What Is a Conventional Loan and How Does It Work?

A conventional loan is a mortgage that isn’t backed by a government agency (like FHA, VA, or USDA). Instead, it follows guidelines set by Fannie Mae and Freddie Mac, two government-sponsored enterprises. Conventional loans are the most common type of mortgage in the U.S. and are popular with buyers who have solid credit, stable income, and at least some money saved for a down payment.

How Conventional Loans Work

• Conforming vs. Non-Conforming:

  • Conforming loans meet Fannie Mae/Freddie Mac limits and guidelines.

  • Non-conforming loans (like jumbo loans) exceed those limits.

• Credit-based:
  Lenders rely heavily on your credit score, debt-to-income ratio, and down payment.

• Private Mortgage Insurance (PMI):
  If you put down less than 20%, you’ll typically need PMI, which can be removed once you reach 20% equity.

Conventional Loan Requirements

While exact requirements vary by lender, here are typical guidelines:

• Credit Score: Minimum 620 (higher score = better rates).

• Down Payment: As low as 3% for first-time buyers, but 5–20% is most common.

• Debt-to-Income Ratio (DTI): Usually capped around 45–50%.

• Loan Limits (2025):

  • $806,500 in most U.S. counties.

Advantages of Conventional Loans

• ✅ Flexible terms (10, 15, 20, or 30 years).

• ✅ Lower overall cost if you have strong credit.

• ✅ PMI can be removed — unlike FHA mortgage insurance, which can be permanent.

• ✅ Widely accepted for primary homes, second homes, and investment properties.

Drawbacks to Consider

• ❌ Stricter credit and income requirements compared to FHA or VA.

• ❌ Larger down payment often required for best rates.

• ❌ Rates can be higher if credit is below 700.

FAQs

• Do I need 20% down for a conventional loan?
  No. Some programs allow as little as 3–5% down, but 20% avoids PMI.

• Can I use a conventional loan for an investment property?
  Yes — conventional loans are often the go-to option for second homes and rentals.

• Are conventional loans always better than FHA?
  Not always. FHA loans can be more forgiving if your credit score is lower or your savings are limited.

A conventional loan is a flexible, widely used mortgage option for buyers with solid credit and income. If you’re aiming for competitive rates, the ability to remove PMI, and broader property options, a conventional loan may be your best fit.