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- A conventional mortgage isn't backed by the government and has stricter eligibility requirements.
- A conventional mortgage can be either conforming or nonconforming. Most borrowers get conforming mortgages.
- You may qualify for a conventional mortgage if you have a good credit score, among other factors.
One of the first decisions you'll make when shopping for a mortgage is whether you want a government-backed loan or a conventional loan.
Conventional mortgages are by far the most popular mortgage option for borrowers. But when it comes to deciding what mortgage you'll use to purchase a home or refinance, it's important to understand what type of mortgage you qualify for and what best suits your needs. Read on to learn about conventional loans and whether it's the right type of mortgage for you.
What is a conventional mortgage?
A conventional mortgage, or conventional loan, is a mortgage that isn't insured or guaranteed by a government agency.
You'll get a conventional mortgage from a private lender, such as a bank, a nonbank mortgage lender, or a credit union. Though these loans aren't insured by a government agency, many conventional mortgages are backed by government-sponsored enterprises Fannie Mae and Freddie Mac. This means that the mortgage will be sold to one of these entities after closing.
Conventional vs. government-backed mortgage
By contrast, a government-backed mortgage comes with some sort of insurance or guaranty that a federal agency, such as the Federal Housing Administration, United States Department of Agriculture, or Department of Veterans Affairs, will cover a portion of the mortgage if the borrower defaults.
Because they don't come with this kind of insurance, conventional mortgages generally have stricter eligibility requirements. You'll need a higher credit score, lower debt-to-income ratio, and more money for a down payment.
Types of conventional mortgages
Conventional mortgages can be broken down into two categories: conforming and nonconforming loans. The main difference between these two types is the amount of money you need to borrow.
A conforming mortgage meets the conforming loan limit set by the Federal Housing Finance Agency (FHFA) and fits the requirements to be purchased by Fannie Mae or Freddie Mac. The FHFA sets the limit for conforming loans every year. In 2023, the limit is $726,200 in most parts of the US. In areas with a higher cost of living, the limit goes up to a max of $1,089,300.
A nonconforming mortgage doesn't meet these criteria. One of the most common types of nonconforming mortgages is a jumbo loan, which is a mortgage that exceeds conforming loan limits.
To qualify for a nonconforming mortgage like a jumbo loan, you may need a higher credit score, bigger down payment, and lower debt-to-income ratio than you would for a conforming loan.
Who qualifies for a conventional mortgage?
For the most part, the eligibility requirements for a conventional mortgage break down into three categories: credit score, debt-to-income ratio, and down payment.
If you can't meet all three qualifications, you'll want to check if you qualify for a government-backed mortgage or wait to buy a home. With more time, can improve your credit score, pay off some debt, or save more for a down payment.
Credit score
You'll need a credit score of at least 620 to qualify for a conforming conventional loan, though individual lenders may require higher scores than this. For a nonconforming loan, you'll probably need a score of 700 or higher.
Debt-to-income ratio
Your debt-to-income ratio (DTI) is the amount you pay toward debts each month divided by your gross monthly income. For example, if you spend $2,000 per month on your mortgage and student loan payments, and you earn $3,000 per month, your DTI ratio is $2,000 divided by $3,000, or 66%.
When you apply for a mortgage, your potential future mortgage payment will be included in this calculation. For conforming conventional mortgages, you may qualify with a total DTI ratio as high as 50%. But the maximum DTI you can have will depend on your overall financial profile, including your credit score and down payment amount. To have the best chances of getting approved, your DTI should be no higher than 36%.
If you're getting a jumbo loan, you'll likely have a harder time qualifying with a DTI above 45%.
Down payment
For conforming loans, the minimum down payment you can make is 3%, though some lenders may require at least 5% or 10%. Jumbo loans may require 10% or more, but it varies from lender to lender.
If you put down less than 20% on a conforming loan, you'll need to pay for private mortgage insurance until you reach 20% equity in the home. This monthly cost will be added to your mortgage payments. You'll generally pay between $30 and $70 per month for every $100,000 you borrow, according to Freddie Mac.
Conventional mortgage interest rates
Conventional mortgage rates are usually a little higher than government-backed rates. But some government-backed loans come with fees that could end up costing you more than the higher rate would. If you're trying to decide between a conventional or government-backed mortgage, do the math instead of assuming the lower rate is the better option.
Here are the factors that affect your conventional loan interest rate:
Economy
Current economic trends have a big impact on mortgage rates. When the economy is slow, rates often drop due to lower borrower demand.
Mortgage rates also dropped to historic lows in 2020 and 2021 in response to policy moves from the Federal Reserve that were intended to keep the economy from sinking during the pandemic.
Conversely, when the economy is hot, mortgage rates often jump up in response to higher borrower demand. Rising inflation caused by a too-hot economy can push mortgage rates up as well, as we've seen happen over the past year and a half.
Where you live
You may have noticed that houses are more expensive in cities than in rural areas, or more expensive in certain cities and states than others. But where you live affects your interest rate, too. Interest rates are usually higher in areas with a higher cost of living, but the difference shouldn't be huge.
Personal finances
Your credit score, debt-to-income ratio, and down payment don't just determine whether you'll qualify for a conventional mortgage — they also help determine your interest rate.
The better your finances, the lower your rate. Borrowers can snag a better rate by having a credit score of 670 or higher, a debt-to-income ratio below 36%, or a down payment of at least 20%.
Term
You'll need to choose between a fixed-rate or adjustable-rate mortgage.
A fixed-rate mortgage locks in your rate for the entire life of your loan. Although US mortgage rates will increase or decrease over the years, you'll still pay the same interest rate in 30 years as you did on your very first mortgage payment.
An adjustable-rate mortgage, or ARM, keeps your rate the same for the first few years, then periodically changes over time — often once or twice a year.
An ARM may be a worthwhile option if you're not buying a forever home, because you could move before risking a rate increase.
Term length
You'll also choose a term length, or how many years you'll spend paying back the loan.
For fixed-rate mortgages, a 30-year term is the most common option. Most lenders also offer 15-year and 20-year loans. Some have even more term lengths to choose from.
A 5/1 ARM is the most common type of adjustable-rate mortgage. You'll pay the same rate for the first five years, then your rate will change once per year. Most lenders also have 7/1 and 10/1 ARMs.
The longer your term, the higher your rate will be.
Points
At closing, you can choose to pay a fee to receive mortgage points. The more points you have, the lower your rate will be.
One mortgage point is typically 1% of your mortgage amount. If your loan is $100,000, one point would cost you $1,000.
One point will usually drop your rate by 0.25%.
For example, you buy a home with a $100,000 mortgage at a 3.5% interest rate. You pay $2,000 at closing for two mortgage points, so your rate drops by 0.5% total. You'll now only pay 3% on your loan.
Conventional mortgage frequently asked questions
Is conventional better than FHA?
Conventional loans can be better than FHA loans if you have a strong financial profile. For those with high scores, low DTIs, and large down payments, conventional loans are generally more affordable overall than an FHA loan. But FHA loans often have lower rates than conventional loans, and they can be more affordable for those with rockier credit histories.
Do you have to put 20% down on a conventional loan?
No, you do not have to put 20% down on a conventional loan. This is a common misunderstanding; 20% is the minimum down payment you'll need to avoid paying PMI. Most borrowers put down less than 20%, and you can put down as little as 3%.
Is it hard to get approved for a conventional loan?
Conventional loans have more stringent requirements than government-backed mortgages, but that doesn't mean it's significantly harder for most borrowers to get approved for one. The better your credit and finances, the more likely you are to get approved.
What is the lowest down payment for a conventional loan?
The lowest down payment you can make on a conventional loan is 3%, though some lenders may require at least 5% or 10%.
Why would someone only accept a conventional loan?
Sometimes, homebuyers with FHA loans can have a harder time getting their offers accepted than buyers who have conventional financing. Home sellers want to accept offers that they're certain are going to close on time and with few bumps along the way. Because of this, they may view offers backed by conventional loans as preferable because these loans tend to close faster and they don't come with the same appraisal and repair requirements that FHA loans do, which can slow down the process.