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Conventional Mortgage: Everything You Need to Know

A conventional mortgage is one type of mortgage you can use to buy or refinance a home.

Aly J. Yale Aly J. Yale Updated December 1, 2021

Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to here as "Credible."

A conventional mortgage is one of the many loan products you can use to purchase or refinance a house. Conventional mortgages can be a little harder to qualify for than other types of home loans, but they can also offer significant benefits if you’re eligible.

Conventional loan products can be a good choice if you have good credit, want to save on long-term costs, and are looking to avoid mortgage insurance (or at least cancel it later on).

Here’s what you should know about conventional mortgages:

  • What is a conventional mortgage?
  • What are the requirements of a conventional mortgage?
  • How conventional mortgages compare to government-insured loans
  • Conventional mortgage rates
  • Is a conventional mortgage right for you?

What is a conventional mortgage?

A conventional mortgage is a home loan that is not insured by a government agency (like FHA, VA, and USDA loans are). Conventional loans can be either conforming or non-conforming. Conforming loans have a balance under the “conforming” loan limit for the county. In 2022, the conforming loan limit for one-unit properties is $647,200 in most of the U.S. In higher-cost areas, the limit is $970,800.

Non-conforming loans — more commonly known as jumbo loans — usually have a balance higher than this limit. Since theyThese are also called jumbo loans, and because they have a higher balance and are not eligible for purchase by Fannie Mae and Freddie Mac, they often come with higher interest rates than conforming loans.

What are the requirements of a conventional mortgage?

Qualifying for a conventional loan can generally be a bit harder than it would be for an FHA mortgage or other government-insured loan. Because they lack any sort of government guarantee to protect them from loss, lenders take on more risk with these loans. For this reason, they’re typically pickier about who they’ll lend to.

Here are the typical requirements for a conventional home loan:

 Typical requirements
Min. down payment3% with PMI
(20% without PMI)
Mortgage insurance
  • No required upfront fees
  • PMI only sometimes required
    (when down payment is less than 20%)
  • Canceled automatically when LTV reaches 78%
Min. credit scoreAt least 620
Debt-to-income ratio43% or less
Property type
  • Primary residence
  • Investment property
  • Second home

Find Out: How to Get a Mortgage Pre-Approval

How conventional mortgages compare to government-insured loans

Conventional mortgages are just one of the four main types of mortgage loans. In addition to a conventional home loan, you can also choose an FHA loan, a USDA loan, or a VA loan.

Here’s a quick look at how those differ from conventional mortgages:

 ConventionalFHAVAUSDA
Min. down payment20%
(down to 3% with PMI)
3.5% to 10%
(depends on credit score)
NoneNone
Min. credit score620500 to 580
(depends on down payment)
None580
Max LTV97%96.5%100%100%
Mortgage insurance
  • Only required with down payments under 20%
  • Canceled automatically when you reach 78% LTV
  • Required on all loans
  • Can only be canceled on certain loans after 11 years
NoneNone, but they do come with upfront and annual guarantee fees
Property type
  • Primary residence
  • Vacation / second homes
  • Investment property
Primary residence onlyPrimary residence onlyPrimary residence only
Max DTI ratio43%
(but lenders are free to go higher)
43% to 45%41%
(but lenders are free to go higher)
41%

Conventional mortgages vs. FHA Loans

Conventional loans tend to be more affordable than FHA loans, both upfront and over the life of the loan.

For one, they don’t require upfront mortgage insurance, and if you make a large enough down payment, you might not have to pay for mortgage insurance at all. If you do, you can request cancellation of your premiums once your loan hits an 80% loan-to-value ratio — otherwise it will be canceled automatically once the LTV reaches 78%. Mortgage insurance remains in effect for life on many FHA loans.

There are also smaller down payment requirements on conventional loans, and you can use the funds to purchase any type of property you want — including vacation homes and investment properties. But you’ll need a higher credit score to qualify. FHA loans require at least a 500 to 580 credit score, depending on your down payment.

Read More: First-Time Homebuyer Tips: 10 Mistakes to Avoid

Conventional mortgages vs. VA Loans

The key difference here is that VA loans are reserved for only qualifying military members, veterans, and their spouses. The average homebuyer can’t qualify for these.

If you do meet the requirements for military service set out by the Department of Veterans Affairs, then you’re most likely better off with the VA loan, as these mortgages come with serious benefits:

  • They require zero down payment
  • The seller has to pay a portion of your closing costs
  • There’s no mortgage insurance required
  • They tend to have some of the lowest interest rates

One time you might want a conventional loan over a VA loan is if you’re buying a home priced beyond your VA loan entitlement or some sort of rental or investment property since VA loans can only be used on primary residences.

Learn More: How to Get the Best Mortgage Rates

Conventional mortgages vs. USDA Loans

USDA loans are mortgages designed for rural home purchases only. They can only be used on properties in specific, designated parts of the country, and borrowers’ households have to fall under a certain income threshold, too. (This varies by county. See the full list of income limits here.)

Unlike conventional mortgages, USDA loans don’t require a down payment. They do, however, require mortgage insurance and an upfront guarantee fee. You also can’t use them on investment properties.

Find Out: How to Know If You Should Buy a House

Conventional mortgage rates

Conventional change daily and vary by lender. Rates for conventional home loans are typically competitive with government-backed loans and often come with less fees. If you have a high credit score and good financials, you might find a better interest rate on a conventional loan than you would with, say, an FHA loan.

While lenders offer a variety of conventional loan terms, the 15-year fixed term and 30-year fixed term are the most common.

Is a conventional mortgage right for you?

If you’re simply looking for the easiest loan to qualify for, FHA loans might be your best bet for buying a house. Or if you qualify for a special loan program like a VA loan or USDA loan, these are likely the smartest path forward, as they require no down payment and can allow you to secure a mortgage with low interest rates and favorable terms.

However, if you’re well-qualified, conventional loans offer a host of advantages. Unlike government-backed loans, you won’t have to pay any program-specific fees when taking out a conventional mortgage. And, even if you don’t have 20% saved for a down payment, your loan servicer will automatically cancel your PMI once the LTV reaches 78%.

Whatever you decide, make sure you shop around for your loan first. Rates and terms can vary greatly depending on your lender. Credible Operations, Inc. doesn’t offer every type of mortgage loan, but you can use us to compare multiple prequalified rates on conventional mortgages. It only takes at once in just a few minutes and won’t affect your credit score.

Credible makes getting a mortgage easy

  • Instant streamlined pre-approval: It only takes 3 minutes to see if you qualify for an instant streamlined pre-approval letter, without affecting your credit.
  • We keep your data private: Compare rates from multiple lenders without your data being sold or getting spammed.
  • A modern approach to mortgages: Complete your mortgage online with bank integrations and automatic updates. Talk to a loan officer only if you want to.

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Trustpilot

Chris Jennings contributed to the reporting for this article.

About the author
Aly J. Yale
Aly J. Yale

Aly J. Yale is a mortgage and real estate authority. Her work has appeared in Forbes, Fox Business, The Motley Fool, Bankrate, The Balance, and more.

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Home » All » Mortgages » Conventional Mortgage: Everything You Need to Know

Types of Mortgages


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