What Is a Conventional Loan and How Does It Work?
Key Takeaways
- A conventional loan is a type of mortgage offered by a private lender and not directly backed by a government agency.
- Conventional mortgages may have stricter requirements than some government-backed loans, often needing a larger down payment and a stronger credit profile.
- Compared to some other mortgage types, conventional loans can offer competitive rates and may have lower lifetime borrowing costs for those who qualify.
- Conventional home loans can have fixed or adjustable rates.
For many Americans, homeownership is a big goal, and one that usually requires choosing a mortgage. There are different types of home loans to consider, and one of the most popular and common options is a conventional loan. A conventional loan is a mortgage offered by a private lender, without direct backing from an agency of the federal government. Depending on your credit and financial situation, you can use a conventional loan to purchase a variety of home types, such as a primary residence, vacation home, or a rental/investment property.
What Is a Conventional Loan?
A conventional loan allows you to borrow money to buy or refinance a home. Conventional loans can have varying loan terms, including the type of interest rate and how long you have to repay the loan. The main difference between conventional loans and other loan types is they aren't government-backed and typically carry stricter credit requirements, but fewer guidelines to be eligible.
To be eligible for a conventional loan, you must meet lender requirements, which take your credit history, current debts, total income, and other factors into account. Lenders will review your application and, if approved, will offer you a loan with terms that outline how you’ll repay the money and at what cost.
Are Today’s Rates Right for You?
We can help make buying a home, refinancing, and getting cash from your equity more affordable. Ask us what rate we can offer you.
Get Your Rate
Types of Conventional Loans
Conventional loans can be categorized as either conforming or non-conforming:
- Conforming loans: These are loans that conform to the guidelines set by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, and don't exceed Federal Housing Finance Agency (FHFA) loan limits.
- Non-conforming loans:These are loans that don't meet the guidelines set by Fannie Mae and Freddie Mac and may exceed FHFA loan limits, such as with a jumbo loan, portfolio loan, or subprime loan.
Conventional loans can also be fixed- or adjustable-rate mortgages:
- Fixed-rate mortgages: A fixed-rate conventional loan has the same interest rate throughout the life of the loan, although the total monthly mortgage payment may change if taxes, insurance, or other escrowed costs change. Fixed interest rates will continue until the loan is paid off or the homeowner decides to refinance the mortgage. Common fixed-rate home loans are 15-year and 30-year mortgages, but conventional fixed loans allow for any mortgage term from 8–30 years.
- Adjustable-rate mortgages (ARMs): An adjustable-rate mortgage has an interest rate that can change over time based on the loan’s conditions. There’s typically an introductory period, commonly 3, 5, or 7 years, where the rate stays the same before being subject to change in defined intervals thereafter. Regardless of the introductory period, most ARMs are amortized over 30 years.
In both cases, the mortgage rate offered at the time of approval can be impacted by the index rate, the lender, and the borrower’s financial health.
Pro Tip
When choosing between a 15-year and 30-year mortgage, borrowers often consider how their monthly payment would differ. A 30-year home loan allows for lower minimum monthly payments, but higher overall costs because interest is paid for a longer period. A 15-year home loan usually offers savings on interest but requires a higher monthly payment to pay the mortgage back over the shorter, 15-year term.
How Does a Conventional Loan Work?
Conventional loans are the most widely used mortgages in the U.S. and provide the operating standard for mortgages in our country. Here’s how they work:
- You confirm you meet basic conventional loan requirements, including credit score and income.
- You submit a loan application to a private lender like Freedom Mortgage for the amount needed for your home purchase.
- The lender reviews the application, confirms if you qualify for the loan, and approves or denies the loan with specific terms and conditions you must agree to.
- Once the loan is approved and the home is closed on, you will make monthly payments until the loan is paid off.
- Homeowners may decide to refinance their loan further down the line to change their interest rate, switch between adjustable- or fixed-rate loans, or access equity in cash.
The monthly conventional mortgage payment will include principal and interest. For most borrowers, additional costs like property taxes and homeowners insurance are also included in the monthly payment, which can cause minimum payments to fluctuate with escrow changes.
Conventional Loan Requirements
To qualify for a conventional home loan, you'll need to meet some requirements, which can vary depending on your lender. Here’s what you might expect:
- Income: You’ll need to provide proof that you have a steady source of income that will allow you to reasonably afford a mortgage payment, on top of your other expenses.
- Credit score: You’ll usually need to have a credit score of 620 or higher for a conventional loan, but requirements vary by lender, loan type, and other factors so a higher or lower minimum credit score requirement is possible.
- Debt-to-income (DTI) ratio: Lenders typically look for borrowers with a DTI ratio under 45% for conventional loans. However, lenders may require a lower DTI or may allow a higher DTI with compensating factors like larger down payments or a cash reserve for several months of mortgage payments.
- Down payments: Generally speaking, you must make a minimum 3%–5% down payment to qualify for a conventional home loan. A down payment of 20% or more exempts you from having to pay private mortgage insurance (PMI).
- Closing costs: Conventional loans require customers to pay closing costs and fees that may include, but aren't limited to appraisal fees, origination fees, title fees and insurance, homeowners insurance, mortgage discount points (if you choose points), and property taxes.
If you’re looking to get a better understanding of how much you might be approved for and save with a conventional mortgage, consider getting prequalified for an estimate.
Conventional Loan Pros and Cons
When thinking about whether a conventional loan is right for you, here are some key considerations:
The potential advantages and disadvantages of a conventional home loan will vary from person to person. Consider speaking with a loan advisor to review your options and see what you could qualify for.
Conventional Loans vs. Other Home Loans
In addition to conventional home loans, borrowers may consider FHA loans, VA loans, and USDA loans, each with their own characteristics:
Conventional Loan FAQs
Have more questions about a conventional loan? We're here to support you with answers to frequently asked questions:
Is It Better to Have a Conventional Loan or an FHA Loan?
Whether it's better to have a conventional loan or an FHA loan will depend on your financial situation and goals. For example, conventional loans can offer savings to those with strong credit and funds for a larger down payment. FHA loans can be ideal for first-time homebuyers with weaker credit and less money to put down.
Do All Conventional Loans Require 20% Down?
No, most conventional loans don't require a down payment of 20%. Some lenders accept down payments as low as 3%. That said, down payments of less than 20% of the purchase price require you to pay private mortgage insurance (PMI).
What Is the Maximum Conventional Loan Limit for 2026?
Conventional loans with limits on the amount of money you can borrow are often called "conforming" loans. In 2026, the maximum conventional conforming loan limit for a single-family home in most areas is $832,750. Certain high-cost areas (such as Hawaii and Alaska) may have higher limits.
How Often Do Conventional Loan Limits Change?
Conventional loan limits are generally reviewed every year and can change based on the average price of homes in the U.S. The FHFA sets these conventional loan limits for each calendar year and usually announces changes a month or two before they take effect.
Final Thoughts: Is a Conventional Loan Right for You?
Whether you're looking to move into a new primary residence, buy a vacation home, or start developing your real estate investment property portfolio, conventional loans can be a financially savvy solution. If you're ready to take the next step with a conventional loan, get prequalified today.
Victoria Araj is the Senior Director, Managing Editor at Freedom Mortgage. In her 20 years of working for top mortgage lenders, she’s held roles in mortgage banking, public relations, editorial content, and more. She has a bachelor’s degree in Journalism with an emphasis in Political Science from Michigan State University, and a master’s degree in Public Administration from the University of Michigan. She has spoken at several industry conferences, where she’s discussed the importance of editorial content for brands.
You Might Be Interested In
VA Loans vs. Conventional Loans: What’s the Difference?
Should You Choose a VA or Conventional Loan?
What Types of Mortgages Can You Get?
Learn More About Your Mortgage Choices
VA Loans vs. Conventional Loans: What’s the Difference?
Should You Choose a VA or Conventional Loan?
8 Tips To Start Saving for a Home
Get Started Saving for Your New Home Today
- ${title}${badge}