The process of applying for a conventional loan can be confusing, even before you begin, starting with a key question: Which loan type, what type of mortgage, or what loan limit should you consider? Some homebuyers opt to go with a conventional mortgage with specific conventional loan requirements. Many don’t even learn there are different mortgage loan types.
From an FHA loan (Federal Housing Administration) to a loan from the Veterans Affairs (VA loan) or a USDA (United States Department of Agriculture) loan, knowing the various types of loan options available to you can make a big difference in your home-buying journey. The same is true for keeping in mind a few important factors about conventional loan requirements.
Buying a home can seem complicated but we got your back. Our loan officers are here to guide you to the best mortgage for your house or answer any questions concerning any loan program.
What is A Conventional Loan?
It is a loan that is not insured or guaranteed by a government agency. This is in contrast to government-backed mortgages such as FHA loans, USDA loans, or VA loans.
Even though conventional mortgages aren’t government-backed, many still use government-set loan limits along with income and credit score requirements to qualify for the mortgage.
Most of the time, a conventional mortgage loan costs less than government-backed loans. However, they have more stringent qualifications.
Some Conventional Loans Use Government-Set Criteria
You may think that just because the government doesn’t back conventional mortgages, you don’t need to meet any criteria set by them. However, many conventional loans still conform to these loan conditions. This allows lenders to relieve some risk, making ways to lend money and possibly offering a lower interest rate for their borrowers. Certainly, a bad credit history or unpaid interest on a credit card will not help.
Conforming Conventional Loan
A conforming conventional loan credit is less than the maximum loan amount set by the Federal Housing Finance Agency (FHFA). In most counties, this means the minimum conventional loan is less than $484,350 as of 2024. In high-cost living areas, a conforming loan can be up to $726,535.
In addition, a conforming loan meets loan standards that are set by Fannie Mae or Freddie Mac. Since these are both government-sponsored enterprises, a conforming conventional loan with certain conventional loan eligibility requirements is sometimes also called a GSE loan. In general, most conventional loans offered by banks, credit unions, and mortgage brokers are conforming conventional loans.
Non-conforming Conventional Loan
A non-conforming conventional mortgage loan is one that exceeds the FHFA loan limits or uses different underwriting standards from Fannie or Freddie.
One of the most common types of non-conforming loans is a jumbo loan. This is commonly used when you need to finance more than the FHFA loan limit, which means the bank or lender usually needs extra protection in case you’re no longer able to keep paying the loan.
Conventional Mortgage Credit Score
When you apply for a conforming conventional loan, you’ll see similar lending criteria at different lenders. Most private lenders, for example, want to see a minimum credit score of up to 620 for the borrower. Each mortgage lender, however, may have slightly different guidelines.
Conventional Loan Down Payment
Many programs don’t have income requirements or a specific minimum down payment for a conventional loan. Instead, they look at how much debt a borrower has compared to their income. You’ll typically want to have a debt-to-income ratio (DTI ratio) of less than 50%.You will most likely need a down payment of at least 5% — but putting at least 20% down could save you money on private mortgage insurance (PMI).
Conventional Loan Rates
Mortgage rates are affected by several factors, including the cost of federal housing, the federal rate, and your financial situation. One of the things you may have to choose is whether you want a fixed-rate or adjustable-rate mortgage.
Fixed-Rate Conventional Loans
Conventional loans can be classified by their mortgage rates. A fixed-rate conventional loan has rates that stay the same for the life of the mortgage.
Many people prefer a fixed interest rate conventional loan because they will have a steady mortgage rate that they can plan for. It won’t be affected if rates rise.
The most common type of fixed-rate conventional loan is a 30-year fixed-rate conventional mortgage. This will save your personal finance situation with affordable monthly mortgage payments, though you could choose a shorter term — for example, 15 years.
You have the option of paying an additional fee for a lower rate!
Adjustable-Rate Conventional Loans
An adjustable-rate mortgage, or ARM, is the flip side of fixed-rate mortgages. As mortgage rates change, your interest rate will reflect that.
Most ARMs adjust annually. However, they may have an initial period of three to ten years with an initial fixed rate.
There Are Low Down Payment Options
Traditionally you needed a 20% down payment to get a mortgage. One benefit of doing this is that you can avoid having to purchase private mortgage insurance — but there are conventional loans that offer some flexibility if you need it.
3% or 5% Down Payment
Fannie Mae offers the HomeReady program, while Freddie Mac has the Home Possible one. Both are mortgage options based on your monthly income and allow you to put a down payment of only 3%. If you have a lower credit score, you may need to put down a 5% down payment. In either of these cases, you’ll have to finance the remaining 97% or 95% of the home’s purchase price.
In addition to the Home Ready and Home Possible programs, first-time home buyers can put down as little as 3% regardless of their income limit.
Zero-Down Payment
There are actually zero-down payment conventional loans that allow you to finance 100% of the home’s value. These are offered by certain lenders that offer in-house non-conforming conventional loan. Typically, you must meet special qualifications to apply.
While a zero-down payment mortgage may sound tempting, it can be very risky. Since you don’t have any initial equity, it takes a lot longer to build up any equity. This typically means you’ll pay a lot more in interest.
You can get a loan for your renovations
A type of mortgage that many people don’t learn about is a conventional renovation loan. This can be perfect if you buy a fixer-upper, whether you do so to stay within budget, because house prices are high, or because inventory is low.
These loans include the CHOICERenovation and the HomeStyle loans. You can finance the home purchase and renovations with the same loan.
Pros and Cons of a Conventional Home Loan
Finding the right mortgage and monthly payment that matches your monthly finances can be challenging and requires expert advice. Especially when you already carry student loans or personal loans. We have compiled the lists below to help you better understand the pros and cons of a conventional home loan to buy a home.
Pros
- Borrowers with great credit (740+) taking advantage of Conventional Loans will benefit by having a lower mortgage insurance premium and lower conforming conventional loan rates.
- Unlike with FHA, Private Mortgage Insurance does not last the entire life of the loan and can potentially be waived when you hit 20% equity or higher down payment altogether.
- A current homeowner can purchase as many homes as they wish, provided they can fulfill the down-payment requirements.
Cons
- Lower credit scores will be penalized by additional fees called Loan Level Price Adjustments. Having a good credit score is important to get a conventional mortgage with good terms and conditions.
- First-time home buyers have a 3% minimum down payment.
- With additional residences, the required down payment conventional loan increases upward of 20%, with 10% being the minimum requirement for the second home.
Conventional Loan Limits in 2025
According to the latest information, starting January 1, 2025, conventional loan limits are increasing due to rising home prices nationwide (source), but they vary from state to state. The new limits range from $524,225 in low-cost areas to $1,209,750 in high-cost areas for single-unit properties. These changes help ensure homebuyers have better access to financing as housing prices continue to grow.
How To Get A Conventional Loan With Society Mortgage?
In the vast market of real estate financing, understanding your options is paramount. As you compare and research the myriad of choices, remember that conventional home loans come with a unique blend of benefits and requirements.
Whether you’re a first-time homebuyer or looking for a cash-out refinance, your credit profile, closing costs, and potential insurance premiums will play a role in the loan option you select. Don’t let higher rates deter you; with the right loan term and type of loan, you can secure a deal that aligns with your financial goals. If you ever find yourself pondering over adjustable-rate loans or the intricacies of the VA funding fee, our service is always reserved for you.
As one of the best mortgage lenders, we prioritize consumer financial protection and equal housing opportunity. Whether you need a loan to purchase a cozy single-family home or are considering a portfolio loan for broader investments, we’re here to show the way. Dive into our press room for the latest updates, and always remember to check your credit report and consumer access rights. With every step, we aim to simplify the process, ensuring that your home financing journey is as seamless as possible.
Apply for a Conventional Loan
Society Mortgage can help you get a loan tailored to your needs. If you are ready to get started with your real estate purchase, contact a loan officer with experience and apply today!
Frequently Asked Questions
What types of conventional mortgage loans are there?
Mortgage loans come in various forms to suit different needs. Fixed-rate mortgage loans offer stable rates over the life of the loan, while adjustable-rate mortgages (ARMs) are fluctuating. Conforming loans adhere to Fannie Mae and Freddie Mac guidelines and have borrowing limits, whereas non-conforming or jumbo loans exceed those limits and often come with stricter requirements. Interest-only mortgages allow for lower initial payments by covering only interest, and balloon mortgages require a large final payment after regular installments. Piggyback loans help avoid private mortgage insurance by using two simultaneous loans, and combo or hybrid loans mix features of both fixed and adjustable-rate mortgages. Each type has its own pros and cons, tailored to various financial situations and goals.
What types of properties can be financed with a conventional mortgage loan?
Mortgage loans are commonly used for financing a variety of residential properties, including single-family homes, multi-family homes like duplexes and triplexes, condominiums, and townhouses. They can also be used for Planned Unit Developments (PUDs), second homes, vacation properties, and business investment properties. We even offer conventional loans for manufactured homes.
The terms, interest rates, and down payment requirements can vary depending on the type of property and whether it’s a primary residence, a second home, or an investment property.
What is an ideal conventional mortgage credit score?
Qualifying for a conventional loan depends on several factors such as credit score, debt-to-income ratio, and down payment amount. While there are specific criteria to meet, such as a minimum credit score of around 680 and a debt-to-income ratio of 46% or less, many lenders offer flexibility in their requirements. Additionally, various conventional loan programs, such as HomeReady and Home Possible, allow for lower down payments of 3% or 5%, making homeownership more accessible.
Do all conventional loans require 20% down?
Not all loans require a 20% down payment. While a 20% down payment can help borrowers avoid private mortgage insurance (PMI), there are conventional loan options available with lower down payment requirements. Some programs, such as Fannie Mae’s HomeReady and Freddie Mac’s Home Possible, allow borrowers to put down as little as 3% or 5%. Additionally, certain lenders may offer specialized loan products with down payment requirements that differ from the standard 20%. However, it’s essential to note that putting less than 20% down may result in the need for private mortgage insurance, which can increase the overall cost of the loan.
What’s the maximum debt-to-income ratio?
The maximum debt-to-income (DTI) ratio for a conventional loan typically depends on the lender and the specific loan program. However, conventional loans typically have a maximum DTI ratio of around 43% to 50%. This means that your total monthly debt payments (including the mortgage payment) should not exceed 43% to 50% of your gross monthly income. Note that lenders may have different criteria and may be willing to make exceptions based on other factors such as credit score and financial reserves.
Is an FHA loan better?
FHA loans offer lower credit score requirements and down payments but entail mortgage insurance premiums throughout the loan term. Conventional loans often demand higher credit scores and down payments, yet PMI can be canceled upon reaching 20% equity. Conventional loans also work more to higher loan limits and less stringent property standards, though FHA loans are assumable, providing future flexibility.
How long does it take to get approved?
The average timeline is around 30 to 45 days, yet it’s essential to communicate closely with your lender, provide all requested documentation promptly, and stay informed about the progress of your application to ensure a smooth and timely approval process.
What is a conventional house loan?
A conventional home loan is a mortgage that is not backed by a government agency. It’s offered by private lenders and follows guidelines set by entities like Fannie Mae and Freddie Mac. Borrowers often need a good credit score and may need to make a down payment, typically 20% or less.
What is the downside of this loan?
One downside is that generally it often requires a higher credit score and a larger down payment compared to government-backed loans. Additionally, borrowers with smaller down payments may need to pay for private mortgage insurance (PMI) until they reach 20% equity in their home. Finally, conventional loans may have stricter qualification requirements and higher interest rates for borrowers with lower credit scores.
