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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:
|Min. down payment||3% with PMI
(20% without PMI)
|Min. credit score||At least 620|
|Debt-to-income ratio||43% or less|
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:
|Min. down payment||20%|
(down to 3% with PMI)
|3.5% to 10%|
(depends on credit score)
|Min. credit score||620||500 to 580|
(depends on down payment)
|Mortgage insurance||None||None, but they do come with upfront and annual guarantee fees|
|Property type||Primary residence only||Primary residence only||Primary residence only|
|Max DTI ratio||43%|
(but lenders are free to go higher)
|43% to 45%||41%|
(but lenders are free to go higher)
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.
Conventional mortgages vs. VA Loans
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.
Chris Jennings contributed to the reporting for this article.