Thinking of Buying a House? Conventional Loans Explained!

There are many different types of mortgages, and conventional loans are a popular option for many homebuyers. This guide will explain conventional loans and whether they might be a good fit for you.

What’s a Conventional Loan Mortgage?

What does conventional mean? If we define a conventional loan, it is any mortgage that is not insured or guaranteed by the government. It’s money you borrow from a bank to pay back over time. Unlike some other home loans, the government isn’t involved here. Instead, mortgage insurance companies step in to protect the bank in case you can’t pay your loan back anymore.

What is the role of Fannie Mae and Freddie Mac? 

These companies are like giant banks that buy bundles of mortgages in the secondary market, sort them based on risk (like credit scores, loan-to-value ratios, etc.), and then sell them to investors as “mortgage-backed securities.” This allows banks to reinvest in generating more loans because they get their money back quickly. 
This is why lenders deny your loan when your scenario or documentation does not conform to Fannie Mae or Freddie Mac guidelines: They can’t recuperate their money until you refinance or sell the house.

Is a Conventional
Loan a Conforming

A conventional loan is a broader category than a conforming loan. All conforming loans are conventional loans, but not all conventional loans are conforming loans. Most conventional loans are called “conforming loans” because they follow specific rules set by Fannie Mae and Freddie Mac. However, there are other conventional loans that are not conforming, like Jumbo loans, Bank Statement loans, and DSCR loans. 

What Are The Different
Terms Of A
Conventional Loan? 

Conventional loans have a variety of terms, including 10, 15, 20, 25, and 30 years.  The shorter your loan term, the lower your interest rate should be. But your monthly payment will be higher because you’re paying off the same loan amount in a shorter time. 
Conventional loans are also available as fixed-rate, adjustable-rate, conforming, jumbo, and non-qualifying mortgages. 

How to Get a Mortgage: Conventional Loan Requirements

Just like any other mortgage, conventional loans have specific requirements you’ll need to meet. Here are some of the main things lenders look for:


Generally, a score of 620 or higher is required for a conventional loan, but a higher score can mean a lower interest rate.


The minimum down payment for a conventional loan is usually 3%, but putting down more can improve your chances of getting approved and lower your monthly payments.

Income and employment:

Lenders want to see that you have a steady income and can afford the monthly mortgage payments. They will typically look at your pay stubs, tax returns, and employment history.

Debt-to-income ratio (DTI):

This ratio compares your total monthly debt payments to your gross monthly income. A lower DTI shows lenders you have more room in your budget for a mortgage payment.

Down Payment Requirements.

The amount of money you need to put down upfront for a conventional loan depends on a few things:

First-time Homebuyer:

You might be able to snag a house with as little as 3% down payment, but this only applies if your income is at or below 80% of the average income in the area you want to buy (called the Area Median Income or AMI). If you don’t qualify for the 3% option, you’ll need at least 5% to put down.

Second-time Homebuyer:

If you’ve bought a house before, the minimum down payment is 5%, but FHA is still 3.5%

Multi-Unit Property:

As of November 8th, 2023, you can buy a duplex, triplex, or fourplex to live in yourself with only a 5% down payment (previously 15%)!

Vacation Home:

 If you’re buying a house that won’t be your primary residence, you’ll need at least a 10% down payment.

Investment Property:

Investors looking to buy a rental property must make a minimum 20% down payment.

What is PMI? 

When you get a conventional loan with a down payment less than 20%, there’s an extra insurance your lender might need called PMI, which stands for Private Mortgage Insurance. PMI is insurance that protects the lender in the event of borrower default.

Is Private Mortgage Insurance the same as Mortgage Insurance Premium? 

Mortgage Insurance can be called Private Mortgage Insurance (PMI) when used for Conventional loans, and Mortgage Insurance Premium (MIP) when used for FHA loans.

The Cost of PMI

PMI is usually added to your monthly mortgage payment, so it’s important to factor that cost in when budgeting for your new home. The cost of PMI depends on a few things:

Loan Type:

Are you buying a house (purchase) or refinancing your current mortgage? Is your interest rate fixed or adjustable (ARM)? The loan type can affect the PMI cost.

Credit Score:

A higher credit score typically means a lower PMI premium.

Down Payment:

The bigger your down payment, the lower the PMI cost (or you might not even need it!).

PMI Bottom Line: 

The good news about PMI is that when you have 20% equity, all you need to do is call your mortgage company and request an appraisal. If the home value comes at 80% loan to value, you can say goodbye to your PMI, and it is time to celebrate! You can also pay off your loan until you reach 22% equity, and then your mortgage company will automatically remove PMI from your mortgage loan. 

Conventional Loan Interest Rates: The Power of a High Credit Score

Your credit score plays a significant role in determining your eligibility for a conventional loan. Generally, a minimum score of 620 is required. However, when comparing a conventional loan vs an FHA loan, borrowers with a lower credit score than 720 usually elect to do an FHA loan. 

Alternative Loans for Lower Credit Scores

It’s important to consider alternatives for borrowers with credit scores below 720. While conventional loans offer many benefits, their interest rates can become less attractive for those in this range. FHA loans, insured by the Federal Housing Administration, are designed to be more accessible to borrowers with lower credit scores. 

Factors That Influence Interest Rates: 

The specific rate you qualify for will depend on your individual circumstances. Here are some key factors that influence your conventional loan interest rate:
Credit Score: Borrowers with higher credit scores than 720 generally receive better conventional loan rates.
Down Payment:  A larger down payment (more than 20%) can lead to a more favorable interest rate.
Loan Type: Interest rates can vary slightly depending on the type of conventional home loan you choose (fixed-rate vs. adjustable-rate).
Loan Term: The length of your loan (typically 15 or 30 years) can also affect the interest rate. Use our conventional loan calculator to see the difference. 
Debt-to-Income Ratio (DTI): The maximum approval DTI ratio is 50%. However, a lower than 36% and also 43% DTI generally improves your interest rate by attracting more lenders to compete for your loan.

Conforming Loan Limits 

In 2023, the conforming loan limit for conventional loans was $726,200. The Federal Housing Finance Agency (FHFA) sets this limit based on its House Price Index, which increases as home prices rise. 

What are the Conforming Loan Limits 2024?

On January 1, 2024, the conforming loan limit increased to $766,550 in most of the U.S. In high-cost areas, it increased from $1,089,300 to $1,149,825. 

Conforming loans are mortgages that fall within the conforming loan limit. Mortgages that exceed the limit are considered Jumbo loans. Jumbo loans have higher interest rates. 

Exploring Different Types of Mortgage Options

Jumbo vs Conventional Loan

There are maximum loan amounts for conforming loans depending on the type. These limits are set by Fannie Mae and Freddie Mac, which buy mortgages from lenders and influence loan standards. If your loan amount exceeds the conforming loan limit for your area, it’s considered a jumbo loan. Jumbo loans may have stricter qualifying requirements and potentially higher interest rates compared to conforming loans.

VA Loan vs Conventional Loan

While both conventional and VA loans can help you finance your home purchase, they have distinct eligibility requirements and benefits. Let’s explore the key differences
Conventional Loans: Open to anyone with a qualifying credit score, debt-to-income ratio, and down payment.
VA Loans: Exclusive benefit for veterans, active-duty service members, and eligible surviving spouses.
Conventional Loans: Typically require a minimum down payment of 3%, although it can vary depending on loan type and credit score.
VA Loans:  Offer the significant advantage of requiring no down payment at all.
Conventional Loans:  If your down payment is less than 20%, you’ll likely need private mortgage insurance (PMI).
VA Loans: Don’t require mortgage insurance, regardless of your down payment amount.
Conventional Loans: No upfront fees associated with the loan itself.
VA Loans: The program charges a funding fee to offset its cost to taxpayers. The fee varies based on your down payment, loan purpose (purchase or refinance), and how many times you’ve used your VA loan benefit.

Bottom Line Between Conventional and VA Loans.

VA Loans: Restrict property usage to your primary residence. You cannot use them for second homes or investment properties.

Generally speaking, VA loan interest rates are substantially lower than Conventional loan interest rates. The only drawback to a VA loan is the funding fee, but the Department of Veteran Affairs waives if you receive compensation for service-connected disabilities.

FHA vs Conventional Loan: 

Bottom Line Between Conventional and VA Loans.

VA Loans: Restrict property usage to your primary residence. You cannot use them for second homes or investment properties.

Generally speaking, VA loan interest rates are substantially lower than Conventional loan interest rates. The only drawback to a VA loan is the funding fee, but the Department of Veteran Affairs waives if you receive compensation for service-connected disabilities.

FHA vs Conventional Loan: 

Choosing between an FHA loan vs conventional loan depends on your financial situation. Let’s break down the key difference between FHA and Conventional to help you decide:
Conventional Loans: Generally require a credit score of at least 620 for approval, but they will not make financial sense to you when compared to an FHA or VA loan unless the credit score is above 720.
FHA Loans: Offer easier qualification with a minimum credit score of 500 (with a 10% down payment) and 580 (with a 3.5% down payment). However, most lenders require a 620 score. 
Conventional Loans: Typically require a minimum down payment of 3%, but may vary depending on loan type and credit score. Most people put 5% down or more. 
FHA Loans: Allow a lower minimum down payment of 3.5%.
Conventional Loans: Private mortgage insurance (PMI) is required if your down payment is less than 20%. PMI can be removed once you reach 20% equity in your home. The cost depends on your credit score, loan to value, and DTI. 
FHA Loans: Require mortgage insurance premiums, which last the entire loan term if your down payment is less than 10%. The annual cost is 0.55% of the loan amount regardless of credit score, and DTI. The cost decreases to 0.5% if you put 5% down or more. 

Bottom Line Between FHA Mortgage vs Conventional Loan

If you have a strong credit score (above 720) and sufficient savings for a 5% down payment or more, a conventional loan might be ideal. If your credit score falls below 720 or you have a limited down payment, an FHA loan can be a good option. However, be aware of the ongoing mortgage insurance costs.

The Bottom Line

Conventional loans might be a good fit if you have a strong credit score and a down payment saved. However, it’s wise to research other loan options, and consult a mortgage professional for personalized guidance. 

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