Conventional Loans: A Complete Guide
Conventional loans are one of the most widely used mortgage types in the U.S., offering flexible terms, competitive rates, and fewer restrictions than government-backed loans. They’re not insured by a federal agency like the FHA or VA, but instead follow the guidelines set by Fannie Mae and Freddie Mac.
Who Conventional Loans Are For
Conventional loans are a great fit for borrowers with solid credit, verifiable income, and a decent down payment. They offer the potential to avoid long-term mortgage insurance costs and provide greater flexibility in loan structure.
Ideal for:
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First-time or repeat buyers with good credit (620+)
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Borrowers with at least 3%–5% down (or 20% to avoid PMI)
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Homebuyers purchasing a primary residence, second home, or investment property
Types of Conventional Loans
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Conforming Loans: Fall within the loan limits set by the Federal Housing Finance Agency (FHFA).
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Non-Conforming Loans: Exceed the conforming loan limits (also called Jumbo loans).
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Fixed-Rate Mortgages: Your interest rate remains the same for the entire loan term.
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Adjustable-Rate Mortgages (ARMs): Your rate may change after an initial fixed period (e.g., 5/1 ARM).
Minimum Qualifications
To qualify for a conventional loan, lenders typically look for:
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Credit Score: Minimum 620 (higher scores receive better rates)
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Down Payment: Minimum 3% for first-time buyers; 5% for others
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Debt-to-Income (DTI) Ratio: Preferably below 43% (some exceptions apply)
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Employment History: Two years of consistent income (W-2 or self-employed)
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Reserves: One to two months of mortgage payments in the bank (more for investment properties)
Required Documents
You’ll need the following to apply:
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Most recent 30 days of pay stubs
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Last 2 years of W-2s or full tax returns (especially if self-employed)
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2+ months of bank statements
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Photo ID and Social Security card or number
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Signed credit authorization form
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Proof of down payment source (if receiving gift funds, documentation is required)
Mortgage Insurance (PMI)
Private Mortgage Insurance (PMI) is required if your down payment is less than 20%. You can:
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Cancel PMI once you reach 20% equity
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Pay monthly or as a one-time upfront premium
Seller Concessions
Seller concessions refer to when the seller agrees to cover part of your closing costs. This can help reduce your out-of-pocket expenses at closing.
Limits for Conventional Loans:
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Primary residence:
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3% of the purchase price if you put less than 10% down
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6% if you put 10–25% down
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9% if you put more than 25% down
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Investment properties:
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Maximum 2% regardless of down payment​
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Concessions can be used to cover costs like prepaid taxes, insurance, discount points, or lender fees—but not the down payment itself.
(2025 Estimate)
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Conforming Limit (Most Areas): $766,550
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High-Cost Areas: Up to $1,149,825 (varies by county)
Pros and Cons
Pros:
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Competitive interest rates for qualified borrowers
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No upfront mortgage insurance premium
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Flexible property types: primary, secondary, or investment
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PMI can be removed with 20% equity
Cons:
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Stricter credit and income guidelines
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PMI required if under 20% down
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Higher rates than government-backed loans for lower credit scores
Should You Apply for a Conventional Loan?
If you’ve got good credit, steady income, and want flexibility in your mortgage structure, a conventional loan could save you thousands in interest and mortgage insurance over time.