What Is a Conventional Loan?
Conventional loans are mortgages offered by private lenders and are not backed by a government agency. They come in two types: conforming and nonconforming.
Conforming loans meet Federal Housing Finance Agency requirements, which include a maximum loan amount and a minimum 3% down payment. Conforming loans also require borrowers to meet minimum credit score and maximum debt-to-income ratio standards.
Lenders can sell conforming conventional loans to Fannie Mae or Freddie Mac, which are government-sponsored enterprises. Selling the loans reduces the lenders’ risk in case of default and allows them to use the proceeds from the sale to offer more mortgages.
Nonconforming loans fail to meet FHFA requirements in some way, usually by exceeding the conforming loan limit. Often called jumbo loans, nonconforming mortgages are used mostly to buy more expensive homes. With no government requirements to meet, lenders carry all the risk on these loans and are free to set their own requirements for borrowers.
Conforming Conventional Mortgages
Conforming conventional loans meet FHFA requirements, the most important of which for most borrowers is the maximum loan amount. A baseline maximum loan limit applies to most areas of the United States, with a high-cost limit applying in areas where homes are more expensive. The FHFA posts on its website a map showing where the high-cost limit applies.
Borrowers may use a conforming loan to buy a home with one to four living units.
FHFA Conforming Loan Limits for 2024
|High-Cost Area Limit
It’s important to note that the conforming loan limit applies to how much you borrow — not the value of the home or its purchase price.
For example, you can buy a one-unit $800,000 home with a conforming loan as long as your down payment is at least $33,450 to keep your loan amount below the $766,550 baseline limit.
You also could get a “piggyback” loan, which is a second mortgage, home equity loan, or home equity line of credit that you take out alongside your first mortgage. You can use these loans to reduce how much you borrow on your primary mortgage so it’s under the loan limit.
Say you wanted to buy a $900,000 home in a baseline area. If you have $90,000 for a down payment, you would need a loan of $810,000, which exceeds the conforming loan limit. But if you get a piggyback loan for $90,000 and put that toward your down payment, it would reduce the amount you need to borrow on your primary loan to $720,000, which meets the conforming loan limit. The trade-off is you would have two mortgage payments each month.
Conforming loans also set a maximum debt-to-income ratio and a minimum credit score requirement that borrowers must meet. Individual lenders may set requirements of their own.
Borrowers who may not have enough income or a high enough credit score to qualify for a conforming conventional loan may want to consider conventional loans backed by Fannie Mae and Freddie Mac that are designed to make homeownership more affordable to more people.
Conventional Mortgage Options for Low-Income Borrowers
|Minimum Down Payment
|Fannie Mae 97% LTV Standard
|• At least one borrower has to be a first-time homebuyer.
• No income limits.
• Mortgage insurance required.
|Fannie Mae HomeReady
• Not limited to first-time homebuyers.
• Income cannot exceed 80% of the area median.
• Mortgage insurance required if your loan-to-value ratio exceeds 90%.
|Freddie Mac Home Possible
• Intended for very-low- to low-income borrowers.
• Income cannot exceed 80% of the area median.
• Not limited to first-time homebuyers.
Nonconforming Conventional Mortgages
Lenders set their own terms for nonconforming loans, and they vary significantly.
Most nonconforming loans fall into the category of jumbo loans. These loans exceed the conforming loan amount up to about $2 million. Borrowers need good credit and a large down payment to get a jumbo loan.
Since nonconforming loans can’t be sold to Fannie Mae or Freddie Mac, lenders take all the risk on these loans and often charge higher interest rates to compensate.
Other nonconforming loan types are designed for borrowers with unusual circumstances or are mortgages of any size that don’t belong to another category.
Conforming Conventional Loan Requirements in 2024: How Do You Qualify?
Lenders conduct a detailed review process called underwriting when processing mortgage applications to ensure borrowers can afford the loan and meet all its requirements.
Minimum down payment
Conforming loans require borrowers to make a down payment. The minimum down payment is 3% of the purchase price for fixed-rate loans on single-unit homes. The minimum is higher if you choose an ARM, or are buying a home with multiple units.
Minimum Down Payment Requirements
|Number of Units
|Minimum Down Payment
|3% for fixed-rate loans, 5% for adjustable-rate loans.
|3 or 4
A larger down payment reduces both the amount you need to borrow and your monthly payment. If you’re struggling to get approval for a mortgage, a larger down payment can help. Putting down more money also can get you a lower interest rate on your loan.
What is private mortgage insurance?
Private mortgage insurance compensates your lender for its losses if you default on your mortgage.
If you’re taking out a conventional loan and your down payment is less than 20%, your lender will require you to pay for PMI. This coverage is arranged by your lender but provided by private insurers.
Keep in mind that PMI increases the cost of your mortgage payment and benefits only the lender in case of foreclosure. As a result, many borrowers try to avoid PMI by making a larger down payment.
Minimum credit score
A credit score is a number that represents how well a borrower has repaid their debts and managed their credit. Using the FICO system, credit scores range between 300 and 850, with higher scores indicating better credit than lower ones. Borrowers need a credit score of at least 620 to qualify for a conventional loan.
Individual lenders may have additional conventional loan requirements.
Maximum debt-to-income ratio
Your debt-to-income ratio shows how much of your gross monthly income is taken up by your minimum monthly debt obligations.
Conforming loan requirements allow for a maximum DTI ratio of 50%. If you earn $8,000 per month before taxes then your monthly debt payments — including your projected mortgage payment — should total no more than $4,000.
For manually underwritten loans, the maximum DTI ratio is 36%. That limit increases to 45% if the borrower meets additional credit score and reserve requirements.
Calculate your DTI ratio by adding up your monthly debt obligations, dividing the sum by your gross monthly income, and multiplying by 100. You also can use our free DTI ratio calculator.
Income and assets
Lenders review your income to determine whether you can afford the monthly payment on a mortgage. There’s no minimum income requirement to get a conforming conventional mortgage, but approval is easier if you can show a steady income.
If you’re self-employed, expect your lender to ask for income or profit-and-loss records from at least the last two years.
Lenders also will review financial assets such as your checking and savings account balances, certificates of deposit, individual retirement accounts, 401(k) savings, and any stocks, bonds, or mutual funds you own.
Closing costs are fees that must be paid to originate and fund the loan, as well as transfer legal ownership of the property. Closing costs typically include appraisal fees, loan origination fees, credit reporting fees, title insurance fees, homeowners insurance premiums, property taxes, and more. Expect closing costs to range between 2% and 5% of the purchase price. So, if you’re purchasing a $300,000 home, then expect your closing costs to total between $6,000 and $15,000.
Because the property secures the mortgage, the home itself is an important factor in getting a mortgage. Properties that are eligible for conventional loans include single-family homes, condos, townhouses, and co-ops. The home also must be structurally sound, safe to occupy, and have a roof with at least two years of functionality left. The home also must be accessible by roads that meet local legal requirements.
Lenders typically order an independent appraisal to determine how much a property is worth. The home appraisal estimates the property’s fair market value using, in part, recent sales prices for similar nearby properties. Your lender will use the appraisal to confirm that the principal you’re asking to borrow is appropriate relative to the value of the home.
Eligibility Requirements for a Conforming Conventional Mortgage
|At least 620.
|50% or less for automated underwriting. For manual underwriting, the limit is 36%, though that can be increased to 45% for borrowers who meet other requirements.
|Income and Assets
|Enough income and assets to cover your monthly mortgage payments, even in the event of a financial emergency.
|At least 3% of the home’s purchase price.
|Single-family homes, condos, townhouses, second homes, investment properties.
Advantages and Disadvantages of Conventional Loans
While conventional loans are common, they aren’t the best option for everyone. Weigh the pros and cons when shopping around for a mortgage.
Advantages of a conventional mortgage
- Lower total cost. A conventional mortgage often is the most affordable option for homebuyers with good credit and a down payment of 10% to 15%. One way to compare loan costs is by looking at the loan’s annual percentage rate, which represents the annual cost of interest and fees. Your APR is listed on Page 3 of the loan estimate your lender provides you three business days after receiving your mortgage application.
- Widely available. You can apply for a conventional loan at most major banks, credit unions, and other types of lenders.
- No PMI is required with a 20% down payment. Paying mortgage insurance is mandatory for all FHA loans, but you can avoid PMI on a conventional loan if you put down at least 20%.
Disadvantages of a conventional mortgage
- Stricter credit score requirement. Conventional loans generally require a higher minimum credit score compared with mortgages backed by government programs.
- Higher down payment requirement. To get a conventional loan, you need a down payment of at least 3%. Some government-backed loans allow borrowers to make a smaller down payment or no down payment at all.
- PMI requirement. You can expect PMI to cost $30 to $70 per month for every $100,000 you borrow. If you can’t afford to put down 20%, then PMI will be an additional expense to pay until you reach 20% equity in your home.
Alternatives to Conventional Loans
If a conventional loan isn’t right for you, there are other types of mortgages out there. These include government-backed loans, such as:
Conventional loans vs. FHA loans
Conventional loans are often less expensive for those who have good credit and a sizable down payment. Loans backed by the Federal Housing Administration tend to be cheaper for borrowers with a lower credit score and down payment. An FHA loan is easier to get, which means it’s a good option for first-time homebuyers, but making a larger down payment with a conventional loan likely will save you money in the long run.
Conventional loans vs. VA loans
Veterans Affairs loans are available only to eligible military service members, veterans, and their surviving spouses. This type of loan is made by private lenders and insured by the Department of Veterans Affairs.
Compared to conventional mortgages, VA loans can be more affordable and easier to get for borrowers who qualify. VA loans have no minimum credit score requirement, and no minimum down payment. VA loans also don’t require mortgage insurance, unlike FHA loans and some conventional loans, though borrowers must pay a one-time VA funding fee.
Conventional loans vs. USDA loans
The U.S. Department of Agriculture offers loans for low- and mid-income borrowers who want to buy a home in an eligible rural area.
Compared to conventional loans, USDA loans limit how funds can be used and require borrowers to meet income eligibility standards. Borrowers also must pay an upfront guarantee fee and an annual guarantee fee. However, USDA loans have no down payment requirement, which means they can be a good option for qualified borrowers with little savings.
Conventional Loans vs. FHA Loans vs. VA Loans vs. USDA Loans
|Minimum Down Payment
|No minimum down payment.
|No minimum down payment.
|Minimum Credit Score
|500, with 10% down payment; 580, with 3.5% down payment.
|No minimum credit score; depends on lender.
|No minimum credit score, though a score of at least 640 is recommended.
|PMI required if putting less than 20% down.
|Mortgage insurance, including an upfront premium and a monthly premium.
|No mortgage insurance, but a one-time VA funding fee is required.
|No mortgage insurance, but an upfront guarantee fee and an annual guarantee fee are required.
How To Get a Conventional Loan
If you’re just starting your homebuying journey, take stock of your finances. Apply for mortgage pre-qualification to get an informal idea of how much you can expect to borrow. Think about how you can adjust your budget to accommodate homeownership or help you save for a down payment.
You can find a conventional loan by working directly with a lender or mortgage broker.
Shopping around is essential. Though the details like loan limits and down payment minimums apply regardless of lender, interest rates and fees will vary. Getting multiple quotes can help you find the best deal on a loan and save money. You also may use a free loan comparison tool to help you compare mortgage offers.
When you’re ready to tour homes and make offers, get mortgage preapproval. This gives you a more precise idea of what your loan might look like and shows real estate agents and home sellers that you’re a serious buyer.
Once you’ve found a home you like and the seller has accepted your offer, it’s time to get official loan approval from a lender. Here are some of the documents you’ll likely be asked to provide:
- Bank statements for checking and savings accounts.
- Pay stubs.
- W-2 or 1099 forms.
- List of debts.
- Investment account statements.
- Social Security card.
- Proof of identification.
- Down payment gift letters, if applicable.
By law, mortgage approval decisions must be based on factors such as the borrower’s credit history, income, and existing debts. Lenders are prohibited from discriminating against borrowers based on race, skin color, religion, national origin, sex, marital status, age, disability, or participation in income assistance programs.
You’ll receive a loan estimate within three business days of submitting your application. This document will explain in detail the loan the lender is offering you. You must tell the lender you’re accepting the offer to proceed.
Three days before closing, you’ll receive a closing disclosure, which will include all the final terms and costs associated with your loan. You accept those terms when you sign the loan documents at closing, after which the loan is funded, legal ownership of the property is transferred to you — and you now own a home.
FAQ: Conventional Loan Requirements and Benefits in 2024
Check out the answers to some frequently asked questions about conventional mortgages.
Conventional loans and FHA loans fit different niches. FHA loans usually are better for borrowers with lower credit scores and who can make only a small down payment. Conventional loan requirements are stricter. FHA loans also require mortgage insurance payments for either 11 years or the full term of the loan. With a conventional loan, you usually can stop paying for PMI as soon as you have more than 20% equity in your home.
The primary drawback of a conventional loan is that you need to meet stricter eligibility requirements and there is a maximum loan amount for conforming mortgages.
Conventional loans typically are not difficult to get. They’re the most common type of mortgage out there, with more than 70% of homebuyers using them.