What Is a Conventional Loan?

Introduction

A conventional loan is a home loan that is not backed by the government. Instead, it is offered by banks, credit unions, and mortgage lenders and follows guidelines set by Fannie Mae and Freddie Mac.

Conventional loans are the most common type of mortgage used to buy a house.

Conventional Loan vs Other Loans

Conventional Loan Down Payment

Many people think you need 20% down for a conventional loan, but that is not always true.

• 3% down for some first-time home buyers
• 5% down
• 10% down
• 20% down with no PMI required

Common low down payment conventional programs include HomeReady, Home Possible, and Conventional 97.

PMI (Private Mortgage Insurance)

If you put less than 20% down on a conventional loan, you usually must pay PMI. PMI protects the lender, not you, and adds to your monthly payment.

PMI can usually be removed once you reach 20% equity in your home.

Typical Conventional Loan Requirements

• Credit score around 620 or higher
• Down payment of at least 3%
• Debt-to-income ratio under about 45%
• Stable income
• Employment history around 2 years

Benefits of Conventional Loans

• Low down payment options
• PMI can be removed later
• Lower interest rates with good credit
• Can be used for primary homes, second homes, or rental properties
• Often cheaper than FHA loans long-term

Final Thoughts

A conventional loan is the most common type of home loan and is a good option for many first-time home buyers, including some buyers with SSI or fixed income if they meet credit and debt requirements.

The most important factors for qualifying are credit score, income, debt-to-income ratio, and down payment.