A conventional mortgage is a home loan offered by private lenders such as banks, credit unions, and mortgage companies. Unlike FHA, VA, or USDA loans, conventional loans are not backed by the government. Instead, they follow guidelines set by Fannie Mae and Freddie Mac, two government-sponsored entities (GSEs) that help keep the mortgage system running smoothly.
Many homebuyers prefer conventional mortgages. Of the more than 2,500,000 purchase loans acquired in 2024*, conventional loans made up about 63%. While government-backed loans save borrowers money upfront, conventional loans remain the top option for flexibility, competitive interest rates, and potential long-term savings.
Let’s explore whether a conventional loan is your ideal homebuying fit.
Pros and Cons of Conventional Loans
Here are the top pros and cons of conventional loans:
Conventional Pros & Cons
| Pros | Cons |
|---|---|
| Potential for lower long-term interest costs | Typically requires a larger down payment compared to government-backed loans |
| Opportunity to avoid private mortgage insurance (PMI) with 20% down | Higher credit score requirements |
| More flexible loan terms and options | Harder to qualify without substantial income and financial stability |
| Can be cheaper overall for well-qualified borrowers | Interest rates can be less favorable for borrowers with lower credit scores |
Overall, conventional loans stand out for their overall interest savings and flexible loan options, but realizing their full benefits requires substantial savings for a down payment.
Another huge benefit is that conventional mortgages don’t require mortgage insurance if you provide a down payment of 20% or more. Even without putting 20% down at closing, mortgage insurance on conventional loans cancels at 78% equity. In comparison, government-backed loans require an ongoing fee to help fund their loan programs, and most have ongoing fees or mortgage insurance that last the life of the loan (even if you provide a large down payment at closing).
On the flip side, there are a few downsides to be aware of. Higher credit score requirements mean conventional loans often have stricter eligibility criteria than government-backed loans. Borrowers typically need a credit score of at least 620, but you'll want to aim for 720 or higher to access the most favorable rates and terms. This can be a barrier for first-time buyers or those still working to rebuild their credit.
Another consideration is the larger down payment that is often required. While getting a conventional loan with as little as 3% down through programs like Fannie Mae's HomeReady or Freddie Mac's Home Possible (for income-qualified borrowers) is possible, most conventional loans require between 5% and 20% down.
Common Types of Conventional Loans
Whether you're a first-time buyer, upgrading to your forever home, or even shopping in a high-cost market, there's likely a conventional loan type designed to meet your unique situation. Here's a breakdown of the most common types of conventional loans and how they might fit into your homebuying journey.
Conforming vs. Non-Conforming Loans
Let’s start with the basics of conforming and non-conforming loans. These two differ in whether the loan follows the guidelines Fannie Mae and Freddie Mac set, including loan limits, credit score requirements, and debt-to-income (DTI) ratios.
Conforming loans are the most standard type of conventional loan. These loans conform to Fannie Mae and Freddie Mac rules, making them easier to sell on the secondary mortgage market. That helps lenders keep costs lower and interest rates more competitive for borrowers.
One key rule involves loan limits. In 2025, the conforming loan limit is $806,500 in most parts of the country, but it can go higher in more expensive markets like San Francisco, New York City, and Honolulu. So, if you buy a $500,000 home and put down 10%, you’re well within the conforming range.
Non-conforming loans, on the other hand, break outside those guidelines. The most common example is a jumbo loan, which kicks in when your loan amount exceeds the conforming limit. For example, if you're purchasing a $900,000 home with 10% down, your loan would exceed $806,500 by over $3,000, which puts it in jumbo loan territory.
These loans usually require a higher credit score (often 700+), a lower DTI, and larger cash reserves. Interest rates on jumbo loans can also be slightly higher since they carry more risk for lenders. Still, they’re popular with buyers in high-cost real estate markets.
Fixed-Rate vs. Adjustable-Rate Mortgages (ARMs)
Choosing between a fixed-rate mortgage and an adjustable-rate mortgage (ARM) is a key decision for a conventional mortgage. Here’s a look at how the two compare:
| Fixed-Rate Mortgage | Adjustable-Rate Mortgage (ARM) | |
|---|---|---|
| Interest Rate | Stays the same for the loan term | Starts low, adjusts after introductory period |
| Best For | Long-term homeowners | Short-term buyers or those planning to refinance |
| Predictability | High (fixed payments) | Lower at first, but increases after the adjustment period |
| Example | 30-year at 6.25% | 5/1 ARM: Fixed 5 years, then adjusts yearly |
Overall, ARMs can save you money early on, which is ideal if you plan to move, refinance, or sell before the adjustment period kicks in. However, some risk exists: if market rates rise sharply, your monthly payment could increase significantly once the fixed period ends. Fixed-rate loans are a solid choice if you plan to stay in your home long-term and want peace of mind knowing your payment won’t change.
HomeReady® and Home Possible® Loans
Fannie Mae’s HomeReady® and Freddie Mac’s Home Possible® are two conventional mortgage options intended to help expand affordable homeownership for buyers with modest incomes or limited savings. These programs provide a 3% down payment, reduced private mortgage insurance (PMI), and flexible credit requirements. However, you’ll need to meet their income limit requirements to qualify.
HFA Preferred® and HFA Advantage® Loans
HFA Preferred® and HFA Advantage® are conventional loan programs backed by Fannie Mae and Freddie Mac. They are designed to work with state and local housing finance agencies (HFA) and feature 3% down payment requirements, reduced mortgage insurance costs, and flexible credit guidelines.
To qualify, buyers must meet the income and purchase price limits set by the participating HFA and typically complete a homeownership education course. Keep in mind that HFA loans are only available through participating local housing finance agencies.
Conventional Loans vs. Other Loan Types
When comparing mortgage options, understanding how conventional loans compare to other loan types, like FHA, VA, and USDA, is essential. Each option has its own eligibility requirements and benefits, and the right choice depends on your financial situation and goals.
Conventional vs. FHA Loans
| Factor | FHA Loans | Conventional Loans |
|---|---|---|
| Who It’s Best For | Ideal for buyers with lower credit scores or limited financial histories, including many first-time homebuyers | Best for borrowers with solid credit and financial stability |
| Backing | Insured by the Federal Housing Administration (FHA) | Not backed by the government |
| Credit Score | Typically requires a minimum credit score of 580 | Often requires a score of 620 or higher |
| Down Payment | Requires as little as 3.5% down | Typically requires 5–20%, depending on the lender and borrower qualifications |
| Mortgage Insurance | Includes both upfront and annual mortgage insurance premiums (MIP) | Requires private mortgage insurance (PMI) only if your down payment is under 20% |
Let’s say you’re a first-time buyer with a credit score of 600 and about $8,000 saved for a down payment. On a $200,000 home, an FHA loan would allow you to put down just 3.5% ($7,000), making it a feasible option even with your limited savings and less-than-perfect credit.
However, remember you’ll pay both upfront and ongoing mortgage insurance. On the other hand, a conventional loan might not be within reach unless you improve your credit score and save a bit more for a larger down payment.
Conventional vs. VA Loans
| Factor | VA Loans | Conventional Loans |
|---|---|---|
| Who It’s Best For | Exclusive to Veterans, active-duty military members, and eligible surviving spouses | Best for borrowers with solid credit and financial stability |
| Backing | Backed by the U.S. Department of Veterans Affairs (VA) | Not backed by the government |
| Credit Score | No official minimum credit score requirement | Typically requires a score of 620 or higher |
| Down Payment | Does not require a down payment | Usually requires 5–20%, depending on the borrower’s qualifications |
| Mortgage Insurance | Does not require private mortgage insurance (PMI) but requires an upfront fee called the VA funding fee, which varies depending on down payment size and loan type. Some borrowers may qualify for an exemption. | Requires PMI if the down payment is less than 20% |
Imagine you're an Army Veteran planning to buy a $300,000 home. With a VA loan, you could purchase the home with zero down, no PMI, and still qualify even if your credit score isn't perfect. That can free up your savings for moving costs or home improvements.
In contrast, a conventional mortgage might require putting down at least $15,000 (5%), and if you don’t reach the 20% threshold, you’d also need to factor in monthly PMI, adding to your overall mortgage expenses. For those eligible, a VA loan can offer substantial cost savings and more forgiving credit standards.
Conventional vs. USDA Loans
| Factor | USDA Loans | Conventional Loans |
|---|---|---|
| Who It’s Best For | Designed for low- to moderate-income borrowers purchasing homes in eligible rural or suburban areas | Best for borrowers with solid credit and financial stability |
| Backing | Backed by the U.S. Department of Agriculture (USDA) | Not backed by the government |
| Credit Score | Typically requires a minimum credit score of 640 | Generally requires a credit score of at least 620 |
| Down Payment | Offers 100% financing and no down payment requirement | Usually requires 5–20% down, depending on the borrower’s qualifications |
| Mortgage Insurance | Requires an upfront (1%) and recurring fee (0.35%) | Requires PMI only if the down payment is under 20% |
Let’s say you’re a second-time homebuyer looking to settle in a quiet, rural area and working with a modest budget. You find a $180,000 home in a USDA-eligible community. Even though you've owned a home before, you can still qualify for a USDA loan as long as you meet the income and location requirements.
With 100% financing, you wouldn't need a down payment, allowing you to keep your savings intact for other expenses like moving, repairs, or emergency funds. Meanwhile, a conventional loan might require putting down at least 5% (or $9,000) and potentially paying PMI, increasing your upfront and monthly costs.
A USDA loan can be a smart and budget-friendly choice for buyers looking for affordable options outside urban centers, especially those re-entering the market.
Is a Conventional Loan Right for You?
Deciding whether a conventional loan is right for you starts with closely examining your financial picture.
Do you have a strong credit score (typically 720 or higher)? Can you make a down payment of at least 5%, or even better, 20%, to avoid private mortgage insurance? Do you have a steady income and a track record of managing your debt responsibly? If you nod yes to these questions, a conventional loan could fit your home financing journey.
Even if you don’t have a large down payment saved, you might still qualify for a conventional mortgage through programs like Fannie Mae’s HomeReady® or Freddie Mac’s Home Possible®. These options allow as little as 3% down and have reduced mortgage insurance requirements, making homeownership more accessible to qualified borrowers with moderate incomes.
Of course, every buyer’s situation is unique. If you're unsure whether a conventional loan is the best path forward, the Paddio.com team is here to help! Get started here.
Our team of loan experts can walk you through the different loan options available, answer your questions, and provide the guidance you need to make a confident, informed decision.
Sources
*From 2024 MBS Pivot data accessed through Polygon.
