What is a Conventional Loan?


A conventional loan is a mortgage that is not

backed by any Government agency such as

the Federal Housing Administration (FHA) or

Veterans Administration (VA). Conventional

loans meet the lending requirements of Fannie

Mae and Freddie Mac, the two largest buyers

of mortgage loans in the US.

Most conventional mortgages are issued by

private lenders who then sell the loan to one

of these Government Sponsored Entities




Conventional Loan Requirements Credit-

The minimum credit score requirement is

typically between 620-640 depending on the



Occupancy- Conventional loans can be used to finance a primary residence, a second home, vacation property or a rental property. This is in contrast to government-backed loan programs which can only be used to finance a primary residence.


Property Type- Single-family homes, duplexes, 2-4 unit properties,condominiums and townhouses are eligible.


Income- Income will be verified by reviewing recent pay check stubs, tax returns and W2s. Debt-to-income ratio must not exceed 43%.


Assets- Bank and investment statements will be verified to ensure the borrower has sufficient assets to close. These funds must be able to cover a down payment plus associated closing costs.


Government-Backed Loans


Government-backed loans are issued by private lenders and guaranteed by the Federal Government with programs such as FHA or VA. Conventional loans are not insured by the government but by private mortgage insurance companies.


FHA Loans – An FHA mortgage is popular for it’s low 580 credit score requirements and 3.5%

down payment.


VA Loans – VA loans are for Veterans, they come with no downpayment or mortgage insurance.


USDA Loans – The Department of US Agriculture created the USDA guaranteed loan program for low-to-median income homebuyers in rural areas of the country.



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Loan Conventional Loan Pros

Higher loan limits than FHA


Adjustable-rate and fixed-rate loan terms available


No private mortgage insurance (PMI) with 80% loan-to-value ratio


Available for second homes and investment properties


PMI cancels when the LTV reaches 78%


Lower PMI rates than FHA


Conventional 97 with 3% down


Conventional Loan Cons

Credit score requirement is higher than FHA (minimum 620-640)


Higher down payment requirement  (5%-20%)


Qualifying guidelines are more strict


Low income borrowers may not qualify


A conventional loan may be a good fit for you if…


Minimum Fico credit score of 620


Have a 20% down payment


Want to avoid PMI by putting at least 20% down


Have a high income (low debt-to-income ratio)


Need a loan amount that is above the FHA loan limit


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Down Payment Guidelines


There are no standard down payment guidelines for conventional financing. The minimum down payment is usually between 5% – 20% of the sales price.


The conventional 97 loan offers 97% financing, requiring just a 3% down payment.


Conventional mortgage loans with less than a 20% down payment and the mortgage is greater than 80% of the value of the home a private mortgage insurance policy is required.


A private mortgage insurance policy, or PMI, is an insurance policy that compensates the lender the difference between the 80% threshold and the amount of down payment should the loan ever go into default.


Conventional vs FHA Loans


FHA Loan Advantages


Easier to qualify for because of their low credit score and down payment requirements


Require just a 3.5% down payment making them an attractive option for first-time home buyers


Borrowers with a 580 credit score may qualify with just a 3.5% down payment


Higher DTI ratios accepted making them better for low-income borrowers


FHA Loan Disadvantages


FHA loans require mortgage insurance regardless of the down payment


In some cases PMI is required for the life of the loan


Limited to buying only homes that are approved for an FHA loan


Properties in need of repair will not qualify


May have higher interest rates


Non-Conforming Loans


Conforming loans are mortgage loans that are underwritten to standards issued by Government-backed entities Fannie Mae and Freddie Mac and make up more than half of all mortgages issued today.


Loans that do not meet these requirements are non-conforming loans. This includes jumbo loans, portfolio loans, and investor loans.


Conventional Loan Limits


Conventional loan limit in low-cost areas is $453,100


Conventional loan limit in high-cost areas is $679,650


For a list of the maximum loan limit in your area click here.


In Conclusion…


Conventional loans make up over 60% of all home loans issued in the US. If you have a 20% down payment you can enjoy low interest rates and avoid mortgage insurance saving you thousands per year. With their higher credit score requirements conventional loans are more difficult for first-time homebuyers to qualify for. Do you think you’re ready to apply for a mortgage?

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