
• Non-Conforming Loans: Exceed limits; viewed as higher risk with stricter qualification criteria.

Fixed-Rate vs. Adjustable-Rate Conventional Loans

• Fixed-Rate Mortgage: Same interest rate and monthly payment throughout the loan term (e.g., 15 or 30 years).
• Adjustable-Rate Mortgage (ARM): Lower initial rate that adjusts after a fixed period (e.g., a 5/1 ARM fixes for five years and then adjusts annually). Useful if planning to move or refinance before rate changes.

Who Typically Chooses A Conventional Loan?

Ideal for borrowers with steady income, strong credit, and low debt relative to income. Offers low interest rates and flexible loan terms.

Ideal Borrower Profiles

• Minimum credit score of 620.
• Good credit history for favorable rates.
• Steady income and employment.
• Debt-to-income ratio under 45%.

Common Uses For Conventional Loans

• Buying a primary residence.
• Purchasing a second home or vacation property.
• Financing investment properties for rental income.
• Accessing home equity for repairs or other expenses.

Guide To Getting A Conventional Loan

Start by evaluating financial status. Use mortgage calculators to estimate monthly payments. Compare options online or with banks. Prepare documentation and ensure eligibility to streamline the process.

What You Need To Get Started (Documentation, Credit Requirements, Down Payment)

Required documents include proof of identity, residence, income, employment, and credit history. Credit score usually must be at least 620. Down payment amounts vary; some lenders accept as low as 3%. Being prepared with paperwork speeds processing.

Application Process Overview

• Choose a lender and compare offers.
• Submit the loan application and documents (pay stubs, bank statements, tax returns).
• Lender reviews the credit report and verifies information.
• Home appraisal determines property value.
• Loan approval, signing, and closing follow successful review.

Application Steps

• Review your credit score and fix issues if needed.
• Gather required documents.
• Compare lenders’ rates and terms.
• Submit the application and await the lender’s decision.

Conclusion

Knowing the types and features of conventional loans helps buyers choose appropriate financing. Gathering necessary documents and assessing finances in advance eases the loan process and supports confident decision-making.

Frequently Asked Questions

What Is The Minimum Credit Score Needed For A Conventional Loan?

At least a 620 credit score is required. Higher scores lead to better terms and lower rates.

Do I Need A 20% Down Payment For A Conventional Loan?

No. Down payments can be as low as 3%, but PMI is required if under 20% until equity reaches that threshold.

How Do Conventional Loan Limits Work?

Loan limits are set by the Federal Housing Finance Agency. In 2025, most single-family homes qualify for loans up to $806,500. Loans exceeding this are jumbo loans with stricter rules.

Can First-Time Homebuyers Get Conventional Loans?

Yes. First-time buyers can put down as little as 3% and benefit from conventional loan options if they meet credit and income requirements.

Written by Kent Baker Updated June 2, 2025 by Albert Fang