• Conventional mortgage loans are home loans that are not backed by any governmental department.
  • Conventional loans may be conforming, meaning they meet industry guidelines, such as loan size limits, set by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac. Non-conforming loans do not meet these standards.
  • Borrowers with strong credit scores often benefit from greater flexibility, higher loan limits, and lower borrowing costs with conventional loans.
  • Choosing the right mortgage financing for your home purchase is one of the most important steps in your home-buying journey. Your chosen mortgage type is a critical factor in determining your monthly mortgage payments, down payment requirement, and total interest expense over the life of the loan.  

Conventional loans are the most popular option, with 73% of American homebuyers choosing a conventional loan in 2023.[1] This flexible home loan type often offers favorable interest rates and higher loan limits, but it may require a better credit score than government-backed alternatives.

In this article, you’ll learn all about conventional loans, including:

  • What a conventional loan is and how it works;
  • The benefits and possible drawbacks of a conventional loan; and
  • How to qualify for a conventional loan.

What Is a Conventional Loan?

A conventional loan is any home loan not insured, guaranteed, or offered by a department of the U.S. government.[1]

This sets conventional loans apart from government-backed loans, such as FHA loans (guaranteed by the Federal Housing Administration), VA loans (guaranteed by the Department of Veterans Affairs for veterans, military service members, and their spouses), and USDA loans (guaranteed by the United States Department of Agriculture for homes in areas with lower population densities).

How Do Conventional Loans Work?

With a conventional loan, you borrow a lump sum from a lender (such as a bank, credit union, or mortgage company) to purchase a home, then repay that loan balance, plus interest, over the term of the loan.

You can use a mortgage payment calculator to see how much your monthly mortgage payments would be based on the purchase price, down payment amount, and interest rate.

For example, if you are purchasing a $400,000 home with a 20% down payment, you might apply for a 30-year conventional loan of $320,000. If you secure a 6.95% mortgage interest rate, you would pay $2,118 per month (not including property taxes or homeowners insurance premiums) to repay the loan in full over 30 years. Borrowers also incur closing costs related to purchasing the home, which may be paid upfront or incorporated into the loan amount.

Conforming vs. Non-Conforming Conventional Loans

Conventional loans can be either conforming or non-conforming.[1]

Conforming Conventional Loans

Conforming loans meet standards set by GSEs, Fannie Mae and Freddie Mac, which operate under supervision from the Federal Housing Finance Agency (FHFA).[2] These loans can be packaged and sold on the secondary market, so they present less risk to the lender and may offer more favorable terms for borrowers.

Conforming conventional loans must meet standards, including:

  • Loan limits. For 2025, conforming loans across most of the U.S. cannot exceed $806,500. However, in some markets, including Alaska, Hawaii, and Guam, as well as high-priced cities throughout the continental U.S., the limit is higher. The 2025 maximum for these areas is $1,209,750 (50% more than the baseline limit).[2]
  • Property type. Conforming loans are limited to residential properties of four units or fewer. The property can be a primary residence, a second home, or an investment property, although the eligibility requirements for a primary residence may be less stringent than for other property types.
  • Criteria for Fannie Mae and Freddie Mac’s underwriting process. Borrowers must meet strict criteria relating to credit scores, verifiable income, and debt levels. For example, conventional buyers with conforming loans must have a credit score of at least 620 with a debt-to-income ratio (DTI) below 45%.[3]
  • Down payment amount. Well-qualified first-time buyers may be eligible for down payments as low as 3% with a conforming conventional loan (while non-first-time buyers may qualify for down payments as low as 3-5%). However, borrowers who put down less than 20% may be required to purchase private mortgage insurance (PMI) to protect the lender against the increased risk of financing such a high percentage of the property’s value.[3]

Non-Conforming Conventional Loans

Loans that do not meet Fannie Mae and Freddie Mac’s standards are non-conforming. Jumbo loans, for example, exceed the loan amount requirements for conforming loans, making them non-conforming. In some cases, borrowers do not qualify for Fannie Mae and Freddie Mac’s automated underwriting process. For example, self-employed homebuyers may not have the employment history and verifiable income required for conforming loans. 

Lenders have more flexibility when originating non-conforming loans. However, these loans pose greater financial risk to the lender, so lenders may charge higher interest rates to offset this increased risk.[3]

Fixed vs. Adjustable-Rate Conventional Loans

Conventional loans may offer fixed interest rates or adjustable interest rates.

Fixed-rate mortgages have a set interest rate that remains stable for the term of the loan. Adjustable-rate mortgages (ARMs), on the other hand, offer interest rates that automatically fluctuate at set intervals after an initial introductory rate period.

Fixed-rate mortgages provide more predictable monthly payments, but the introductory rate on ARMs is typically lower than available fixed rates.

Conventional Loan Terms

Many lenders offer conventional loan terms between 10 and 30 years. Shorter loan terms have higher monthly payments but typically cost less in the long term because less money is paid in total interest expense.[4]

What Are the Advantages of Conventional Loans?

Many buyers choose conventional loans because of the benefits they offer, including:

  • Suitable for multiple property types. Can be used for primary residences, vacation homes, second homes, and investment properties.
  • Flexibility. You can choose between fixed-rate mortgages and ARMs and select your loan term from a wide range of options.
  • Potentially lower mortgage insurance costs. The PMI cost for borrowers with down payments of less than 20% may be lower than the mortgage insurance premium required for FHA loans. 
  •  Higher loan limits. You may be able to borrow more than with a conventional loan than with a government-backed loan.
  • Faster loan processing. Conventional loans do not require the additional inspections and underwriting required by most government-backed loans, so the processing may be quicker and easier.

Are There Potential Downsides to Conventional Loans?

There are a few potential downsides to consider before applying for a home loan:

  • Higher credit score requirement. Conventional loans typically require higher credit scores than government-backed loans, particularly FHA loans, which may be available with credit scores as low as 500 (through some lenders, with a higher down payment).[5]
  • Potentially larger down payment. Conventional loans do not offer 0% down payment options, like you might find with VA and USDA loans.[4]

What Are the Requirements for a Conventional Loan?

Conventional loan requirements, whether conforming or non-conforming, vary by lender but may include the following:[6]

  • Minimum credit score: Credit scores of at least 620 are required, but scores over 750 are preferred for better interest rates.
  • Stable, verifiable income. Lenders want assurance that you earn enough to cover the mortgage payments.
  • Maximum DTI ratio: Many lenders require that your monthly debt payments take less than 36% of your income. However, a DTI greater than 36% may be allowed, dependent upon other loan characteristics.
  • Minimum down payment: Conventional loans may offer down payments as low as 3% for first-time buyers of primary residences, 5% for non-first-time buyers of primary residences, 10% for second homes, and 15-20% for investment properties.
  • Private mortgage insurance. PMI is required if the down payment is less than 20%.
  • Cash reserves. You may need to show that you have enough cash to cover the down payment and closing costs. Some lenders also require up to six months of mortgage payments in savings, especially for jumbo loans or investment properties.
  • Appraisal and insurance. You may need to have the property appraised to confirm the value. And you will need to maintain hazard insurance for the property.

How Do I Apply for a Conventional Loan?

You can apply for a conventional loan with any mortgage lender. Many lenders even allow you to apply for a conventional loan online. The application process requires you to answer questions about your identity, employment, and finances. You’ll also be asked to upload relevant financial documents, including:[7]

  • Proof of identity, such as a passport or driver’s license.
  • Proof of income, such as pay stubs and tax returns.
  • Proof of assets, such as bank and investment account statements.
  • A list of current debts, including credit cards, student loans, auto loans, etc.

You'll also need to provide information about the property, including:

  • The property address.
  • The property's value, as evidenced by a home appraisal.
  • The seller's legal right to sell, as evidenced by a title search.

The lender can use this information to determine whether you qualify for a conventional loan and, if so, how much they can lend you.

Conventional Loan FAQs

What Is the Difference Between a Conventional Loan and a Regular Loan?

The term "regular loan" is not a recognized classification, but it is often used interchangeably with “conventional loan.”

Do You Have to Put 20% Down on a Conventional Loan?

Putting 20% down can help you save money by avoiding PMI and potentially reducing the interest rate, but it is not necessary. Well-qualified buyers may be able to secure a conventional loan with as little as 3-5% down.

What Is the Difference Between Conventional Loans and Government-Backed Loans?

While government-backed loans are guaranteed, insured, or funded by government agencies, conventional loans are not.

Do Conventional Loans Offer Lower Interest Rates Than Government-Backed Loans?

Conventional loans may offer lower interest rates than government-backed loans, but that’s not always the case. Interest rates depend on multiple factors, including credit scores, debt-to-income ratios, economic conditions, and lender policies.

Can Self-Employed Workers Qualify for a Conventional Loan?

Possibly. Self-employed homebuyers still need to prove that their income is high enough to cover existing debts plus the new home loan. Annual tax returns can serve as proof of income.

The Bottom Line

Conventional mortgage loans are a flexible home loan option, serving a range of property types for many homebuyers. Borrowers with good credit may benefit from lower borrowing costs, higher loan limits, and faster mortgage application processing than government-backed loans offer.