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Conventional loans are the main engine driving the home mortgage machine — the go-to loan product for most borrowers. More than half of all purchase mortgages were conventional loans in 2022.
Conventional mortgages are not insured by the government and have their own specific requirements on what it takes to qualify.
Because they are the loans mortgage lenders make most often, here’s what you need to know about conventional mortgages in 2024.
Read more: How to buy a house in 2024
A conventional loan is not insured or guaranteed by a government agency. It’s a technical distinction, though, because Fannie Mae and Freddie Mac, two government-sponsored companies, provide capital to the mortgage market and directly impact the qualifications required for conventional mortgage loan approval.
Fannie Mae and Freddie Mac buy conventional mortgages from lenders, freeing up money for mortgage providers to make more loans.
Read more: First-time home buyer in 2024 — What you need to know
If you are looking to buy a home or refinance a mortgage and have a decent income, a good credit history, and average debt, a conventional loan is probably right for you.
By contrast, other types of mortgages like FHA, USDA, and VA loans cater to those who need a boost to homeownership because of lower credit scores, limited savings, or low-to-moderate income.
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Buying or refinancing a home with a conventional loan allows you a great deal of flexibility:
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Home buyers with typical credit scores, income, and debt loads will likely qualify.
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Conventional loan programs such as HomeReady and Home Possible allow down payments as low as 3%.
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As the most commonly available mortgage, you can shop a variety of mortgage lenders for the best mortgage rate.
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In addition to fixed-rate mortgages, conventional loans are available as adjustable-rate mortgages. ARMs typically have a lower initial fixed interest rate, which converts to a variable rate that adjusts every six months or annually.
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Conventional mortgages also come in a variety of payback periods. While 30-year loans have historically been the most common, you can choose a 20-, 15- or 10-year loan term.
Tip: While your mortgage payment will be higher, shorter mortgage terms allow you to pay off the loan faster and significantly reduce the amount of interest you pay. You will also gain home equity more quickly.
Read more: 15-year vs. 30-year mortgage
Conventional loans have one other important variation: conforming or non-conforming.
Conforming conventional loans are issued for loan amounts under $766,550, though higher limits are available in areas with the most expensive real estate.
Non-conforming loans, or jumbo loans, are for financing homes over the conforming loan limit.
Learn more: What is a non-conforming loan, and how does it work?
Specific mortgage loan requirements vary by lender, but generally, conventional loans require a borrower to:
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Have a debt-to-income ratio of 50% or less. However, most lenders are looking for a DTI of 41% or less.
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Provide a down payment of 3% or more if you’re a first-time home buyer. Some lenders even offer 1% down payment programs for first-time buyers. Otherwise, 5% is an entry-level down payment, though you will be required to purchase private mortgage insurance (PMI).
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Have a FICO credit score of 620 or higher.
Read more: The credit score needed to buy a house
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Down payment requirements as low as 3% for first-time home buyers and just 3% equity for qualified loan refinancing.
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You can opt for an adjustable-rate or fixed-rate mortgage.
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With a down payment of 20% or more, you can forego private mortgage insurance.
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Available as jumbo loans for the purchase of higher-priced properties.
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Flexible terms are available to first-time home buyers and Native Americans.
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Can also finance home renovations, energy-efficient improvements, and the purchase of manufactured homes.
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Higher credit score requirements than with FHA or USDA loans.
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With a down payment of less than 20%, you’ll be required to pay private mortgage insurance.
Learn more: How to get rid of PMI
Conventional loans can be good because many lenders let you put only 3% down. They also often have more term options than many other types of home loans, such as a 20-year term. However, it still might be worth looking into FHA, USDA, or VA mortgages.
No, you don’t have to put 20% down on a conventional loan. A 20% down payment can be great because then you don’t have to pay for private mortgage insurance (PMI), but many conventional mortgage lenders let you put down as little as 3%. If you need a certain type of conventional mortgage called a jumbo loan, you’ll probably need to put down 10% or 15%, at least.
Someone might want a conventional loan if they have a strong credit score and low debt-to-income ratio, because then they can get a relatively good rate. It’s common to be able to put down 3% with a conventional loan these days, whereas even FHA loans require 3.5%.
It isn’t hard to get a conventional loan if you have a 620 credit score and 3% down payment. You can get an FHA loan with a lower score, but you need a slightly higher down payment (3.5%). It’s also relatively easy because most mortgage lenders offer conventional loans, so if you qualify, you can shop around to find the best deal.
When it comes to a conventional versus FHA loan, conventional can be better if you have a great credit score and low debt-to-income ratio. A conventional loan often allows a 3% down payment, while an FHA loan requires 3.5%. It can also be easier to cancel your mortgage insurance with a conventional loan than with an FHA loan. But an FHA loan has more lenient requirements overall.
One of the main downsides of a conventional loan is private mortgage insurance (PMI). If you put less than 20% down at closing, you’ll pay a monthly premium toward PMI until you build enough equity for your lender to remove it. (You can request to cancel PMI once you have 20% equity in the house, and the lender must remove it when you reach 22% equity.) VA and USDA loans don’t require monthly mortgage insurance payments, but FHA loans do.