What is a conventional mortgage?

A conventional mortgage is a home loan that isn’t insured by a government agency. Rather, it is a completely private instrument, its terms and parameters set by the bank, credit union or whatever financial institution is offering it. Virtually every type of mortgage lender offers conventional loans, and they are ideal for borrowers with a strong credit profile, stable income and minimal debt.

Conventional loans can come with a fixed or adjustable rate, and they can be conforming, meaning they fall within the loan limits set by the Federal Housing Finance Agency (FHFA), or non-conforming in that they exceed these limits. In 2024, the conforming loan limit is $766,550 in most areas, and $1,149,825 in pricier markets.

How are conventional mortgage rates determined? 

Lenders typically base fixed-interest mortgage rates on two factors – 10-year Treasury rates and demand by investors in mortgage-backed instruments. (Even so, mortgage rate movements are notoriously difficult to predict.) Adjustable-rate mortgages, meanwhile, are based on the secured overnight financing rate (SOFR). When you borrow, a variety of factors affect the rate you pay. Lenders include such things as your credit score, your debt-to-income (DTI) ratio and your loan-to-value (LTV) ratio.

Be sure to shop around to find the best rate – comparing three offers can save you thousands of dollars over the life of the loan.

Conventional loan requirements

Conventional loans often have stricter borrower requirements than government-insured FHA, VA and USDA loans. In general, to qualify for a conventional loan, you’ll need:

• A 620 minimum credit score
• 3%-5% minimum down payment
• Maximum 43% debt-to-income (DTI) ratio
• At least two years of consistent employment and steady income

Although these are the minimum standards, there are exceptions (for example, some lenders allow up to a 50 percent DTI ratio). As with any type of mortgage, to qualify for the best rates, you’ll need a good to excellent credit score.

Some conventional loan programs allow you to put down as little as 3 percent to 5 percent, but the tradeoff is you’ll need to pay for private mortgage insurance (PMI), a cost added on to your monthly mortgage payment. PMI protects the lender — not you — if you default on your loan, and you’ll need to pay this until you accumulate 20 percent equity in your home. If you can make at least a 20 percent down payment upfront instead, you won’t have to pay this expense.

The down payment requirement for a conventional loan can also depend on what type of property you’re financing. If you’re buying an investment property, for instance, you might be required to put down at least 15 percent.

Who should consider a conventional loan?

Consumers have a number of types of home loans to choose from. Any borrower with solid credit, low debt and established income should consider a conventional loan. They are available to first-time and trade-up homebuyers, as well as those who are downsizing. Investors in single-family or multi-family dwellings might also consider conventional mortgages. 

In contrast, borrowers with less-solid credit scores and ready cash might choose a mortgage backed by the Federal Housing Administration (FHA) or U.S. Department of Veterans Affairs (VA). These mortgages typically carry lower requirements around credit scores and down payments.

Comparing loan requirements

Here's how the requirements for different types of home loans  — conventional and various government-insured loans — stack up against each other.

Pros and cons of conventional loans

Conventional loans are the most popular mortgage option, but even so, they’re not for everyone. Some of the advantages and disadvantages:

Pros

• Can be used to finance a range of property types
• No loan limit
• Lower down payment acceptable
• Can cancel PMI when you reach equity threshold
• No upfront mortgage insurance

Cons

• Can be harder to qualify with a lower credit score
• Can have higher interest rates
• PMI if less than 20 percent down

Additional resources