What is a Conventional Loan?

Agent holding keys

A conventional loan is a type of mortgage that is not backed by the government. This means that the mortgage is issued by a private lender instead of a governmental entity. Because conventional loans are not backed by the government, they may have stricter requirements than other types of loans. Conventional loans make up 70-80% of all purchase mortgages in the United States.

If you’re thinking about applying for a conventional loan, here’s what you need to know.

Conventional Loan Overview

A conventional loan is any mortgage loan that is not insured or guaranteed by the government (such as the Federal Housing Administration, Department of Veterans Affairs, or the Department of Agriculture). Conventional loans can be either “conforming” or “non-conforming.” Conforming conventional loans follow guidelines set by Fannie Mae and Freddie Mac—two government-sponsored entities that buy and securitize mortgages—while non-conforming loans do not.

Conforming Loans

In general, conforming loans tend to have lower interest rates than non-conforming ones. That’s because lenders perceive them to be less risky; after all, Fannie Mae and Freddie Mac guarantee that they will make good on the loan even if the borrower defaults. As a result, home buyers who opt for a conventional loan can often get a lower interest rate than they would with another type of loan.

The following are requirements and features of conforming loans:

  • Credit score requirements for conventional loans are generally stricter than for government-backed mortgages like FHA, VA, or USDA loans. For a conforming loan, you’ll typically need a credit score of at least 620.
  • A maximum debt-to-income ratio of 50%
  • A down payment of 3% for high credit scores, 5% – 20% is common.
  • Mortgage insurance is required for some conventional loans if you make a down payment of less than 20% of the home’s purchase price or appraised value—though it can be difficult to find a lender willing to lend you that much money without it.
  • If you do have to pay mortgage insurance on a conventional loan, it will be paid in two ways: as an upfront premium at closing or rolled into your monthly payments.
  • Fixed-rate loans with 10 to 30 year terms
  • Adjustable-rate mortgages (ARMs) with low starter rates available

Non-Conforming Loans

If your loan doesn’t meet the guidelines to be considered a conforming loan, then it’s considered a non-conforming conventional loan. The most common type of non-conforming conventional loan is called a jumbo loan. A jumbo loan exceeds the maximum amount allowed for a conforming conventional loan. The most common reason for this is because the value of the home you’re buying is higher than the limit set by Fannie Mae and Freddie Mac guidelines.

Another reason why your loan may not be considered conforming could be due to certain characteristics such as having a lower credit score or too much debt in proportion to your income (also known as your debt-to-income ratio). If this is the case, you may still qualify for what’s called an Agency Jumbo Loan which has flexible guidelines and only requires a minimum credit score of 620. You may also be able to put down less than 20%. Keep in mind that with all Agency Jumbo Loans there are still maximums set by each Agency which are dependent on which county you live in. 

Due to their oversized nature and accompanying risk, jumbo loans often come with stricter qualifying criteria like larger down payments (5% – 30% or more) and higher credit score requirements (660 – 700+) but this isn’t always the case. Shop around with different lenders to see what terms they can offer you based on your unique financial situation.   

Now that we’ve gone over some basics about Conventional Loans don’t hesitate to contact me if you have any further questions or would like help getting started on your pre-approval process!