Conventional loans are one of the most popular ways to buy a home in the U.S. While they reward borrowers with strong credit by offering flexibility and lower costs, qualifying for a conventional loan can be difficult if your financial history has a few bumps.
Is a conventional loan the right move for you? Learn what a conventional loan is, the different types available, and the requirements you need to get approved.
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What is a conventional loan?
A conventional loan is a mortgage that is not backed or insured by a government agency. Instead, it is originated and funded by private lenders, such as banks, credit unions, and independent mortgage companies. See our list of the top mortgage lenders.
Because the government doesn’t guarantee these loans, lenders are on the hook for the risk. To minimize that risk, they generally set stricter qualification requirements regarding your credit score and debt-to-income (DTI) ratio compared to government-backed alternatives.
The primary alternatives to conventional mortgages are loans insured by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), and the Department of Agriculture (USDA). These loans generally have lower qualification requirements (including smaller down payments) but come with higher fees and interest rates.
Conventional loans: pros and cons
Are you trying to decide whether a conventional loan is the right choice for you? Here are some advantages and drawbacks to consider.
Pros
- Higher loan limits: In many areas, you can borrow more with conventional loans than with FHA loans.
- Property flexibility: You can use conventional loans for second homes and investment properties.
- Cancellable PMI: You aren’t stuck paying mortgage insurance for the life of your loan.
- No upfront mortgage fee: Unlike FHA (1.75%) and VA (funding fee) loans, conventional loans rarely have an upfront insurance premium added to the balance.
Cons
- Stricter requirements: You’ll need a credit score of at least 620 and a lower DTI ratio to qualify.
- Higher upfront costs: If you don’t qualify for 3% down programs, the minimum down payment is 5%, whereas some government-backed loans require no down payment at all.
- Mandatory PMI: If your down payment is less than 20%, you’d have to pay PMI until reaching 20% equity.
Conforming vs. non-conforming loans: What’s the difference?
Conventional loans typically fall into two main categories: conforming and non-conforming. It’s crucial to understand the difference, as it determines how much you can borrow and the interest rate you’ll pay.
Conforming conventional loans
As the name suggests, this type of loan meets the standards set by Fannie Mae and Freddie Mac, the two government-sponsored enterprises that buy mortgages from lenders. The most important guideline here is the loan limit, which is updated annually.
For example, in 2025, the limit for single-family homes in most areas is $806,500.[1] So, if you take out a conventional loan for a $600,000 home, it is considered conforming.
Pros
- Lower interest rates, standardized underwriting, and easier qualification.
Cons
- Strict loan limits; you cannot borrow more than a set cap without switching to a non-conforming loan.
Non-conforming conventional loans
Any conventional loan that does not follow Fannie Mae and Freddie Mac standards is considered “non-conforming.” The most common type is a jumbo loan, which is used to buy luxury homes that cost more than the conforming limit.
Pros
- The ability to purchase properties that do not meet conforming standards (for example, pricier homes).
Cons
- Stricter qualifications, limited availability, and a more rigorous underwriting process.
Conventional loan requirements
Do you have the financial profile to get approved? Here is a quick overview of the main requirements for applying for a conventional loan.
Credit score with a minimum of 620
To qualify for a conventional loan, you typically need a minimum score of 620. Borrowers with lower scores generally cannot qualify for this type of loan and may need to consider an FHA loan instead.
While 620 is the minimum, having a higher score comes with major perks, including lower interest rates and reduced private mortgage insurance (PMI) premiums. Typically, borrowers get the best possible terms once they cross the 720 or even 760 threshold, depending on the lender.
Down payment of at least 3% (depending on what programs you qualify for)
One of the biggest myths in real estate is that you need 20% down. In reality, you can put down as little as 3% if you qualify for specific conventional loan programs, such as:
- HomeReady (through Fannie Mae)
- Home Possible (through Freddie Mac)
- Conventional 97 (backed by Fannie Mae)
If you don’t qualify for these programs, the standard conventional loan down payment requirement for most buyers is 5%.
That said, putting down 20% has a massive benefit: it allows you to avoid paying PMI altogether. Plus, a larger down payment lowers your monthly bill, saves you thousands in interest, and gives you more equity upfront.
Private mortgage insurance (PMI) with less than 20% down
Private mortgage insurance protects lenders if the borrower stops making payments. It is required if you put down less than 20% on a conventional loan and can range from 0.19% to 1.86% of your loan amount annually.
Here’s the good news: PMI is temporary. Lenders typically must automatically cancel PMI if your loan balance drops to 78% of the original home value.[2] Alternatively, you can request the removal yourself once your loan balance reaches 80% of the home’s original value.
Debt-to-income (DTI) ratio around 43%
Lenders also look closely at your DTI—the ratio of how much of your pre-tax income goes toward paying debts, including your future mortgage. The standard maximum for a conventional loan is around 43%, although lenders can go up to 50% if the rest of your application is especially strong.[3]
Property standards
The property you want to buy must pass an appraisal and inspection to be approved for a conventional loan. These loans are more lenient than FHA or VA loans regarding property condition, but the house still has to be livable and safe. Deal-breakers often include things like severe roof damage or a lack of a working bathroom.
Main types of conventional loans
“Conventional loans” is a broad category, and there are many specific loan products within it. Here are the most common types you might encounter:
| Type | Description |
|---|---|
| Fixed-rate mortgage | Your interest rate remains the same for the entire life of the loan (usually 15 or 30 years), providing predictable monthly payments. |
| Adjustable-rate mortgage (ARM) | The interest rate is fixed for an initial period (e.g., 5,7, or 10 years), and then adjusts periodically based on market rates. |
| Jumbo loan | A non-conforming loan for an amount exceeding the FHFA limits, which usually comes with stricter requirements. |
| Low-down-payment loans | Allow qualified borrowers to buy a home with as little as 3% down. |
| Portfolio loan | A loan that a lender originates and keeps in their own portfolio. This allows them to approve some unique situations, such as recent self-employment or non-standard income. |
Conventional loan vs. FHA loan
Choosing between a conventional loan and an FHA loan is one of the most common debates for home buyers.
| Feature | Conventional loan | FHA loan |
|---|---|---|
| Minimum down payment | 3% | 3.5% |
| Minimum credit score | 620 | 580 |
| Mortgage insurance | PMI (ends at 20% equity) | MIP (removed after 11 years if down payment is > 10%). |
| Property type | Primary, secondary, and investment properties | Only primary residence |
| Loan limits | Higher (for example, $806,500 in most areas in 2025). | Lower ($524,225 in low-cost areas). |
🤔 An FHA loan may be a better option for first-time homebuyers or those with a lower credit score or limited savings for a down payment. However, if you have a credit score above 680, a conventional loan could be the smarter financial move because you can eliminate mortgage insurance and lower your monthly costs.
Conventional loan vs. VA loan
If you are an eligible veteran, active-duty service member, or surviving spouse, choosing a VA loan may be the best option.
| Feature | Conventional loan | FHA loan |
|---|---|---|
| Minimum down payment | 3% | 3.5% |
| Minimum credit score | 620 | 580 |
| Mortgage insurance | PMI (ends at 20% equity) | MIP (removed after 11 years if down payment is > 10%). |
| Property type | Primary, secondary, and investment properties | Only primary residence |
| Loan limits | Higher (for example, $806,500 in most areas in 2025). | Lower ($524,225 in low-cost areas). |
🤔 The VA loan wins hands down for most veterans thanks to 0% down and zero PMI. However, a conventional loan is the only choice if you are buying a second home or an investment property.
Start with a conventional loan unless you qualify for special programs
If you can qualify for a conventional loan and have enough of a down payment, it's generally the most cost-effective route to take with getting a mortgage—and that's why it's such a popular loan type. It comes with less fees and competitive rates. That said, if your financial profile is more complicated or you qualify for a program that allows a lower down payment, that might be the better play for you. Always consult closely with your lender and financial advisor to get the best picture of which loan product is the best for your situation.
Disclaimer: The information provided in this article is for informational purposes only. It is not intended as legal, financial, investment, or tax advice, and should not be relied upon as such. Consult a licensed financial advisor or tax professional regarding your personal financial situation before making any decisions.