Conventional Mortgages: A Comprehensive Guide (2024)

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• A conventional mortgage isn't backed by the government and has stricter eligibility requirements.
• A conventional mortgage can be either conforming or nonconforming. Most borrowers get conforming mortgages.
• You may qualify for a conventional mortgage if you have a good credit score, among other factors.

One of the first decisions you'll make when shopping for a home is what type of mortgage you'll use.

Conventional mortgages — those not guaranteed by any government agency — are by far the most popular option for borrowers. You can use them to both buy and refinance a house, and they're widely offered by most mortgage lenders.

Are you preparing to apply for a mortgage loan? Here's what you need to know about conventional loans.

Types of conventional mortgages

Conventional mortgages can be broken down into two categories: conforming and non-conforming loans. The main difference between these two types is the amount of money you need to borrow and the qualifying requirements.

Conforming loans

A conforming mortgage meets the conforming loan limit set by the Federal Housing Finance Agency (FHFA) and fits the requirements to be purchased by Fannie Mae or Freddie Mac. The FHFA sets the limit for conforming loans every year. In 2024, the limit is $766,550 in most parts of the U.S. In areas with a higher cost of living, the limit goes up to a max of $1,149,825.

To get a conforming loan, you'll need to meet certain qualifying criteria set out by Fannie and Freddie. Specifically, you'll need at least a 620 credit score and a debt-to-income ratio of 45% or less.

Non-conforming loans

A nonconforming mortgage doesn't meet these criteria. One of the most common types of nonconforming mortgages is a jumbo loan, which is a mortgage that exceeds conforming loan limits.

With non-conforming loans, lenders have more leeway in who they can loan to, so you may find it easier to get a loan with a lower credit score, higher debt-to-income ratio, or non-traditional income. (Though with a higher-limit jumbo loan, you can typically expect more stringent requirements due to the larger amount of money on the line).

Benefits of conventional mortgages

Conventional loans have many benefits when compared with other mortgage options. These include:

Flexibility

Conventional loans aren't as standardized as government-backed ones, so there's much more flexibility. You'll find a wider range of terms, loan limits, and options.

No mortgage insurance

If you can make a 20% down payment, you won't need mortgage insurance with a conventional mortgage. This can save you significantly over the course of your loan term. FHA loans always require mortgage insurance (both upfront and as part of your monthly payment).

Lower closing costs

Since conventional loans don't come with many of the upfront fees that government loans do, you could pay fewer closing costs with a conventional loan, too.

Faster processing

Government-backed mortgages come with a lot of red tape, which can sometimes make them longer to process and underwrite. A conventional loan could offer you a faster closing time.

Conventional mortgage requirements

For the most part, the eligibility requirements for a conventional mortgage break down into three categories: credit score, debt-to-income ratio, and down payment.

If you can't meet all three qualifications, you'll want to check if you qualify for a government-backed mortgage or wait to buy a home. With more time, can improve your credit score, pay off some debt, or save more for a down payment.

Credit score

The credit score you need to buy a house is a minimum of 620 to qualify for a conforming conventional loan, though individual lenders may require higher scores than this. You'll probably need a score of 700 or higher for a nonconforming loan.

Debt-to-income ratio

Your debt-to-income ratio (DTI) is the amount you pay toward debts each month divided by your gross monthly income. For example, if you spend $2,000 a month on your mortgage and student loan payments and you earn $3,000 a month, your DTI ratio is $2,000 divided by $3,000, or 66%.

When you apply for a mortgage, your potential future mortgage payment will be included in this calculation. For conforming conventional mortgages, you may qualify with a total DTI ratio as high as 50%. But the maximum DTI you can have will depend on your overall financial profile, including your credit score and down payment amount. Your DTI should be no higher than 36% to have the best chance of getting approved.

If you're getting a jumbo loan, you'll likely have a harder time qualifying with a DTI above 45%.

Down payment

For conforming loans, the minimum down payment you can make is 3%, though some lenders may require at least 5% or 10%. Jumbo loans may require 10% or more, but it varies from lender to lender.

If you put down less than 20% on a conforming loan, you'll need to pay for private mortgage insurance until you reach 20% equity in the home. This monthly cost will be added to your mortgage payments. You'll generally pay between $30 and $70 a month for every $100,000 you borrow, according to Freddie Mac.

Documentation

Finally, you'll need to provide your lender with some financial documentation to show you have the income to make your payments. This typically includes tax returns, W-2s, bank statements, pay stubs, and more.

Conventional mortgages vs. other loan types

A conventional mortgage, or conventional loan, is a mortgage that isn't insured or guaranteed by a government agency.

You'll get a conventional mortgage from a private lender, such as a bank, a nonbank mortgage lender, or a credit union. Though a government agency doesn't insure these loans, many conventional mortgages are backed by government-sponsored enterprises Fannie Mae and Freddie Mac. The mortgage will be sold to one of these entities after closing.

By contrast, a government-backed mortgage comes with insurance or guarantees that a federal agency, such as the Federal Housing Administration, United States Department of Agriculture, or Department of Veterans Affairs, will cover a portion of the mortgage if the borrower defaults. Here's how those differ from conventional loans:

• FHA loans: FHA loans often allow for lower credit scores than conventional loans (down to 500 in some cases), though they have higher down payment requirements (at least 3.5% versus a conventional loan's 3%). They also require mortgage insurance upfront and over the loan term.
• VA loans: VA loans are only for veterans, military members, and their spouses. They don't require a down payment, but there is an upfront funding fee.
• USDA loans: USDA loans can only be used to purchase homes in eligible rural parts of the country, and you must have a qualifying low to moderate income for your area to qualify. No down payment is required, but there is an upfront guarantee fee.

How to get a conventional mortgage

Conforming, conventional mortgages are the most popular mortgage product out there, so if you're considering one of these loans, you're not alone. Here's how to get yours:

Step 1: Check your credit

Pull your credit, and find out what score you're working with before applying for your loan. The higher your score, the easier it will be to qualify (and the better your interest rate will be.) If it's on the lower end, you may want to take steps to improve it before filling out an application.

Step 2: Save for a down payment

You'll need at least a 3% down payment to qualify for a conventional loan, but in most cases, anything less than 20% will mean paying private mortgage insurance each month. This costs between $30 to $70 a month for every $100,000 borrowed, according to Freddie Mac.

Step 3: Get pre-approved

Getting pre-approved with a mortgage lender will help you gauge what you can borrow, what rate you'll get, and what price range you should be shopping in. Compare preapproval offers from several lenders to ensure you get the best deal.

Step 4: Complete the application and provide documentation

Last, you'll need to fill out your lender's full application and provide any financial documentation it requests. Stay in close contact with your loan officer until closing day, which is when you'll pay your closing costs and down payment and sign the final paperwork.

Conventional mortgage FAQs