If you’re exploring mortgage options, you’ve likely heard the term conventional loan. But what exactly is it, and how does it compare to government-backed alternatives like FHA or VA loans?
This guide explains what a conventional loan is, how it works, who it’s best for, and how to decide if it’s the right fit for your home financing journey.
What Is a Conventional Loan?
A conventional loan is a mortgage that’s not backed by a government agency such as the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the USDA. These loans are issued by private lenders and typically follow guidelines set by Fannie Mae and Freddie Mac.
Most conventional loans are conforming, meaning they fall within loan limits and meet underwriting standards. Others are non-conforming — such as jumbo loans — and are used for higher-priced or unique properties.
Use our Loan Compass to compare conventional loans to other popular mortgage types.
How Do Conventional Loans Work?
With a conventional mortgage, the lender evaluates your application based on your credit score, income, debt-to-income ratio (DTI), employment history, and down payment. Once approved, you make monthly payments of principal and interest over the agreed term — usually 15 or 30 years.
Some key features:
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Available as fixed-rate or adjustable-rate (ARM) loans
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Offered in conforming and non-conforming forms
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Can be used to purchase, refinance, or renovate
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May require private mortgage insurance (PMI) with a low down payment
Conforming vs. Non-Conforming Conventional Loans
Not all conventional loans are the same. Here’s how they break down:
Conforming Loans
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Meet guidelines set by Fannie Mae and Freddie Mac
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Must stay within the loan limits set by the Federal Housing Finance Agency (FHFA)
→ For 2025, that’s typically $806,500, but limits are higher in high-cost areas -
Easier to qualify for and typically come with lower interest rates
Non-Conforming Loans
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Do not meet Fannie/Freddie standards
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Includes jumbo loans, loans for unique property types, or those with special underwriting needs
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May require larger down payments or higher credit scores
Check your local limit using the FHFA Loan Limit Tool
Down Payment and PMI Requirements
You do not need 20% down to qualify for a conventional loan. Many programs allow:
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3% down for first-time buyers
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5% down for repeat buyers
However, if you put down less than 20%, you’ll usually need private mortgage insurance (PMI). PMI adds to your monthly payment but can be removed once you reach 20% equity — a key advantage over FHA loans, where mortgage insurance is often permanent.
Credit Score & Income Requirements
Most conventional lenders require a minimum credit score of 620, though 700+ scores qualify for the best rates and lowest PMI costs. Your debt-to-income (DTI) ratio should ideally be below 43%, although some lenders go higher with strong compensating factors.
Want to know where you stand? Use our Loan Affordability Calculator to estimate your borrowing power.
Pros and Cons of a Conventional Loan
Advantages
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Competitive interest rates
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No upfront mortgage insurance premiums
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PMI can be removed
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More flexibility in property types and terms
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Widely accepted by sellers
Disadvantages
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Higher credit and income standards
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PMI required if under 20% down
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Stricter underwriting for self-employed borrowers
When Does a Conventional Loan Make Sense?
This loan type is ideal if you:
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Have strong credit and stable income
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Can put down at least 3%–5%
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Want flexible loan options and property types
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Prefer to avoid long-term mortgage insurance
It’s also a great fit for borrowers refinancing out of FHA or VA loans, especially when equity has increased.
Common Misconceptions About Conventional Loans
Myth: You need 20% down.
Reality: Many buyers qualify with just 3%–5% down.
Myth: FHA is always easier to qualify for.
Reality: If your credit is 680+, a conventional loan may offer better long-term savings.
Myth: PMI lasts forever.
Reality: You can request PMI removal at 20% equity — or it drops automatically at 22%.
Compare to Other Loan Types
| Feature | Conventional Loan | FHA Loan | VA Loan |
|---|---|---|---|
| Down Payment | 3%–20% | 3.5% | 0% |
| Mortgage Insurance | PMI if <20% down | MIP (often permanent) | None |
| Credit Score Minimum | 620 | 580+ | ~620 (varies) |
| Property Flexibility | Broad | Primary only | Primary only |
| Loan Limit Rules | FHFA conforming limits | FHA county limits | No strict limits |
Learn more: Beginner’s Guide to FHA Loans | VA Loan Guide
General Questions About Conventional Loans
What is a conventional loan?
A conventional loan is a mortgage that is not backed by a government agency like the FHA, VA, or USDA. Instead, it’s offered by private lenders and typically follows guidelines set by Fannie Mae and Freddie Mac. Most conventional loans are “conforming,” meaning they fall within loan limits established by the FHFA. These loans are ideal for borrowers with good credit, stable income, and a down payment of at least 3% to 5%.
What’s the difference between conforming and non-conforming loans?
A conforming loan meets the loan limits and underwriting standards set by Fannie Mae and Freddie Mac. A non-conforming loan exceeds those limits or falls outside standard criteria, such as jumbo loans or loans for unique property types. Conforming loans are easier to qualify for and usually have better interest rates.
Do I need a 20% down payment for a conventional loan?
No. Many conventional loan programs allow as little as 3% to 5% down, especially for first-time buyers. However, if you put down less than 20%, you’ll likely be required to pay private mortgage insurance (PMI) until you reach 20% equity. The more you put down, the lower your monthly payments and overall loan cost.
What credit score do I need for a conventional loan?
Most lenders require a minimum credit score of 620, though a higher score (680–740+) can help you qualify for better rates and terms. A lower score may still be approved but could come with higher interest rates or more stringent underwriting.
Loan Structure and Qualification Questions
What are the pros and cons of a conventional loan?
Pros:
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Competitive interest rates
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No upfront mortgage insurance fees
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PMI can be removed after 20% equity
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Flexible terms (fixed or adjustable)
Cons:
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Higher credit score requirements
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PMI required with <20% down
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Stricter debt-to-income (DTI) limits
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Less forgiving for those with limited savings or credit issues
Can I refinance into a conventional loan from FHA or VA?
Yes. Refinancing from an FHA or VA loan into a conventional loan is common — especially if you want to remove mortgage insurance or take advantage of better rates. To do this, you’ll typically need at least 20% equity, a qualifying credit score, and proof of stable income.
What’s the difference between fixed-rate and adjustable-rate conventional loans?
A fixed-rate loan has a stable interest rate and monthly payment for the life of the loan — usually 15 or 30 years. An adjustable-rate mortgage (ARM) has a lower introductory rate for the first few years, then adjusts annually based on market conditions. ARMs may be appealing for short-term buyers, but fixed-rate loans offer long-term stability.
Final Thoughts
A conventional loan is one of the most flexible and widely available mortgage options — perfect for buyers with strong credit, consistent income, and moderate savings. Whether you’re purchasing your first home, upgrading to a larger property, or refinancing from another loan type, conventional financing offers long-term benefits and competitive rates.
Still unsure if it’s right for you? Use our Loan Compass tool to compare options, or connect with a lender to explore your eligibility.
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