Buying a home is a major milestone, and choosing the right mortgage plays an important role in making it happen. For many Americans, a conventional mortgage is the most common and flexible financing option. But what exactly is a conventional loan, and how do you know if it’s the right choice for your situation?

If you’re a first-time or repeat homebuyer with a strong financial profile, understanding how conventional mortgages work can give you a clear advantage. This guide explains everything you need to know, from what defines a conventional loan and how it differs from government-backed options to the requirements, benefits, and considerations that can help you make an informed decision.

What is a Conventional Mortgage?

A conventional mortgage is a type of home loan not insured or guaranteed by a government agency, unlike a government-backed loan such as an FHA, VA, or USDA loan. Instead, these loans are funded and backed by private lenders.

While many lenders offer them directly, most conventional loans must follow specific rules to be sold on the secondary mortgage market. This process is how the two government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, come into play.

Conforming vs. Non-Conforming Loans

It is important to understand the key distinction between conforming and non-conforming conventional loans.

• Conforming loans: These are conventional loans that meet the strict guidelines set by Fannie Mae and Freddie Mac. These guidelines cover everything from loan limits to borrower credit scores and debt-to-income (DTI) ratios. Because conforming loans are less risky for lenders, they often come with more competitive interest rates.
• Non-conforming loans: Also known as jumbo loans, these conventional mortgages exceed the loan limits set by the FHFA for conforming loans. Non-conforming loans are more difficult to qualify for, typically requiring higher credit scores and down payments.

The Role of Fannie Mae and Freddie Mac

While Fannie Mae and Freddie Mac do not directly lend money to home buyers, they are the backbone of the conventional mortgage market.

Here is how they work:

1. A private lender, like a bank or credit union, originates a conventional mortgage for you.
2. The lender then sells your mortgage, along with many others, to Fannie Mae or Freddie Mac.
3. The GSEs package these loans into mortgage-backed securities and sell them to investors.
4. This transaction provides the original lender with fresh capital to issue new mortgages to other home buyers, keeping the market liquid and supporting a steady supply of mortgage funds.

Because lenders know they can sell these loans to Fannie Mae and Freddie Mac, they tend to offer similar products and terms that align with the GSEs’ rules.

How Conventional Mortgages Work

For most home buyers, a conventional loan means a fixed-rate, amortizing loan with a 15- or 30-year term. Here is a closer look at the different structures available.

Loan Structure and Repayment Basics

A conventional mortgage is a long-term loan that is paid back over time through a series of regular payments, typically monthly. A portion of each payment goes toward the principal (the original amount borrowed), and the rest goes toward interest. This process is known as amortization.

In the beginning, more of your payment covers interest, and less goes toward the principal. As time goes on, this ratio reverses, and more of your payment is applied to the principal balance, so you build equity faster.

Typical Loan Terms

The most common conventional loan terms are 15, 20, and 30 years.

• 30-Year Fixed-Rate: This is the most popular choice for home buyers because it offers the lowest monthly payments, making it easier to afford a more expensive home. However, you pay more in total interest over the life of the loan.
• 15-Year Fixed-Rate: With a shorter term, you will pay off your loan much faster and save significantly on interest costs. The trade-off is that your monthly payments will be higher than on a 30-year loan.
• Other Terms: Some lenders offer 10- or 20-year fixed-rate options as well. The shorter the term, the higher the monthly payment and the lower the total interest paid.

Fixed-Rate vs. Adjustable-Rate Options

You can choose between a fixed-rate or adjustable-rate mortgage (ARM) for a conventional loan.

• Fixed-Rate Mortgage (FRM): Your interest rate and monthly principal and interest payment remain the same for the entire life of the loan. This stability makes budgeting easier and protects you from future rate hikes.
• Adjustable-Rate Mortgage (ARM): With an ARM, you get a lower initial interest rate for a set period, typically 5, 7, or 10 years. After this initial period, your rate adjusts periodically based on market indexes, so your monthly payment could go up or down. ARMs are often a good option if you plan to sell the home or refinance before the fixed-rate period ends.

Conventional Loan Requirements

To be approved for a conventional mortgage, you will need to meet specific financial criteria. Because these loans are not government-insured, lenders have stricter requirements for borrower eligibility.

Minimum Credit Score and Income Standards

• Credit Score: For a conforming conventional loan, you will generally need a minimum credit score of 620. However, a higher score, such as one in the 700s, can significantly lower your interest rate and make it easier to qualify for a low down payment.
• Income: Lenders want to see a stable and consistent income history, typically a minimum of two years. Your income will be verified using documents like W-2s, pay stubs, and tax returns to ensure you can comfortably afford the monthly mortgage payments.

Down Payment Requirements

One of the biggest misconceptions about conventional loans is that you need a 20% down payment. While putting down 20% allows you to avoid private mortgage insurance (PMI), it is not a requirement.

• 3% Down Payment: Special programs like Fannie Mae’s HomeReady or Freddie Mac’s Home Possible allow for a minimum 3% down payment for eligible first-time home buyers.
• 5% Down Payment: A 5% down payment is another common option, especially for borrowers who do not qualify for the 3% down programs.
• 10% or 15% Down Payment: Larger down payments can help lower your interest rate and reduce your monthly PMI payments, though you will still need to pay PMI until you reach 20% equity.
• 20% or More Down Payment: This is the threshold to avoid paying PMI altogether, which can lead to significant long-term savings.

Debt-to-Income (DTI) Ratio

Your DTI ratio is a key factor lenders use to assess your ability to manage monthly payments. It is the percentage of your gross monthly income that goes toward paying your debts.

Lenders calculate your DTI by dividing your total monthly debt payments by your gross monthly income.

While conventional loans may allow a DTI ratio of up to 50% in some cases, most lenders prefer it to be at or below 43%. A lower DTI indicates that you are a less risky borrower.

Private Mortgage Insurance (PMI)

If you put down less than 20% on a conventional mortgage, you will need to pay for Private Mortgage Insurance (PMI).

When PMI is Required

PMI is a type of insurance that protects the lender, not you, in case you stop making your mortgage payments. It is required on all conventional loans with a loan-to-value (LTV) ratio higher than 80%, which means a down payment of less than 20%.

How PMI Costs are Calculated

PMI costs vary based on a few factors, including your credit score, down payment size, and loan amount.

• The Cost: PMI is typically an annual premium, often ranging from 0.46% to 1.5% of the loan amount.
• Payment: It is usually included as an additional fee in your monthly mortgage payment.

How and When It Can Be Removed

The good news is that PMI is not a permanent cost. The Homeowners Protection Act (HPA) of 1998 offers multiple ways to remove it.

• Borrower Request: You can ask your lender to cancel PMI once your LTV ratio reaches 80%. You will need to be current on your payments, and an appraisal may be required to verify the property’s current value.
• Automatic Cancellation: By law, your lender must automatically cancel PMI once your LTV ratio reaches 78%, or halfway through your loan term, provided you are current on payments.
• Increased Home Value: If your home’s value has increased significantly, you can have it reappraised to demonstrate you have reached 20% equity and cancel PMI early.

Conventional vs. Government-Backed Loans

While conventional loans are popular, they are not the only option. Government-backed loans, like those from the FHA, VA, and USDA, can be a better fit for some buyers.

Pros and Cons of Government-Backed Loans

• FHA Loans: FHA loans offer low down payments and more flexible credit requirements, making them accessible to buyers who might not qualify for a conventional loan. However, you will pay mortgage insurance premiums (MIP) for the life of the loan in many cases, which can increase your long-term costs.
• VA Loans: For eligible military members, VA loans are a huge benefit. They require no down payment and no monthly mortgage insurance premiums. The primary trade-off is the one-time funding fee, but this can be rolled into the loan amount.
• USDA Loans: USDA loans are another excellent option for zero-down financing in designated rural areas. They have income limits and property location restrictions, but they offer competitive interest rates.

Pros and Cons of Conventional Mortgages

Conventional loans aren’t always the easiest or most suitable choice for every homebuyer. The right decision depends on your financial situation, credit profile, and long-term goals. Here’s a balanced look at the key advantages and disadvantages to help you determine whether a conventional loan is the right fit for you.

Benefits of a Conventional Mortgage

• Lower Overall Costs (Potentially): With a 20% down payment, you can avoid PMI, saving you hundreds of dollars each month. If you have a high credit score, your interest rate can be lower than on a government-backed loan.
• Canceling PMI: Unlike FHA loans, which require mortgage insurance for the life of the loan in most cases, you can remove PMI once you build 20% equity in your home.
• Flexibility with Property Type: Conventional loans can be used to finance primary residences, second homes, and investment properties. Government-backed loans are typically limited to primary residences only.
• Property Condition: Conventional loans have less strict property condition requirements compared to FHA or VA loans, which must meet certain safety and structural standards.

Drawbacks of a Conventional Mortgage

• Stricter Credit Requirements: The minimum credit score for a conventional loan is typically higher than for FHA or USDA loans, which can be a barrier for some borrowers.
• Higher Down Payment (Sometimes): While 3% down programs exist, you need to save a larger down payment, ideally 20%, to avoid the cost of PMI.
• More Challenging for Lower Incomes: With stricter DTI requirements, borrowers with high debt or lower income may find it more difficult to qualify for a conventional loan compared to an FHA loan.

Comparison Table: Conventional vs. Government-Backed Loans

Feature	Conventional Loan	FHA Loan	VA Loan	USDA Loan
Backing	Not government-insured	Insured by the FHA	Guaranteed by the VA	Guaranteed by the USDA
Best For	Borrowers with good to excellent credit and stable income	First-time buyers or those with lower credit scores	Eligible military service members, veterans, and surviving spouses	Low- to moderate-income borrowers in eligible rural areas
Min. Credit Score	620+	580 for 3.5% down, 500 for 10% down	No official minimum, but lenders typically require 620+	No official minimum, but lenders typically require 640+
Min. Down Payment	3% for certain programs	3.5% with 580+ credit	0%	0%
Mortgage Insurance	PMI required for less than 20% down, can be canceled	Upfront and annual MIP required, often for the life of the loan	One-time funding fee, no monthly PMI	Annual guarantee fee
Property Eligibility	Primary residence, investment property, vacation home	Primary residence only	Primary residence only	Primary residence in eligible rural areas only

Who Should Consider a Conventional Mortgage?

A conventional mortgage is an excellent choice for a variety of borrowers, but it is not the right fit for everyone.

You should consider a conventional mortgage if:

• You have a strong credit history, generally a score of 620 or higher.
• You have a stable income and a manageable DTI ratio.
• You can afford a down payment of at least 3% and want the option to put down 20% to avoid PMI.
• You are buying a second home, investment property, or higher-priced home that exceeds government loan limits.
• You want the flexibility to remove mortgage insurance once you build sufficient equity.

Consider a government-backed loan if:

• You have a lower credit score that makes it difficult to qualify for a conventional loan, in which case an FHA loan might be a good fit.
• You are an eligible veteran or active-duty service member and can take advantage of the zero-down VA loan benefit.
• You have lower-to-moderate income and are purchasing in a qualifying rural area, making a USDA loan a potential option.

How to Apply for a Conventional Mortgage

Applying for a mortgage involves several steps, and preparation is key to a smooth process.

1. Strengthen Your Credit: Before you even begin, check your credit report for errors and work to improve your score. Pay down debt and avoid taking on new credit to give yourself the best possible standing.
2. Know What You Can Afford: Use a mortgage calculator to estimate your potential monthly payments, factoring in your income, debts, and savings. This will give you a realistic budget for your home search.
3. Gather Your Financial Documents: Have your W-2s, pay stubs, bank statements, tax returns, and investment account statements ready. Having your paperwork in order will make the process faster and smoother.
4. Get Pre-Approved: Contact several lenders to get pre-approved for a loan. A pre-approval letter shows sellers that you are a serious and qualified buyer, which can give you an edge in a competitive market.
5. Find a Home and Make an Offer: With your pre-approval letter, you can confidently begin house hunting. Once you find a home, your offer will include your pre-approval letter.
6. Underwriting and Closing: After your offer is accepted, the loan moves into underwriting. The lender will verify all your financial information, order an appraisal to confirm the property’s value, and review all documents. After the underwriting is complete, you will move to the closing table to finalize the loan and become a homeowner.

Current Market Trends and Loan Limits (2025)

As of October 2025, it is important to consider the current market conditions when planning your mortgage.

• Interest Rates: While rates remain higher than the historic lows of the 2010s, they have trended downward slightly after the Federal Reserve’s September 2025 rate cut. For October 2025, 30-year conventional fixed rates are hovering around 6.25% to 6.30%. However, experts remain divided on future trends, with some predicting rates will stay above 6% through 2025.
• 2025 Conforming Loan Limits: The Federal Housing Finance Agency (FHFA) increased the baseline conforming loan limit for 2025 to $806,500 for a single-family home in most of the U.S. In high-cost areas, the limit is set at $1,209,750. These limits are crucial because borrowing above this amount would require a jumbo loan, which has stricter qualification requirements.
• Market Context: Many buyers feel “locked in” by low pandemic-era rates, contributing to lower housing inventory and strong housing demand. The current market requires diligence and careful planning to navigate.

FAQs

What Is the Minimum Down Payment?

Many borrowers, especially first-time home buyers, can qualify for a conventional loan with as little as a 3% down payment. Some low-down-payment options include Fannie Mae’s HomeReady and Freddie Mac’s Home Possible programs. 

It is important to remember that putting down less than 20% means you will be required to pay Private Mortgage Insurance (PMI). While PMI adds to your monthly payment, the good news is that you can cancel it once you build 20% equity in your home. 

What Credit Score Is Needed?

For a conventional loan, most lenders require a minimum credit score of 620. However, your credit score plays a significant role in determining your interest rate and the total cost of your loan. Borrowers with a credit score of 740 or higher are typically offered the most competitive interest rates and favorable terms. 

If your credit score is below 620, a conventional loan may not be the best option, but government-backed loans like FHA loans offer lower minimum credit score requirements. 

Can First-Time Buyers Get a Conventional Loan?

Yes, absolutely! First-time home buyers can and do get conventional loans. In fact, conventional mortgages are the most common type of loan for home purchases. Low down payment programs like HomeReady and Home Possible are designed to make conventional loans more accessible to borrowers with lower income and limited savings. For first-time buyers with strong financial profiles, a conventional loan often provides the most flexible terms and the lowest long-term costs. 

Is a Conventional Loan Better Than FHA?

Whether a conventional loan or an FHA loan is “better” depends entirely on your personal financial situation.  

A conventional loan is often a better fit if you have:

• A strong credit score (620+).
• A down payment of 3% or more.
• The goal of avoiding or canceling mortgage insurance over the life of the loan. 

An FHA loan may be a better option if you have:

• A lower credit score (below 620).
• Limited savings for a down payment (as low as 3.5%).
• A higher debt-to-income ratio that might make qualifying for a conventional loan difficult. 

Conclusion

Conventional mortgages remain a foundation of the American housing market, offering flexibility and long-term value for homebuyers with strong financial profiles. They’re often a smart choice if you have good credit, steady income, and enough savings for a meaningful down payment, particularly if you want to reduce or avoid mortgage insurance.

By understanding the distinctions between conforming and non-conforming loans and comparing conventional options with government-backed programs, you can make a confident and well-informed decision. The right mortgage choice can save you thousands of dollars over time and bring you closer to your homeownership goals.

If you’re ready to move forward, speak with a trusted lender or mortgage advisor to determine whether a conventional loan aligns with your financial plans. A professional can evaluate your unique circumstances and guide you toward the best path to owning your home.