Mortgage 101

Conventional Loans: What They Are and How to Qualify

Published on: May 16, 2022

conventional loans

Conventional mortgages are home loans that are not part of a government program. Conventional loans are usually less expensive than government-backed mortgages, however, they may be harder to qualify for. A fixed-rate conventional loan is one of the most popular loan options due to its predictable monthly payments for the long term.

Before you shop for a home loan, it’s helpful to understand how conventional fixed-rate mortgages work, including loan features and conventional home loan requirements.

What are conventional loans?

A conventional loan is any mortgage not offered or insured by the government. While borrowers finance conventional loans directly with a bank, credit union, or mortgage lender, two companies, Fannie Mae and Freddie Mac, guarantee most conventional mortgages.  

While conventional borrowers may find interest rates to be more competitive than other loans, conventional home loan requirements may make these mortgages harder for some borrowers to qualify for.  

Conventional loan borrowers can choose between conventional fixed-rate mortgages or conventional adjustable-rate mortgages or ARMs. Additionally, conventional loans come in a variety of term lengths. Standard terms include 15-year and 30-year mortgages. However, borrowers can also opt for a 10-, 15-, 20-, or 25-year conventional fixed-rate mortgage.

What’s the difference between a conventional mortgage and a government-backed mortgage?

The U.S. government offers programs to help make homeownership accessible to more borrowers. These government loans are financed mainly by private lenders, but the federal government guarantees the mortgages. A guarantee means that if the borrower defaults on the loan, the government will repay the lender a portion of the loan. As a result, lenders are willing to extend financing to more borrowers and to those with less-than-perfect credit 

Besides who guarantees the loans, there are several differences between conventional loans and government loans. First, conventional home loan requirements are stricter than government loans. For example, minimum conventional loan credit score requirements are higher than that of government loans.  

Additionally, conventional loans can cost less than government loans. However, this depends on how much a borrower is putting down. While the lowest down payment for conventional loans is 3%, borrowers who put less than 20% down will need to pay private mortgage insurance (PMI) on conventional loans.  

Another benefit conventional loans may have over government loans is the interest rate. Lenders establish interest rates; however, conventional loan interest rates can be more competitive than government loans for borrowers with high credit scores and large down payments. 

Here’s a look at how conventional loans compare to three main government loan programs: FHA, VA, and USDA.

FHA loans vs. conventional home loans 

FHA loans are insured — or guaranteed — by the Federal Housing Administration. While FHA loans are popular among first-time homebuyers, these loans are open to any borrower who qualifies. FHA loans appeal to buyers for their low minimum down payment and credit score requirements. 

FHA vs. Conventional Loans
Loan features  FHA loans  Conventional loans 
Minimum down payment 3.5%  3% for some programs; 20% to avoid PMI 
Minimum credit score   500 with a down payment of 10% or more; 580 with a 3.5% down payment*  580 to 620** 
Loan limits $420,680 in most U.S. counties; $970,800 in high-cost areas (varies by county) $647,200 in most U.S. counties; $970,800 in high-cost areas (varies by county)
Mortgage insurance  Upfront mortgage insurance of 1.75% of loan amount; annual mortgage insurance of 0.45%-1.05% (rate is based on loan amount and term) 0.2%-2% of loan amount with less than 20% down; none if putting more than 20% down

 *As of this writing, Finance of America Mortgage accepts FICO scores as low as 580 for FHA and VA loans.
**Additionally, as of this writing, FAM allows a minimum of 580 FICO score on conventional loans. This FICO minimum requires at least two borrowers. All borrowers’ middle FICO scores must average at least 620 to qualify. For single conventional borrowers, 620 is the required minimum FICO score.

 

VA loans vs. conventional home loans 

Loans guaranteed by the U.S. Department of Veterans Affairs are VA loans. These mortgages are specifically for active-duty military servicemembers, veterans, and eligible surviving spouses. VA loans typically don’t require a down payment and have no loan limits, in many cases. 

VA vs. Conventional Loans
Loan Features  VA loans  Conventional loans 
Minimum down payment  0% down (some borrowers may need to make a down payment)  3% for some programs; 20% to avoid PMI 
Minimum credit score   580 to 620* 580 to 620** 
Loan limits None set by the VA, but some VA lenders may have their own limits $647,200 in most U.S. counties; $970,800 in high-cost areas (varies by county)
Mortgage insurance  No MI required, but VA borrowers may have to pay a one-time VA funding fee 0.2%-2% of loan amount with less than 20% down; none if putting more than 20% down

 *The VA doesn’t set any minimum FICO requirement, but VA lenders do. As of this writing, Finance of America Mortgage accepts FICO scores as low as 580 for FHA and VA loans.
**Additionally, as of this writing, FAM allows a minimum of 580 FICO score on conventional loans. This FICO minimum requires at least two borrowers. All borrowers’ middle FICO scores must average at least 620 to qualify. For single conventional borrowers, 620 is the required minimum FICO score.

 

USDA loans vs. conventional home loans 

The U.S. Department of Agriculture guarantees and finances home loans for rural borrowers with low-to-moderate incomes. USDA loans often require no down payment and may come with fewer fees than other government loans. Borrowers are subject to income limits laid out by the program requirements and must live in designated rural areas. 

USDA vs. Conventional Loans
Loan features  USDA loans  Conventional loans 
Minimum down payment  As low as 0%  3% for some programs; 20% to avoid PMI 
Minimum credit score   No minimum set by USDA, but many lenders require 600 or higher* 580 to 620** 
Loan limits Some loans are subject to limits depending on location of property and borrower income $647,200 in most U.S. counties; $970,800 in high-cost areas (varies by county)
Mortgage insurance  No MI required, but some USDA loans require a guarantee fee                                                                                                                              0.5%-1.86% of loan amount with less than 20% down (may be higher depending on loan type, LTV ratio, and credit score)

 *As of this writing, Finance of America Mortgage accepts FICO scores as low as 600 for USDA loans.
**Additionally, as of this writing, FAM allows a minimum of 580 FICO score on conventional loans. This FICO minimum requires at least two borrowers. All borrowers’ middle FICO scores must average at least 620 to qualify. For single conventional borrowers, 620 is the required minimum FICO score.

Types of conventional home loans

While a conventional loan is any mortgage that is not a government loan, there are different types of conventional loans. For example, conventional loans fit into two broad categories: conforming and non-conforming. Additionally, conventional loans with amounts above certain loan limits are considered jumbo conventional loans.  

Conforming conventional loans. Mortgages in this category meet the loan limits established by the Federal Housing Finance Agency (FHFA). Also, conforming loans follow other guidelines set by Fannie Mae and Freddie Mac.  

Non-conforming conventional loans. Mortgages in this category are not sponsored or bought by Fannie Mae or Freddie Mac and don’t follow conforming loan standards. As a result, non-conforming loans sometimes come with risky terms, such as interest-only or negative amortization. But they can provide financing for buyers who may not qualify for conforming loans, such as borrowers with poor credit, non-traditional income, or those buying properties with non-standard features. 

Jumbo loans. Jumbo loans are mortgages with high loan limits. These loans can be either conforming or non-conforming. Conforming jumbo loans offer amounts higher than the FHFA loan limits established for most counties, but they fall within the FHFA loan limits for high-cost areas. A non-conforming jumbo loan has a limit above the conforming jumbo limit, typically reaching $1 million to $2 million. Non-conforming jumbo loans are for buyers purchasing high-cost homes and usually require excellent credit, a high down payment, and plenty of cash reserves.

Conventional home loan requirements: How to qualify

While lenders determine their specific qualifications for a mortgage, borrowers can expect the following conventional home loan requirements when applying for a mortgage. 

Income: Most conventional loans don’t have income restrictions, but borrowers must have sufficient income to qualify for and repay a mortgage. Two conventional loan programs that allow a 3% down payment are Fannie Mae’s HomeReady® and Freddie Mac’s Home Possible®. These programs target low-to-moderate income borrowers and have income limits.  

Assets: Borrowers may need to have a certain amount of savings, called cash reserves, to qualify for a conventional loan. Requirements range from zero to six months for a home purchase, depending on the loan amount and the borrower’s credit score.  

Credit score: Many conventional lenders have a 620 minimum conventional loan credit score. In some instances, borrowers without credit scores may qualify using non-traditional credit history.

Down payment: The lowest down payment for conventional loans is 3%, but some borrowers may need to put more down. Buyers should also keep in mind that putting down 20% or more for conventional loans avoids PMI payments. Conventional loan down payment sources can include the borrower’s funds, gifts, or down payment assistance programs.  

Debt-to-income (DTI) ratio: A borrower’s debt-to-income ratio is the total amount of their monthly debt payments, including the mortgage, divided by their gross monthly income. The maximum DTI for conventional loans is 45%, however, a DTI of up to 50% or higher may be allowed in some cases.

Occupancy: Borrowers can use most conventional loans to purchase a primary home, second home, or investment property. However, borrowers taking out a HomeReady® or Home Possible® loan must live in the home as their primary residence. 

Conventional Home Loan Requirements 
Income  Some low-down-payment conventional loan programs have income limits 
Assets  Zero to six months of cash reserves 
Credit score  580 to 620 minimum credit score*  
Down payment  3% minimum down payment  
Debt-to-income (DTI) ratio   45% maximum DTI (up to 50% or higher may be accepted in some cases)
Occupancy  Owner-occupied homes, second homes, and investment properties  

*As of this writing, Finance of America Mortgage allows a minimum of 580 FICO score on conventional loans. This FICO minimum requires at least two borrowers. All borrowers’ middle FICO scores must average at least 620 to qualify. For single conventional borrowers, 620 is the required minimum FICO score.

Pros and cons of conventional loans

Conventional loans offer both advantages and disadvantages. Review these pros and cons to see if a conventional loan is a good fit for you. 

Pros  Cons 
Fewer fees than government loans.   Minimum credit score requirements are higher than other loan options. 
Easy to find because most lenders offer them. Require higher incomes and savings to qualify.  
Higher loan amount limits than government loans.  Higher down payments are required compared to other loans. 
Borrowers with high credit scores qualify for the best rates.  Borrowers with lower credit scores may not qualify for lower interest rates.
Low-down-payment options (some programs require 3% down). Additional expense of PMI if putting down less than 20%.
Fewer restrictions on income and property location than government loans.   Harder to qualify with lower credit scores or a high DTI ratio.

Conventional home loan FAQs

Can you refinance with a conventional loan? 

Yes, conventional loans are available for both home purchases and refinances. Borrowers can also refinance from a government loan to a conventional loan. 

Are conventional home loans available at fixed and variable rates? 

Yes, conventional loans have either a fixed or variable rate (also called an adjustable rate). A conventional fixed-rate mortgage has the same interest rate and monthly payment for the life of the loan. On the other hand, the interest rate and monthly payment on a conventional adjustable-rate mortgage change along with market conditions. While most homebuyers opt for a conventional fixed-rate mortgage, both types of loans offer advantages to borrowers. 

Is there down payment assistance for conventional home loans? 

Yes, borrowers can access multiple types of down payment assistance for conventional loans. Options range from state-sponsored programs to initiatives run by community organizations. Local HUD offices will have information for borrowers who need help with the down payment for conventional loans 

Find out which loan is right for you by contacting a local Finance of America Mortgage Advisor today to learn more about your options.

How Much House Can You Afford?

Calculate

Why Finance of America Mortgage?

We’re not about pushing loan papers. We’re about moving your dream forward. And we do that through knowledgeable local advisors, a personal approach, and a variety of smart loan options.

Learn More About Why Finance of America Mortgage?

$105B+

Consumer Loans Funded Since 2015

330+

Local Advisor Branches