What Is a Conventional Loan?
A conventional loan is a mortgage not insured or guaranteed by the government but backed by private lenders and structured to conform to guidelines set by government-sponsored enterprises like Fannie Mae and Freddie Mac. It’s the most common mortgage type in the U.S., used by about 73% of homebuyers purchasing single-family homes.
Key Features & Borrower Qualifications
- Availability: Offered through banks, credit unions, savings & loans and mortgage brokers.
- Credit requirements: Minimum credit score of about 620; scores above 740 typically secure the best rates and terms.
- Down payment: As low as 3% for qualified borrowers (often first-time buyers); 20% avoids private mortgage insurance (PMI).
- Debt-to-income ratio: Maximum usually up to 45%, offering flexibility compared to many government loans.
- Loan limits: Conforming loan limits vary by county; loans exceeding those limits are “jumbo” and require stricter credit and down-payment criteria.
- Loan terms: Available in fixed-rate or adjustable-rate options, commonly 15- and 30-year terms.
Benefits
- Competitive interest rates for borrowers with strong credit profiles.
- Flexibility to finance primary residences, second homes or investment properties (requirements and rates vary by property type).
- Lower mortgage insurance costs than many government-backed options when PMI is required.
- Wider availability of higher loan amounts and program choices compared to FHA or USDA loans.
Drawbacks
- Stricter eligibility criteria—higher credit score and down-payment requirements—than FHA, VA or USDA loans.
- PMI required if down payment is under 20%, increasing monthly payments.
- Potentially higher costs or tighter rules for condos, manufactured homes or non-owner-occupied properties.
Real-World Examples
- A first-time buyer with a 680 credit score puts down 3% on a $300,000 home and takes a fixed-rate conventional loan with PMI until equity reaches 20%.
- A buyer with excellent credit (740+) makes a 20% down payment on a $500,000 home, avoids PMI and locks in a low fixed rate.
- An investor purchases a two-unit property with a conventional loan at a slightly higher rate due to non-owner occupancy.
- A borrower needs more than the county’s conforming limit and opts for a jumbo conventional loan with a 25% down payment to finance a high-value home.
Summary
Conventional loans serve a broad spectrum of borrowers with adequate credit and financial profiles. They offer competitive rates, loan-term flexibility and multiple program options, but require clear eligibility standards and may involve PMI when down payments are low.
