What Are Conventional Loans?
A conventional loan is one of the most common types of home financing options available to borrowers who have solid credit, stable income, and a manageable debt load. Unlike FHA, VA, or USDA loans, conventional loans are not backed by the federal government. Instead, they are offered through private lenders such as banks, credit unions, and mortgage companies.
Because they are not government-insured, conventional loans give lenders more flexibility to customize terms — but they also require borrowers to meet stricter qualifications.
Understanding the Basics of Conventional Loans
Definition and Overview
Conventional loans are mortgages that conform to the lending standards set by Fannie Mae and Freddie Mac, two government-sponsored enterprises that help stabilize the mortgage market. These loans typically feature fixed or adjustable interest rates, and repayment terms usually range from 10 to 30 years.
How Conventional Loans Differ from Government-Backed Loans
Government-backed loans, such as FHA or VA, come with federal guarantees that protect lenders against defaults. Conventional loans, however, depend solely on the borrower’s creditworthiness. This often means higher credit score requirements but fewer restrictions overall.
Types of Conventional Loans
Conforming vs. Non-Conforming Loans
A conforming loan adheres to the limits set by Fannie Mae and Freddie Mac — for 2025, this cap is around $766,550 in most U.S. counties. Non-conforming (jumbo) loans exceed this amount and are used for luxury or high-value properties.
Fixed-Rate Conventional Loans
These loans feature a consistent interest rate throughout the loan term, offering predictability and stability — ideal for long-term homeowners.
Adjustable-Rate Conventional Loans (ARMs)
ARMs start with a lower initial interest rate that can adjust periodically. They’re great for borrowers planning to sell or refinance within a few years.
Jumbo Loans Explained
For high-value properties exceeding conforming limits, jumbo loans provide financing flexibility but require exceptional credit and larger down payments.
Benefits of Choosing a Conventional Loan
Competitive Interest Rates
Borrowers with excellent credit can enjoy some of the lowest rates available, especially when putting down at least 20%.
Flexible Loan Terms
You can choose repayment terms that match your goals — from 10-year aggressive payoffs to 30-year long-term affordability.
No Upfront Mortgage Insurance
Unlike FHA loans, conventional loans don’t require upfront mortgage insurance premiums, saving you thousands at closing.
Conventional Loan Requirements
Minimum Credit Score and Income
A credit score of 620 or higher is typically required. Lenders also assess income stability through tax returns, W-2s, and employment verification.
Down Payment
While 20% is ideal to avoid PMI, some lenders allow down payments as low as 3% for qualified borrowers.
Debt-to-Income Ratio
Your DTI should generally stay below 43%, though some lenders may allow higher ratios with strong compensating factors.
Loan-to-Value Ratio and PMI
If your LTV exceeds 80%, you’ll need Private Mortgage Insurance (PMI) — which can be canceled once you reach 20% equity.
The Conventional Loan Process Step-by-Step
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Pre-Approval: Get assessed for eligibility and loan amount.
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Application: Submit financial documents and property information.
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Underwriting: Lender evaluates your risk and orders an appraisal.
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Closing: Review final documents, sign, and receive your keys!
Pros and Cons of Conventional Loans
Pros Cons
Lower long-term costs Higher credit requirements
Flexible terms Larger down payments
No upfront mortgage insurance Not government-backed
Cancelable PMI Stricter qualifications
Conventional Loans vs. FHA, VA, and USDA Loans
Conventional loans stand out for flexibility and long-term savings, while government-backed options may suit borrowers with lower credit or limited savings. Learn more about FHA vs Conventional Loans for deeper insight.
FAQs About Conventional Loans
Q. What is the minimum down payment for a conventional loan?
A. As little as 3% for first-time buyers.
Q. Can I get a conventional loan with bad credit?
A. It’s possible, but expect higher rates and stricter terms.
Q. Do conventional loans require PMI?
A. Yes, if your down payment is below 20%, but you can remove it later.
Q. How long does it take to close?
A. Typically between 30–45 days.
Q. Are conventional loans better than FHA loans?
A. For qualified borrowers, yes — they’re cheaper in the long run.
Q. What’s the maximum loan amount?
In 2025, the conforming limit is approximately $766,550 for most counties.
Is a Conventional Loan Right for You?
If you have strong credit, steady income, and a solid down payment, a conventional loan can be your most cost-effective path to homeownership. It offers lower long-term costs, flexible repayment options, and greater control over your financial future.
Apply Now!
For a quicker response, call 888.958.5382
Mortgage-World
Written by: Chris Luis, owner/loan officer for Mortgage-World.com
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Chris Luis covers mortgages and the housing market. Chris Luis has over 20 years experience in the mortgage industry.
