What is a conventional loan? | Consumer Financial Protection Bureau (2024)

FAQs

What is a conventional loan? | Consumer Financial Protection Bureau? ›

A conventional loan is any mortgage loan that is not insured or guaranteed by the government (such as under Federal Housing Administration, Department of Veterans Affairs, or Department of Agriculture loan programs). Conventional loans can be conforming or non-conforming.

A conventional loan is a mortgage loan that's not backed by a government agency. These loans come in all shapes and sizes, and while they don't provide some of the benefits as FHA, VA and USDA loans, conventional loans remain the most common type of mortgage loan.

Conventional Loan Minimum Credit Score

In most cases, you'll need a credit score of at least 620 to qualify for a conventional loan. When you apply, your lender will check your credit history to determine if you have qualifying credit. If you don't, you might not get approved for the loan.

What is a conventional loan versus an FHA loan? An FHA loan is a mortgage backed by the Federal Housing Administration. This type of loan uses lower interest rates and less strict credit score requirements. Conventional loans are not backed by a government agency and often use conforming loan limits.

In general, a conventional mortgage is ideal for borrowers with good credit that can provide a larger down payment. Conventional loans are more affordable in the long run and can be a smart investment for your future. There are two types of conventional mortgages: fixed rate and adjustable rate.

The minimum down payment requirement for a conventional loan is 3% of the loan amount. However, lenders may require borrowers with high DTI ratios or low credit scores to make a larger down payment. Even if it's not required, if you're able to make a higher down payment, you may want to consider doing so.

The Advantages of a Conventional Mortgage

Homeowners with good credit and money for a larger down payment could avoid paying upfront mortgage insurance or monthly mortgage insurance like an FHA loan. There are several reasons why a conventional mortgage loan could be the best option for your next home purchase.

Inadequate Property Condition

A home appraisal for a conventional loan also assesses the overall condition of the property. If the home is in disrepair or has significant maintenance issues, it may fail the appraisal.

Reasons your mortgage application may be denied include a dip in your credit score, increased debt, paperwork errors, a low home appraisal and unverified cash deposits.

While there's no minimum income requirement for a mortgage, there are parameters around the DTI ratio. These vary by loan type: Conventional loans: No more than 36 percent, but can go up to 50 percent with “compensating factors,” like a bigger down payment, higher credit score or adequate reserves.

What type of buyer should consider a conventional loan? ›

Conventional loan requirements aren't as tough as many home buyers expect. Borrowers can often qualify for a conventional loan with a credit score of 620 or higher, reliable income, and at least 3% down. Additionally, lenders usually seek a two-year track record of steady income and employment.

If you have a high credit score, money saved for a decent down payment and a low DTI, a conventional loan might be best for you, whereas if you're struggling with your credit score, DTI and the funds for a down payment, you might prefer an FHA loan.

In most cases, if your name is on the title and you've paid on your current mortgage for at least six months, you'll be able to refinance with a conventional loan. This is common for borrowers with current conventional or VA loans.

Conventional loan requirements

Credit score: Mortgage lenders require a minimum score of 620 to qualify for a conventional loan. With a higher score, you're more likely to get a better interest rate and terms.

Borrowers need to have a minimum credit score of about 620 in order to qualify—the highest minimum score of all mortgage products—and have a debt-to-income ratio of 43% or less. Borrowers also need to be able to afford a down payment of 20% or more in order to avoid mortgage insurance.

For example, a jumbo mortgage of $800,000 is a conventional mortgage but not a conforming mortgage—because it surpasses the amount that would allow it to be backed by Fannie Mae or Freddie Mac. At the end of fiscal year 2023, there were 7.5 million homeowners with FHA-insured mortgages.

Conventional loans are ideal for borrowers with strong credit history, typically a credit score between 620 and 740, and a sum of money for about 20% of the down payment. Down payments that are less than 20% require private mortgage insurance (PMI). Your debt-to-income ratio (DTI) should be under 43%.

Conventional loans

These loans are best for borrowers with good credit and an adequate down payment, which could be as little as 3% of the purchase price. Conventional loans can be either fixed rate or adjustable rate.

In 2024, the maximum Conventional conforming loan limit for a single-family home is $766,550. Certain high-cost areas may have higher limits. Conventional loans typically have requirements you will need to meet to get your application approved including: A minimum 620 credit score.