What Is a Conventional Loan?
A conventional loan is a mortgage from a private lender that is not insured by a government agency such as the Federal Housing Administration, Veterans Affairs, or the Department of Agriculture.
Conventional loans come in two types: conforming or nonconforming.
Requirements for a conforming loan are set by the government. The primary requirement is a maximum loan amount. Lenders can sell mortgages that conform to these requirements to Fannie Mae and Freddie Mac, which are government-sponsored enterprises. Doing so allows lenders to free up resources to make more home loans to more people.
Nonconforming loans do not meet the requirements. Usually, nonconforming loans are for more money than the conforming loan limits, and also are known as jumbo loans. Lenders are free to establish their own requirements for nonconforming loans, so eligibility requirements and pricing vary widely.
How does a conventional mortgage work?
A conventional loan is, like most mortgages, used to buy or refinance a home. The loan is a contract stating that the lender will advance money for the borrower to buy a home, and the borrower will repay the loan — along with interest — following a regular schedule of payments. If the borrower fails to pay as agreed, the lender can foreclose on the loan and sell the property to recoup its costs.
Lenders offer a range of conventional mortgage rates, repayment terms, and other features that depend on the specific lender, the property, and the borrower’s financial situation and personal preferences. They are prohibited from discriminating against borrowers based on race, color, religion, national origin, sex, marital status, age, or participation in income assistance programs. By law, mortgage approval decisions must be based on factors such as credit history, income, and existing debts.
The interest rate offered on a conventional mortgage depends on several factors, including the borrower’s credit score and down payment. The mortgage interest rate is important in determining the total cost to borrow.
The primary characteristic of conforming loans is they are within the Federal Housing Finance Agency’s maximum loan amount. The FHFA sets a limit each year for home loans throughout the United States. A higher limit is set for certain counties where market prices for homes are more expensive.
Fannie and Freddie also set eligibility standards that borrowers must meet for a loan to conform, including maximum debt-to-income ratio and minimum credit score requirements. Individual lenders may have other requirements for a conventional loan and request additional documentation from applicants.
Conforming loan limits in 2023
Here are the FHFA conforming loan limits for 2023:
FHFA Conforming Loan Limits in 2023
|1 Unit||2 Units||3 Units||4 Units|
|High-Cost Area Limit||$1,089,300||$1,394,775||$1,685,850||$2,095,200|
The FHFA’s website shows a map of the counties with the high-cost limit.
Example of how conforming loan limits work
The conforming loan limit depends on both the number of units and whether the area you’re buying in has higher costs. You can use the table above to determine the limit based on those factors for the home you’re thinking about purchasing.
To remain conforming, the amount you borrow must be below the limit. It’s important to note that this is the amount of the loan, not the value of the home. For example, in a typical area, you can buy a one-unit $800,000 home with a conforming loan so long as your down payment is at least $73,800, because that will keep your total loan to $726,200 or less.
Keep in mind that making a down payment of less than 20% on a conforming loan will likely mean paying for private mortgage insurance.
What if my loan is over the conforming limit?
If your loan is over the conforming limit, you have a few options.
The first option is to get a nonconforming loan. These loans have no limit on how much you can borrow. Instead, the amount you can borrow depends on your credit and ability to repay, with the specifics up to the lender.
Another option is 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 make a larger down payment to get your primary mortgage amount under the loan limit. You also can use a piggyback loan to avoid paying for PMI.
For example, if you want to buy a $900,000 home in a typical area but only have $90,000 to put down, you would need a loan of $810,000 to afford it. That’s more than the conforming limit of $726,200. You could apply for a mortgage of $720,000 and get a piggyback loan of $90,000, if qualified. That lets you offer a $180,000 down payment to get your primary mortgage amount below the conforming limit.
Lenders set their own terms for nonconforming loans, and they vary significantly.
Many nonconforming loans fall into the category of jumbo loans. These can go up to $2 million, though borrowers need good credit and a large down payment to qualify.
Some nonconforming loans are geared toward people with poor credit, and may come with higher interest rates and risky features. For example, they might require less documentation to verify the borrower’s income, or allow borrowers to only pay interest on the mortgage.
Other nonconforming loans are niche programs designed for borrowers with unusual circumstances, or mortgages of any size that don’t belong to another category.
Because nonconforming loans can be risky, the Consumer Financial Protection Bureau advises borrowers to consult multiple lenders and to look into FHA loans or conforming loans before committing to this type of mortgage.
Conventional Loan Requirements in 2023: How Do You Qualify?
Lenders go through a detailed review process when approving mortgages. Below are some of the most important conventional mortgage requirements:
Eligibility Requirements for a Conforming Conventional Loan
|Credit Score||At least 620.|
|Debt-to-Income Ratio||50% or less (36% for manually underwritten loans; 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.|
|Down Payment||At least 3% of the home’s purchase price.|
|Property||Single-family homes, condos, second homes, investment properties.|
A credit score is a number that represents how well a borrower has repaid their debts and managed their credit. Using the FICO system, most credit scores range between 300 and 850. Borrowers need a credit score of at least 620 to qualify for a conventional loan. Individual lenders may have additional conventional loan requirements.
Credit Score Ranges
|Poor||350 to 579|
|Fair||580 to 669|
|Good||670 to 739|
|Very Good||740 to 799|
|Exceptional||800 to 850|
Your debt-to-income ratio is a percentage calculated by adding up your monthly debt obligations and dividing the sum by your total monthly income before taxes and other deductions are taken out.
Conventional mortgage requirements allow for a maximum DTI ratio of 50%. If you earn $5,000 per month before taxes, for example, then your monthly debt payments should take up less than $2,500 of your income.
For manually underwritten loans, the maximum DTI ratio is 36%, or 45% if the borrower can meet additional credit score and reserve requirements.
You can use our DTI ratio calculator to determine your number.
Income and assets
Lenders look at your total income to determine whether you can afford the monthly mortgage payment. There’s no minimum income requirement to get a conventional mortgage, but it’s easier to get approved if you can show a steady income.
The more income history you have, the better. Most lenders will want to see recent pay stubs, and some might want to see income histories going back a year or more. This is especially true if you’re self-employed. In that situation, expect to provide income or profit and loss records from at least the last two years.
Lenders also evaluate your assets to figure out whether you can afford to continue making your mortgage payments in the event of a financial emergency, like a job loss. These assets include checking accounts, savings accounts, certificates of deposit, individual retirement accounts, 401(k) accounts, stocks, bonds, and mutual funds.
Conforming loans require borrowers to make a down payment. The minimum down payment is as low as 3% of the purchase price for fixed-rate loans on single-unit homes. The minimum is higher for homes with more units, adjustable-rate mortgages, and specific types of refinances, like cash-out-refinances.
Minimum Down Payment Requirements
|Transaction Type||Number of Units||Minimum Down Payment|
|Purchase or limited cash-out refinance||1||3% for fixed-rate loans, 5% for adjustable-rate loans|
|3 or 4||20%|
Remember, buyers who put down less than 20% of the home purchase price typically must pay for PMI.
A larger down payment reduces both the amount you need to borrow to buy a home and the size of your monthly payment. If you’re struggling to get approval for a mortgage, saving up a larger down payment can help. Putting down more money also may get you a lower interest rate.
Because the property secures the mortgage, the home itself is an important factor in getting approved for a loan. Properties that are eligible for conventional financing include single-family homes, condos, townhouses, and co-ops.
Lenders typically order an independent appraisal to determine how much a property is worth, and therefore how much they will lend you to buy it. The home appraisal helps decide whether the mortgage will remain within the FHFA limits for a conforming loan, as well as how much of a down payment is required to get the loan and avoid paying PMI.
Advantages and Disadvantages of Conventional Loans
While conventional loans are the most common type of mortgage, they aren’t the best option for everyone. Weigh the pros and cons when shopping around.
Advantages of a conventional mortgage
- Lower total cost. Conventional mortgages often are the most affordable option for homebuyers who have good credit and a down payment of 10% to 15%. One way to compare costs is using 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 you’ll receive from your lender.
- Widely available. You can find a conventional loan through most major banks, credit unions, and other types of lenders.
- Some flexibility in terms. When choosing a conventional loan, you can select a longer or shorter loan term, or a fixed-rate or adjustable-rate mortgage.
- No PMI 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%.This helps you save money on your mortgage.
Disadvantages of a conventional mortgage
- Stricter credit score requirement. Conventional loans generally require a higher credit score when compared with mortgages backed by government programs, so it can be more difficult to qualify.
- 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 payments 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. FHA loans tend to be cheaper for borrowers with lower credit scores and less saved up. 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. FHA Loans
|Conventional Loan||FHA Loan|
|Minimum Down Payment||3%||3.5%|
|Minimum Credit Score||620||500|
|Insurance Required?||Private mortgage insurance, if putting less than 20% down||Mortgage insurance, including an upfront premium and a monthly premium|
Conventional loans vs. VA loans
VA loans are available only to eligible service members, veterans, and their surviving spouses. This type of loan is made by private lenders and insured by Veterans Affairs.
Compared to conventional mortgages, VA loans can be more affordable and easier to get for borrowers who qualify. The VA doesn’t have a minimum credit score requirement, and borrowers often don’t need to put any money down. 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. VA Loans
|Conventional Loan||VA Loan|
|Minimum Down Payment||3%||No minimum down payment|
|Minimum Credit Score||620||No minimum credit score; depends on lender|
|Insurance Required?||Private mortgage insurance, if putting less than 20% down||No mortgage insurance, but a one-time VA funding fee|
Conventional loans vs. USDA loans
The Department of Agriculture offers loans for low-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 minimum down payment requirement, which means they can be a good option for qualified borrowers with little savings.
Conventional Loans vs. USDA Loans
|Conventional Loan||USDA Loan|
|Minimum Down Payment||3%||No minimum down payment|
|Minimum Credit Score||620||No minimum credit score, though a score of 640 or higher is best|
|Insurance Required?||Private mortgage insurance, if putting less than 20% down||No mortgage insurance, but an upfront guarantee fee and an annual guarantee fee|
How To Get a Conventional Loan
You can find a conventional loan by working directly with a lender or mortgage broker, and use our loan comparison tool to help you compare mortgage offers.
Shopping around is essential. Though the details like loan limits and down payment minimums hold true regardless of the lender you choose, interest rates and fees can vary. Getting multiple quotes can help you find the best deal on a loan and save money.
If you’re in the market to buy a home, it’s a good idea to take stock of your financial situation. Look at your income, expenses, assets, and debt. Think about ways you can adjust your budget to accommodate homeownership or help you save for a down payment. Also take the time to check your credit score and work to improve it if at all possible.
Now also is a good time to get pre-qualified for a loan. This is a basic process that gives you an idea of the mortgages you might qualify for, including the maximum loan amount and monthly payment.
Once you’re ready to start touring homes and making offers, get mortgage preapproval. This is a more involved process than pre-qualification and involves a greater amount of paperwork. However, it gives you a more precise idea of what your loan might look like, shows real estate agents and home sellers that you’re a serious buyer, and sets you up for the final mortgage application.
Conventional Loan FAQ
Check out the answers to some frequently asked questions about conventional mortgages.
Conventional loans and FHA loans fit different niches. FHA loans are insured by the Federal Housing Administration and usually are targeted at people who need loans with low down payment requirements and closing costs, as well as easier qualification. Conventional loan requirements are slightly stricter. However, you can stop paying for PMI once you have 20% home equity. FHA loans can require mortgage insurance payments for 11 years or the full term of the loan.
The primary drawback of a conventional loan is that you need to meet all the eligibility requirements, including DTI ratio, income, and loan amount requirements. That might limit your ability to buy certain homes with a conventional loan.
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.
The Bottom Line on Conventional Loans
Conventional mortgages are the most affordable type of loan for qualified borrowers in many cases. If you have a solid financial foundation, then a conventional loan can deliver a lower interest rate and more-affordable fees. If that doesn’t sound like you, or if you’re a veteran or rural borrower, consider an FHA, VA, or USDA loan as an alternative mortgage option to buy your ideal home.
Rory Arnold and T.J. Porter contributed to the reporting of this article.