What Is a Conventional Loan?

A conventional loan is one of the most popular types of home loans in the United States, and for good reason. Offered by private lenders like banks, credit unions, and mortgage companies, it’s not backed by the government, which is unlike FHA, VA, or USDA loans. Instead, conventional loans follow guidelines set by Fannie Mae and Freddie Mac, two key players in the housing market that help keep the mortgage system running smoothly.

For many homebuyers, conventional mortgages are the go-to choice. This is because they are often seen as the "default" loan because they provide flexibility, competitive interest rates, and the potential for long-term savings. If you have a strong credit history and a steady income, a conventional loan could be the perfect fit for your homebuying goals.

Pros and Cons of Conventional Loans

Conventional loans come with a mix of benefits and potential drawbacks. Knowing both sides can help you decide if this mortgage option fits your financial goals.

Pros of Conventional Loans

1. Competitive Interest Rates
Borrowers with strong credit scores can secure lower interest rates, potentially saving thousands over the life of the loan.
Example: A 740 credit score may get you a much lower rate than a 660 score.

2. Flexible Loan Options
Choose between:

• Fixed-rate mortgages – steady payments for the life of the loan
  

• Adjustable-rate mortgages (ARMs) – lower initial rates that adjust over time
  Tip: ARMs can be ideal if you plan to move within 5–7 years.

3. No Upfront Mortgage Insurance
Unlike FHA loans, conventional loans don’t require an upfront mortgage insurance premium (MIP), helping lower your closing costs.

4. Option to Avoid PMI
Put down 20% or more and you can skip private mortgage insurance (PMI) altogether.
Example: On a $300,000 home, avoiding PMI could save $100–$300 per month.

Cons of Conventional Loans

1. Higher Credit Score Requirements
Most lenders require at least a 620 credit score, and the best rates go to those in the mid-700s or higher. This can be tough for first-time buyers or those with limited credit history.

2. Larger Down Payment Expectations
While some programs allow as little as 3% down, many loans require 5–20%.
Example: A 10% down payment on a $350,000 home means $35,000 upfront.

3. PMI Required for Lower Down Payments
If you put down less than 20%, you’ll typically need to pay PMI—adding to your monthly housing cost and possibly impacting your debt-to-income ratio.

Common Types of Conventional Loans

Conventional loans aren’t one-size-fits-all, and that’s a good thing! 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. The difference between these two comes down to whether the loan follows guidelines set by Fannie Mae and Freddie Mac, including things like 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 $726,200 in most parts of the country, but it can go higher in more expensive markets like San Francisco, New York City, or Honolulu. So, if you're buying a $500,000 home and putting 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 $810,000, 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 a popular option for buyers in high-cost real estate markets.

Fixed-Rate vs. Adjustable-Rate Mortgages (ARMs)

Another key choice you’ll face with a conventional mortgage is whether to go with a fixed-rate mortgage or an adjustable-rate mortgage (ARM), and each has its own pros and cons depending on your financial goals and how long you plan to stay in your home.

A fixed-rate mortgage keeps the same interest rate for the entire life of the loan, whether that’s 15, 20, or 30 years. This makes your monthly principal and interest payments predictable, which many homeowners appreciate, especially in a rising rate environment.

For instance, if you lock in a 6.25% rate on a 30-year fixed mortgage, you’ll pay that same rate every month, no surprises. 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.

Adjustable-rate mortgages, or ARMs, work a little differently. They start with a lower fixed interest rate for an introductory period (often 5, 7, or 10 years) after which the rate adjusts periodically based on market conditions. A 5/1 ARM, for example, means your rate is fixed for five years, then adjusts once per year.

This structure can save you money early on, which is ideal if you’re planning to move, refinance, or sell before the adjustment period kicks in. However, there is some risk: if market rates rise sharply, your monthly payment could increase significantly once the fixed period ends.

Let’s say you're buying your first home and don’t expect to stay more than five years; maybe it's a starter condo or a job relocation is on the horizon. In that case, an ARM might help you snag a lower initial rate and keep your payments more manageable. But if you're settling in for the long haul, many buyers prefer the stability of a fixed-rate loan.

HomeReady and Home Possible Loans

For buyers with modest incomes or limited savings, HomeReady (Fannie Mae) and Home Possible (Freddie Mac) are two specialized conventional loan options worth exploring. These programs are designed to help more people become homeowners, particularly first-time buyers or those who don’t qualify for other loan types.

One major perk? Both programs allow for down payments as low as 3%, which can be significantly more attainable than the typical 5–20% required for many conventional loans. For example, if you’re purchasing a $250,000 home, a 3% down payment would be just $7,500, versus $12,500 for a 5% down or $50,000 for 20%. That difference could mean moving into a home sooner, even if you haven’t saved up a large nest egg.

Additionally, these loans come with reduced private mortgage insurance (PMI) costs and flexible credit requirements, making them more accessible to buyers with lower credit scores or non-traditional income sources. If you're a recent college grad with student loans but a stable job, or a household with multiple income streams, these programs could offer a clear path to homeownership.

In short, there’s no one-size-fits-all when it comes to conventional loans. Whether you're aiming for a standard conforming loan, stretching into jumbo territory, choosing between fixed or adjustable rates, or qualifying through a low-down-payment program like HomeReady or Home Possible, conventional loans offer multiple paths tailored to different stages of life and financial situations. The key is understanding which structure works best for you—and teaming up with a lender who can help guide you through the options.

Conventional Loans vs. Other Loan Types

When comparing mortgage options, it’s important to understand how conventional loans stack up against other loan types like FHA, VA, and USDA loans. Each of these options has its own set of eligibility requirements and benefits, and the right choice for you will depend on your financial situation and goals.

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, keep in mind that 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.

Imagine you're an Army veteran planning to buy a $300,000 home. With a VA loan, you could potentially purchase the home with zero down payment, 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 you to put 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.

For buyers looking for affordable options outside urban centers, a USDA loan can be a smart and budget-friendly choice.

With 100% financing, you wouldn't need a down payment, allowing you to keep your savings intact for other expenses like moving, repairs, or an emergency fund. Even if you've owned a home before, you can still qualify for a USDA loan as long as you meet their income and location requirements.