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What is a conventional mortgage?

These home loans are not insured by the government

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When you are ready to buy a home, you may have two main options for financing: a conventional mortgage or a government-backed loan. Conventional mortgages are available through private lenders like banks, credit unions and mortgage companies. These loans also tend to require higher credit scores and larger down payments, but can offer more flexibility in loan amounts.

Here’s what you need to know about choosing a conventional mortgage for your home purchase.

Key insights

  • Conventional mortgages allow for some flexibility because you can buy an investment property or second home with it.
  • Conventional mortgages have a minimum 3% down payment, but you will have to pay private mortgage insurance with less than 20% down.
  • Some nonconventional loan types, like USDA and VA loans, have no minimum down payment.

Conventional home loan types

A conventional loan can be either conforming or nonconforming, depending on whether it meets Federal Housing Finance Agency (FHFA), Fannie Mae and Freddie Mac requirements.

Here is what you need to know about the different types of conventional home loans.

  • Conforming: These must meet FHFA, Fannie Mae and Freddie Mac requirements. Each year, the maximum loan limit changes based on the housing market and the area. Some states, like Hawaii and Alaska, have higher limits. Conforming loans are the most popular mortgage type.
  • Nonconforming: These loans do not meet the requirements to be acquired by Fannie Mae or Freddie Mac. It is common for investment properties or second homes to be nonconforming loans.
  • Jumbo:Jumbo loans are a type of nonconforming loan for higher-priced homes that exceed the maximum loan limit. To be eligible for a jumbo loan, you need good credit and a large down payment.

Fixed-rate vs. adjustable-rate mortgages

ARMs typically come with a lower interest rate that is fixed for three to five years before the loan’s rate fluctuates.

Whichever loan type you go with, you may have the option between a fixed-rate loan and an adjustable-rate mortgage (ARM). With a fixed rate, your interest rate stays the same for the duration of the loan, which means your monthly payments remain the same. Typically, fixed-rate loans come in 15- or 30-year terms, but some lenders might offer other options.

ARMs, on the other hand, have a fixed rate for a specific time and then an interest rate that can fluctuate over time based on market conditions. This means your monthly payment can go up or down. For example, if you choose a 5/1 ARM, for the first five years you will have a fixed interest rate, and then your interest rate will be adjusted each year afterward.

» MORE: How much house can I afford?

Conventional mortgage requirements

Requirements differ slightly by lender for conventional mortgages. However, most conventional mortgage lenders have these eligibility standards:

  • Credit score: You want a credit score of at least 620 — or 680-plus for jumbo loans.
  • Debt-to-income (DTI) ratio: Your DTI ratio should be at 50% or lower.
  • Down payment: These loans require at least 3% down, although this can vary by the lender, your profile as an applicant and the loan type. Putting down 20% helps you avoid private mortgage insurance (PMI).
  • Proof of income: You should have at least two years of documentation proving stable income (e.g., tax returns, W-2s, pay stubs, bank statements).
  • Loan amount: The amount of a conventional loan can’t exceed the maximum conforming loan limit, which is set each year by the FHFA.

» MORE: What credit score is needed to buy a house?

What’s the difference between conventional loans and government-backed loans?

Overall, government-backed loans are less risky for lenders than conventional mortgages because the government guarantees them. As a result, borrowers may have an easier time qualifying. They tend to have lower requirements for credit score, DTI ratio and down payments.

Government-backed mortgages are designed for specific purposes, and they don’t fit every borrower. Let’s see how a conventional mortgage compares with different types of government-backed mortgages.

FHA loans, backed by the Federal Housing Administration, allow for lower credit scores and a smaller down payment, making them attractive for first-time homebuyers or those with less-than-perfect credit.

For borrowers with a credit score above 580, you can put 3.5% down, but if you have a credit score between 500 and 579, you will need to put 10% down.

FHA loans do not come with PMI but instead a mortgage insurance premium (MIP) that remains for at least 11 years.

A VA loan is a mortgage option backed by the U.S. Department of Veterans Affairs available to service members, veterans and eligible surviving spouses.

VA loans offer advantages such as no down payment, no mortgage insurance and potentially lower interest rates.

A USDA loan is a zero-down-payment mortgage offered by the U.S. Department of Agriculture for eligible rural and suburban homebuyers.

USDA loans are designed to help low- and moderate-income families become homeowners and offer benefits like 100% financing, low interest rates and reduced mortgage insurance premiums, but they do come with certain geographical and income restrictions.

Pros and cons of conventional loans

In general, conventional mortgages have fewer restrictions than government-backed loans — even if some of the requirements are stricter for borrowers. Lenders have more flexibility with conventional loans because they set their own eligibility standards.

“If you have a robust credit score and can afford a solid down payment, a traditional mortgage offers more flexibility and potentially lower costs over time,” said Gagan Saini, director of acquisitions at JiT Home Buyers in Metairie, Louisiana.

Consider these advantages and disadvantages of conventional mortgage loans before making your choice.


  • Flexibility: Conventional mortgages can be used for investment properties or second homes.
  • Possibly cheaper: If you have a high credit score and a large down payment, you could get a lower interest rate with a conventional loan.
  • No mortgage insurance: If you put 20% or more down, you can avoid PMI.


  • Stricter requirements: Lenders generally want to see a higher credit score and income and a lower DTI ratio.
  • Down payments: Some government loan types, such as VA and USDA loans, don’t require a down payment.
  • Higher closing costs: Conventional loans can come with higher closing costs and don’t always offer as much payment assistance for lower-income buyers as VA or USDA loans.

» MORE: How to buy a house

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    What are the interest rates for conventional mortgages?

    Interest rates for conventional mortgages vary based on market conditions and your personal financial situation. You can check daily mortgage rates to get an idea of which rate you might get. Those with higher credit scores generally receive lower interest rates.

    What is the process of obtaining a conventional mortgage?

    When you are ready to buy a house, start by getting preapproved. This will allow you to better understand your budget and what type of rate to expect. You will then find a property and make an offer. Once your offer is accepted, the loan process will move forward with a home appraisal and the Closing Disclosure.

    Can I refinance a conventional mortgage?

    Yes, you can refinance a conventional mortgage at any time. Refinancing might allow you to obtain a lower interest rate, change your loan term or take cash out of your equity. Remember, refinancing is not a quick or cheap process, so make sure you understand the closing costs to see if a refinance is worth your time.

    Bottom line

    A conventional mortgage is the most common type of mortgage in the industry and offers flexibility with loan amounts, down payments, term lengths and interest rates. If you have good credit, low debt and a healthy income, a conventional mortgage is often a good choice.

    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. Consumer Financial Protection Bureau, “Conventional loans.” Accessed Aug. 27, 2023.
    2. Consumer Financial Protection Bureau, “What are Fannie Mae and Freddie Mac?” Accessed Aug. 27, 2023.
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