What Is a Conventional Loan and How Do You Get One?

Published Aug. 19, 2022
A loan officer explains conventional loans to a couple seeking a mortgage.

Buying a home is expensive, which means you’ll probably need to take out a home loan. Conventional loans are the most common type of mortgage and often cost less than other kinds of loans, if you qualify.

What Is a Conventional Mortgage or Loan?

A conventional loan is a mortgage from a private lender that isn’t backed by any government program. The Federal Housing Administration, Department of Veterans Affairs, and Department of Agriculture offer alternative loan programs that make it easier for qualified homebuyers to get a mortgage for little or no down payment.

Conventional loans, however, tend to be a better deal if you have good credit and can afford a down payment of 10% to 15%.

How a Conventional Mortgage Works

A mortgage is a legal agreement that the lender will provide the money you need to buy a home, and you’ll repay the loan with interest.

The interest rate on the mortgage helps determine your monthly mortgage payment and how much you’ll pay overall for the loan. Factors like your credit score, how much you have saved for a down payment, and the loan amount influence the rate you’re offered.

For conventional loans specifically, there are two types: conforming loans and nonconforming loans.

Conforming loans

Conforming loans are conventional mortgages that meet the requirements to be backed by Fannie Mae and Freddie Mac, two government-sponsored enterprises that guarantee home loans.

Because of these requirements, conforming loans come with limits. In 2022, the conforming loan limit for a single-family home in most areas is $647,200, while the limit is $970,800 in certain high-cost areas.

Other requirements include limits on the borrower’s credit score, debt-to-income ratio, and loan-to-value ratio.

Nonconforming loans

Nonconforming loans don’t meet the same requirements as conforming loans, so their terms are set by individual lenders. Pricing, eligibility, and features can vary considerably from lender to lender, which makes nonconforming loans more risky than conforming loans.

Advantages and Disadvantages of Conventional Loans

Some of the benefits of taking out a conventional loan include:

  • Lower cost. If your credit is decent and you have a sizable down payment, conventional loans typically get you a better deal compared with FHA loans.
  • No mortgage insurance (with a 20% down payment). All FHA loans require you to purchase mortgage insurance, while conventional loans only require private mortgage insurance if your down payment is less than 20% of the home’s purchase price.
  • Most common type of home loan. The majority of mortgages in the United States are conventional loans. They are widely available.

At the same time, there are some downsides to conventional home loans, including:

  • Higher minimum down payment. Mortgage lenders typically ask you to make a down payment of at least 5% on a conventional loan. FHA loans allow a down payment as low as 3.5%, while other government-backed loans require no down payment.
  • Higher credit score requirement. Conforming loans require a credit score of at least 620, while the minimum credit score to get an FHA loan is only 500.
  • Private mortgage insurance. PMI, which protects the lender if you stop making mortgage payments, is required if your down payment is less than 20%.

How To Get a Conventional Loan

If a conventional loan sounds like a good fit, then the next step is to check if you qualify. Here are some of the most important eligibility requirements for conforming loans:

Conventional Loan Eligibility Requirements

Type of requirementWhat’s needed
Credit scoreAt least 620
DTI ratio50% or under
Down payment5%, or 3% under special loan programs
Income and assetsEnough funds to cover your monthly payments, even if something unexpected happens

You can start the process of getting a conventional loan by reaching out to a lender or mortgage broker.

To receive a loan estimate, expect to provide the following:

  • Your name.
  • Your Social Security number.
  • Your income.
  • The loan amount you want.
  • A property value estimate.
  • The property address.

Once you officially apply, your lender will need additional documents, like recent pay stubs, W-2 forms, and bank statements.

What’s the difference between FHA loans and conventional loans?

FHA loans are backed by the Federal Housing Administration and have easier qualification requirements than conventional loans. However, when it comes to total cost, conventional loans tend to be cheaper than FHA loans for people with good credit and a 10%-15% down payment.

Here are some of the key differences:

Conventional Loans vs. FHA Loans

Type of requirementConventional loanFHA loan
Down paymentUsually 5%3.5%
Credit score620 or higher500 or higher
Mortgage insuranceRequired if your down payment is under 20%Required for all loans

Conventional Loan FAQ

Here are the answers to some frequently asked questions about conventional loans.

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