What is a conventional mortgage?

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by Kevin Payne

Updated June 6, 2024

In a nutshell

Conventional mortgages are home loans that are not insured or guaranteed by the government. They are the most common type of mortgage loan in the U.S.

Conventional mortgages are available with fixed or adjustable interest rates.
A minimum credit score of 620 or higher is typically required to qualify for a conventional mortgage.
Conventional mortgages are classified as either conforming or nonconforming loans, depending on their size.

A conventional mortgage is a type of home loan not backed by a government agency. Three major loan programs from the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA) are guaranteed or insured by the federal government but offered through approved mortgage lenders.

Despite lacking some of the qualifying flexibility that government-backed loans offer, conventional loans remain the most popular type of mortgage among borrowers. According to the 2023 National Association of Realtors (NAR) report on generational trends among home buyers and sellers, 62% of all buyers used conventional loans to finance their homes.

Types of conventional mortgages

Conventional mortgages fall into two categories: conforming and nonconforming loans. Both loan types are options for homebuyers, but conforming loans follow stricter rules than nonconforming loans do.

Conforming loans

Conforming mortgages meet rules set by Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs) that buy and sell most home loans on the secondary mortgage market in the U.S. Conforming loans are popular among homebuyers because they offer lower interest rates, a range of repayment options and down payment requirements as low as 3% in some cases.

When you apply for a conforming loan, lenders evaluate your personal and financial information, including your gross income, monthly expenses, employment history, assets and your credit score and history. You must meet the guidelines Fannie Mae and Freddie Mac have set to qualify for a conforming loan. Some of these conforming loan borrowing requirements include:

Total debt-to-income ratio (DTI) of 45% or less, though a DTI up to 50% is possible in some cases.
A minimum credit score of 620.
A down payment of at least 3%.

Conforming loans have limits on maximum loan amounts set by the Federal Housing Finance Agency (FHFA). These limits are updated annually and are based on where you live. For 2024, the conforming loan limit is $766,550 for most homes but can reach up to $1,149,825 in high-cost areas.

Nonconforming loans

Nonconforming loans are mortgages that don’t fit the requirements for conforming loans. This is usually because they exceed conforming loan limits or the borrower’s credit score is too low to qualify for a conforming loan. You might also need a nonconforming loan if you purchase a property with more than 10 acres of land, generate agricultural income or own property that has other non-standard features. Nonconforming loans usually have higher interest rates because they pose a greater risk for lenders.

Jumbo loans

Jumbo loans are a type of nonconforming loan. Depending on where you live, you can qualify for a jumbo loan for up to $1 million to $2 million. Specific rules and guidelines vary by lender; however, you’ll typically need a higher credit score and minimum down payment amount to qualify.

Learn more: What is a jumbo loan

Fixed-rate loans

Fixed-rate loans are any mortgage loan that features a fixed interest rate for the life of the loan. This means your principal and interest payment will stay the same throughout your loan term. Lenders set the interest rate when you take out the loan.

Adjustable-rate loans

Adjustable-rate mortgages (ARMs) feature a fluctuating interest rate. Often, ARMs start with a lower interest rate during an introductory period that can range from six months to 10 years. After the initial period, the loan enters an adjustment period in which the interest rate can go up or down based on your loan terms and market conditions.

Learn more: Adjustable rate vs fixed rate mortgages: Which is right for you?

How does a conventional mortgage work?

Conventional loans are available through banks, credit unions, mortgage companies and other private lenders. As mentioned, Fannie Mae and Freddie Mac commonly buy conventional loans from these lenders after closing.

A conventional loan may cost less in interest than a government-backed loan but are harder to qualify for. Plus, if you don’t have a 20% down payment on a conventional mortgage, you’ll pay private mortgage insurance (PMI) to offset the lender’s risk if you default on your payments.

Pros:

Flexibility: Conventional loans are available for a range of property types, including primary homes, second/vacation homes and investment properties.
Lower costs: Depending on your credit score and other factors, conventional loans may offer lower interest rates and fees than other loan options.
Availability: Most lenders offer a variety of conventional loans, so there are plenty of shopping options available. However, not all lenders offer FHA, VA or USDA loans, so those might be harder to shop for.

Cons:

Stricter borrowing requirements: Conventional loans typically require a higher minimum credit score than government-backed loans.
More documentation required: Lenders often require more extensive proof of income and assets when you apply for a conventional loan, especially if you’re self-employed or own your own business.
PMI requirement for low down payments: Lenders require you to pay PMI if you put down less than 20% of the home’s purchase price. This coverage protects your lender (not you) from financial loss if you default on the loan. PMI costs 0.22% to 2.25% of the loan amount and is typically added to your monthly mortgage payment, or paid at closing.

How do I qualify for a conventional mortgage?

To be eligible for a conventional loan, you must meet individual lender requirements. While these can vary from lender to lender, they generally include:

Credit score: Generally, you need a credit score of 620 or higher to qualify, but some lenders or loan types may have higher credit score requirements. Knowing where your credit stands will help you determine whether you qualify for particular types of mortgage loans.
Debt-to-income ratio: Your debt-to-income (DTI) ratio plays a pivotal role in qualifying for a mortgage. DTI compares your monthly debt payments against your gross monthly income. Having a significant amount of income tied up each month in debt repayment can hurt your chances of loan approval. The maximum DTI — for all monthly debts, including your new mortgage — allowed by Fannie Mae and Freddie Mac for conforming loans is 50%, but many lenders prefer a DTI of 36% or less.
Down payment: The outdated myth that you need a 20% down payment to get a conventional loan isn’t true. However, if you put less than 20% down, you’ll pay PMI. Plus, putting more money down may help you qualify for lower interest rate offers.

How to apply for a conventional mortgage

Getting a conventional loan can be an involved, lengthy process. The first step is getting a mortgage preapproval, which requires filling out a mortgage application and providing key financial, employment and income details to a lender.

Learn more: How to get a mortgage: A step-by-step guide

Your lender will perform a hard credit inquiry and review your credit report and financial information to determine how much you can afford to borrow and if you meet key borrowing guidelines for the conventional loan you want. You can apply for a mortgage and be preapproved before finding a home but, once you do make a successful offer, your lender will update your loan file with the property’s details to make a final loan decision.

When you apply for a mortgage, you’ll provide documentation to verify your identity, income, employment status and other financial details, including but not limited to:

Your driver’s license or other government-issued photo ID.
Social Security card or number.
Recent 30 days of pay stubs or other proof of income.
Tax returns for the past two years.
Bank statements for all checking and savings accounts.
Statements for all assets and liabilities.

Once you've been preapproved and have an offer on a home accepted, you'll enter a period called underwriting. During this time, the lender fully processes your loan application, verifying the information and documentation you've provided. They may ask for additional paperwork as necessary to ensure you meet borrowing guidelines.

During underwriting, your lender typically orders an appraisal to get your home’s current market value. And before closing, your lender will double-check your employment status, credit score and income to ensure there are no significant changes, such as a job loss or unaccounted for new debt.

If you’re approved for a loan, you’ll be cleared to close, which finalizes the home purchase and the mortgage. On your closing date, you'll pay any closing costs and your down payment amount.

What is the difference between an FHA mortgage and a conventional mortgage?

FHA loans are insured by the Federal Housing Administration (FHA). They're geared toward borrowers with lower credit scores, generally making them easier to qualify for than conventional loans. However, FHA loans come with costly upfront and annual mortgage insurance premiums. If you put down 10% or more, you’ll pay an annual MIP for 11 years. If you put down less than 10%, you’ll pay those premiums for the life of the loan.

Learn more: What is an FHA loan?

The AP Buyline roundup

Buying a home with a conventional mortgage can help you get lower interest rates and fees than you’d find on some government-backed loans, especially if you're a well-qualified borrower. Compare conventional loans with other mortgage options to determine which one best fits your needs. Shop around with at least three different lenders, comparing rates and terms to find the right mortgage loan for you.

Frequently asked questions (FAQs)

What happens if I can't make my mortgage payments?

If you can't make loan payments, contact your lender immediately to discuss your options. Some lenders may offer assistance through forbearance, loan modification, refinancing or other repayment plans. Failure to make payments or contact your lender in a timely manner could lead to losing your home to foreclosure.

Is a conventional mortgage better?

Conventional mortgages are a great option if you have good to excellent credit. They offer better interest rates and more flexible payment options than other types of mortgage loans.

What is the minimum down payment required for a conventional mortgage?

The minimum down payment required for a conventional mortgage is typically 3%, although more common down payments are 5% to 20%, depending on the lender. If you put down less than 20%, though, you’ll have to pay private mortgage insurance.

Can I use a conventional mortgage to buy a second home or investment property?

Yes, you can use a conventional mortgage to buy a second home or investment property. Conventional loans for second homes and investment properties often have higher interest rates and require larger down payments than primary residence loans.