For most consumers, buying a piece of property to call their own is an expensive endeavor. Prospective homeowners must have some financial footing in the game, and this typically comes in the form of a down payment toward the purchase price of a home.
Although several options exist for homebuyers wanting to put a minimal down payment toward a home purchase, using a conventional loan with a potentially higher down payment requirement is commonplace in today’s real estate market.
Conventional mortgage loans cover a broad swatch of home loans, all which share some distinct characteristics. In this guide, we will break down what a conventional mortgage is by definition, how it works among various lenders, and the eligibility requirements borrowers must meet to qualify.
Before selecting a conventional home loan, buyers should closely consider the benefits, downsides, and alternatives to ensure they are making the best-fit choice. Here’s what you need to know about conventional home loans.
What is a Conventional Mortgage Loan?
A conventional loan is any mortgage that does not fall under a specific government program, like the US Department of Agriculture (USDA), Veterans Affairs (VA), or Federal Housing Administration (FHA).
These mortgages are not guaranteed by any government agency or program. Instead, homeowners work with private lenders, including independent mortgage companies, banks, and credit unions, to secure a conventional home loan for a property purchase.
With a conventional mortgage, lenders set the criteria for qualification and the terms and conditions of each loan based on borrower eligibility.
In nearly all cases, conventional home loans require a down payment from the borrower that can be higher than other loan options, particularly for individuals with less than perfect credit. Additionally, conventional loans are typically fixed-rate loans with either a 15- or 30-year repayment term.
Types of Conventional Home Mortgage Loans
In some circles, the term conventional loan is used interchangeably with conforming loan. Although some conventional loans are conforming, they are not one and the same.
a. Conforming Mortgage Loans
Conforming loans are those offered by private lenders that follow the guidelines set by two government organizations – Fannie Mae and Freddie Mac. Conforming loans meet specific underwriting requirements set by these associations, including a set loan limit. Any loan exceeding the conforming loan limit is considered a non-conforming or jumbo loan.
– Conforming Loan Limits for 2024
The most notable criteria for defining a home loan as conforming is the set loan limit. While this changes periodically, adjusted for inflation, the 2023 baseline conforming loan limit is $726,200 and will jump to $766,550 in 2024. This loan limit applies to most areas throughout the United States. In some higher-cost-of-living regions, loan limits may increase to $1,149,825.
b. Non-Conforming Mortgage Loans
Any property purchase of this amount moves a borrower from a conforming conventional loan to a non-conforming or jumbo loan. Non-conforming loans come with different qualification requirements, and lenders set their own terms as it relates to interest rates, terms, and costs associated with the loan.
A conventional morgage loan can be either a conforming loan or a non-conforming loan.
What are the Eligibility Requirements for a Conventional Mortgage Loan?
Eligibility criteria for a conventional mortgage may vary from one lender to another. However, some baseline requirements exist among nearly all lenders. Here are a few every borrower should know.
1. Down Payment Requirements
One requirement for a conventional home loan that differs from other mortgage options revolves around the down payment. Borrowers with a conventional loan are expected to bring something to the table in the form of financial contribution toward the home purchase. This financial contribution is paid upfront, and the lender finances the remaining price of the property purchase.
Down payment requirements can be as low as 3% with conventional mortgage lenders. However, a 20% down payment was traditionally considered the minimum to qualify for the best-possible conventional loan.
Many lenders offer lower down payment thresholds to help more individuals become homebuyers. However, a higher down payment often leads to a more straightforward qualification process for borrowers.
When the down payment does not meet the traditional 20% minimum, lenders charge private mortgage insurance (PMI) to help offset their risk. Private mortgage insurance increases the monthly loan payment for borrowers. However, in some cases, that monthly addition is less of a financial burden than coming up with a higher down payment amount.
2. Credit Score Minimum
Similar to variations in down payment requirements across conventional lenders, a standard credit score minimum does not exist. However, most lenders want borrowers to have a credit score of at least 620 before they are eligible for a conventional mortgage.
Some bad-credit lenders may offer a mortgage to someone with a lower credit score. However, it will likely come at a high cost and potentially higher down payment requirements.
3. Debt-to-income Ratio Limits
In addition to credit score limits, nearly all conventional home loan lenders have debt-to-income ratio standards. The ratio for debt-to-income is calculated as a borrower’s total debt obligation divided by income.
This measurement highlights whether a borrower has the means to repay the mortgage loan over time. A ratio of 43% or below is necessary to qualify for a conventional mortgage through most lenders.
4. Other Conventional Loan Eligibility Criteria
Above and beyond credit score, down payment, and debt-to-income criteria, nearly all lenders also require the following when applying for a home mortgage loan:
- Proof of income – borrowers must provide proof of income to qualify for a home loan of any kind. This can come in the form of recent paystubs, tax returns, W2 documentation, or verified documentation of income or an offer of income from an employer.
- Employment verification – in addition to proof of income, many lenders verify employment as part of the underwriting process for a conventional loan. For W2 employees, this may involve contacting an employer to confirm salary, employment dates, and other details. To satisfy this requirement, business owners often need to provide extra documentation, including accounting or bookkeeping records, tax returns, and financial history.
- Financial standing – lenders also require proof of assets to verify a borrower has adequate funds for the down payment. Recent bank statements, investment account statements, retirement account statements, and other property documentation all help to meet this requirement.
Benefits of Conventional Mortgage Loans
The biggest draw toward conventional loans is that homebuyers have several different options when it comes to the lender they select.
a. Availability of Lenders
Not all lenders offer alternative loan programs, like VA, USDA, or FHA home loans, but nearly all provide options for conventional conforming mortgages. Here are three top conventional mortgage lenders.
b. Competitive Terms and Interest Rates
Conventional loan borrowers may benefit from more competitive rates and terms because of this additional availability compared to other home loan programs.
c. Loan Options
Additionally, conventional loans come in many different variations. This means that borrowers not interested in or eligible for government-backed home loan programs can often find what they need and want with a conventional mortgage.
From options with lower down payments to higher loan limits, conventional home loans cover a broad range of options for qualified borrowers.
Downsides of Conventional Mortgages to Consider
Although the benefits of conventional home loans can be appealing, downsides exist. Here’s what to know about the caveats relating to conventional mortgages.
a. Private Mortgage Insurance
As mentioned previously, conventional mortgage loans may be available with as little as 3% down payment. However, homebuyers who utilize these mortgage options are likely to pay private mortgage insurance on any loan where they do not contribute at least 20% as a down payment.
The average cost of PMI ranges from 0.58 to 1.86% of the original loan amount. This percentage is added as a line item on the borrower’s monthly mortgage statement and added to the required monthly minimum payment.
Some lenders automatically drop PMI when the loan balance is paid down enough to reach 80% or lower of the home’s value. Others, however, require an application or refinance to remove PMI once that threshold is met.
Therefore, borrowers need to ensure that the addition of PMI to the monthly mortgage payment is manageable and worth the added cost.
b. Restrictive Credit Criteria
Not all lenders hold borrowers to the same qualification standards, but for most conventional loans, homebuyers need to have strong credit.
In most cases, conventional mortgages are not available to individuals with a credit score lower than 620 or those who have experienced bankruptcy or foreclosure in the last few years. Borrowers who have these marks on their credit history report may consider other mortgage options with less stringent eligibility criteria.
Comparing Conventional Loans to USDA, FHA, and VA Mortgages
Conventional home loans offer distinct characteristics compared to other home loan options available to borrowers. Therefore, it is helpful to compare the most common home loan solutions to conventional loan terms and requirements before deciding which loan type is the best suited for a particular situation.
| Conv. Loan | FHA Loan | VA Loan | USDA Loan | |
|---|---|---|---|---|
| Down Payment | 3% | 3.5% | $0 | $0 |
| Credit Rqmts. | 620 minimum credit score | 580 minimum credit score | No minimum credit score | 640 minimum credit score |
| Loan Limits | $766,550; adjusts annually | $498,257 – $1,149,825; adjusts annually | None with full ent. Same as county limits for partial ent. | $766,500 in most areas and income limits apply |
| Private Mortgage Ins. | Yes, if less than 20% down | Yes, 0.45 – 1.05% annually; 1.75% upfront | None | No, but guarantee fee of 0.35% annually; 1% upfront |
| Borrower Eligibility | High credit score and low debt-to-income ratio | Less stringent rqmts. than conv. loans | Military service-member, veteran, or eligible spouse | Income & location limits; higher credit score |
3 Top Conventional Mortgage Lenders
Several options for conventional home loans exist in the private lending world. Here are three of our top picks.
1. loanDepot
Established in 2010, Loan Depot is a growing online private mortgage lender responsible for assisting tens of thousands of borrowers each month to secure the best loan for their home buying needs. Since its inception, Loan Depot has funded hundreds of billions in home loans, powered by its technology-backed customer service and underwriting experience.
Loan Depot offers an array of home loan products, including conventional, FHA, and VA loans. The lender also provides options for fixed-rate and variable-rate mortgages based on the customer’s needs. The lender boasts competitive interest rates, streamlined processes from application to closing, and ongoing support by highly trained and effective staff.
2. Freedom Mortgage
Another top lender in the conventional mortgage space is Freedom Mortgage. Founded as a family-focused business in 1990, Freedom Mortgage has been an advocate for homeownership for borrowers from all walks of life.
The lender has consistently received accolades as a top provider in the mortgage arena, sustained by their willingness and ability to go the extra mile for their customers.
In addition to conventional, low-down-payment mortgage options, Freedom Mortgage also offers VA, FHA, and USDA home loans. Prospective borrowers can quickly get a quote online or call to speak with an experienced loan officer to determine the smartest mortgage option for their needs.
3. New American Funding
New American Funding is another sound option for borrowers utilizing a conventional mortgage loan. The private lender, founded nearly two decades ago, leads with education first for their customers and follows up with exceptional customer service and a streamlined process for getting through the home loan journey.
New American Funding offers several loan types to qualified borrowers, including conventional, FHA, VA, USDA, and jumbo loan products. Potential borrowers can request a quote easily online in minutes and see all available home loan types based on what they need or want in a mortgage.
Who Should Get a Conventional Mortgage Loan?
Conventional loans are the best fit for borrowers with the ability to bring a higher down payment to the closing table. Although some conventional loan options allow for as little as a 3% down payment, the added cost of PMI may make these loans less attractive to those who can come up with a higher down payment upfront.
Conventional mortgage loans also make sense for borrowers who do not meet the criteria or do not want the restrictions associated with government-guaranteed home loan programs, like FHA, VA, or USDA mortgages.
While credit requirements may be more stringent, a conventional loan comes with higher loan limits, no income limits, and no location requirements.
Final Thoughts on Conventional Home Mortgage Loans
Before taking on a conventional mortgage, borrowers should consider all their options.
Comparing the cost in terms of interest rate, repayment term, and other loan conditions is necessary no matter the borrower’s circumstances. Taking the time to do so helps identify whether a conventional mortgage loan makes the most financial sense for the homebuying task at hand.
If you have any questions or comments regarding our conventional home loan guide, please don’t hesitate to leave them below.
