What is a conventional loan? Benefits, requirements and more

Key takeaways 

• Conventional loans typically require stronger credit, with most lenders looking for scores of 620 or higher.
• Down payments can be as low as 3%, though putting down less than 20% means paying private mortgage insurance, which can be removed later.
• Borrowers with stable income and finances often get better terms, including lower rates and reduced long‑term costs.

Most homebuyers need a mortgage to make a purchase work. But with so many options available, choosing the right type of loan can feel confusing.
This guide breaks down conventional loans, the most common type of mortgage, explaining how they work, who qualifies and how they compare with government‑backed options like FHA, VA and USDA loans.

A conventional loan is essentially any mortgage that doesn’t come with a government guarantee. If a borrower defaults, no federal agency steps in to absorb the loss — the risk remains with private lenders such as banks and credit unions.

Government‑backed loans, by comparison, shift some of that risk to taxpayers, which often allows lenders to offer more flexible credit standards or lower upfront costs for borrowers. Conventional loans fall into two categories: conforming loans, which meet size and underwriting standards set by Fannie Mae, Freddie Mac and the FHFA, and nonconforming loans, which do not, including jumbo mortgages used to finance higher‑priced homes.

Conventional mortgages come in several forms, depending on how long you plan to keep the home and how predictable you want your payments to be.

This is the most common option. Your interest rate is set when you close on the loan and never changes. That means your principal and interest payment stay the same from month to month, making it easier to budget.

With an adjustable‑rate mortgage, the interest rate changes over time. Most ARMs start with a lower fixed rate for the first three to 10 years. After that, the rate adjusts periodically based on market conditions, which can raise or lower your monthly payment.

A jumbo loan is used when you need to borrow more than the maximum amount allowed for a conforming loan. In 2025, a jumbo home loan is any mortgage amount exceeding $806,500 for a one-unit property in most of the U.S., a 5.2% increase from 2024. In high-cost areas including parts of California, New York and Hawaii — this limit is higher, reaching up to $1,209,750.

A portfolio loan is one a lender keeps on its own books instead of selling to investors. This option can help buyers who don’t quite meet traditional standards, but it often comes with higher interest rates, larger down payments and higher closing costs.

Subprime loans are aimed at borrowers with lower credit scores or limited credit history. Because these loans carry more risk for lenders, they typically come with higher interest rates. If you’re considering one, it’s especially important to shop around and compare offers.

Lenders set their own standards, but most conventional loans follow similar guidelines.

• Credit score: Most lenders look for a score of at least 620.
• Down payment: Some buyers qualify with as little as 3% down, though jumbo loans usually require more.
• Private mortgage insurance (PMI): If you put down less than 20%, you’ll need PMI. The good news: It isn’t permanent and can be removed once you build enough equity.
• Debt‑to‑income ratio (DTI): Lenders typically prefer your monthly debts to be no more than 45% of your income, though lower is better.
• Loan limits: Conforming loans are capped at $806,500 in most areas in 2025, with higher limits in expensive markets.

A conventional mortgage works well for many homebuyers, especially those with solid credit and stable income. But it isn’t the best fit for everyone, particularly if you’re still building credit or qualify for certain government‑backed loans.

• More flexibility in how you borrow: Conventional loans come with a wide range of term options. Fixed‑rate loans can last 10, 15, 20 or 30 years, giving borrowers more control over monthly payments and long‑term costs. Many government‑backed loans are limited to 15‑ or 30‑year terms.
• No upfront mortgage insurance fee: Unlike FHA loans, conventional mortgages don’t require an upfront mortgage insurance premium. You may still have to pay private mortgage insurance (PMI) if you put down less than 20%, but PMI is temporary and can be removed once you build enough equity.
• Higher borrowing limits: In 2025, the conforming conventional loan limit is $806,500 in most parts of the U.S., compared with $524,225 for FHA loans, though both programs allow higher borrowing limits in expensive housing markets.

• Stricter approval standards: Because these loans aren’t backed by the government, lenders generally require stronger credit profiles. Compared with FHA loans, you’ll usually need a higher credit score and a lower debt‑to‑income ratio to qualify.
• Larger down payments in some cases: Borrowers using jumbo or portfolio loans may need to put more money down. By contrast, eligible buyers using VA or USDA loans can sometimes purchase a home with no down payment at all.
• Interest rates can be higher for some borrowers: In certain situations, FHA loans may offer lower interest rates. Borrowers who rely on subprime or portfolio conventional loans also tend to pay more, reflecting the higher risk lenders take on.

Choosing between a conventional loan and a government‑backed mortgage isn’t always straightforward. Your credit score, savings and long‑term plans all matter. A real estate agent or lender who understands your budget can help you sort through the options and figure out what fits best.

FHA loans, which are backed by the Federal Housing Administration, are a popular option, especially for first‑time buyers. But a conventional mortgage can make more sense for borrowers with stronger credit.

“In many cases the terms for a conventional loan are more favorable than FHA in terms of closing costs and ongoing fees,” said Sarah Alvarez DeFlorio, vice president of mortgage banking at William Raveis Mortgage.

She pointed to mortgage insurance as the difference. FHA loans require an upfront insurance fee plus a monthly payment that typically lasts for the life of the loan. With a conventional mortgage, private mortgage insurance is temporary and automatically drops off once a borrower reaches 78% equity.

Here’s how the two loan types compare:

• Credit score: Most conventional loans require a minimum score of about 620. FHA loans are more flexible. Some borrowers can qualify with scores as low as 500.
• Down payment: Conventional loans can start at 3% down. FHA loans typically require 3.5% down with a credit score of 580, or 10% down for borrowers with lower scores.
• Debt‑to‑income ratio: FHA loans allow higher levels of debt, with maximum DTIs reaching up to 57% in some cases.
• Property use: Conventional loans can be used for primary homes, second homes or investment properties. FHA loans are limited to primary residences.
• Mortgage insurance: FHA borrowers must pay mortgage insurance premiums. Conventional borrowers only pay PMI if they put down less than 20%, and it can be removed later.
• Interest rates: FHA loans may offer lower rates for some borrowers, though terms depend on credit and lender.

VA loans are backed by the U.S. Department of Veterans Affairs and are available only to eligible active‑duty service members, veterans and some surviving spouses. For those who qualify, they can offer significant savings compared with a conventional mortgage.

Here’s how VA and conventional loans differ:

• Credit score: Many lenders look for a credit score of around 620 for both loan types. Some VA lenders may approve borrowers with scores as low as 580, though terms may be stricter.
• Down payment: VA loans don’t require a down payment, which can make homeownership more accessible. Conventional loans typically require at least 3% down.
• Debt‑to‑income ratio: VA lenders generally prefer a DTI of 41% or lower, which can make these loans slightly less flexible for buyers carrying more debt.
• Mortgage insurance: VA loans don’t require private mortgage insurance, even with little or no money down. Conventional loans require PMI if you put down less than 20%.
• Property use: VA loans are limited to primary residences. Conventional loans can also be used for second homes or investment properties.
• Interest rates: VA loans often come with lower interest rates than conventional mortgages, though rates vary by borrower and lender.
• Fees: VA loans include a one‑time VA funding fee and standard loan origination charges, though some borrowers may be exempt from the funding fee.

USDA loans are designed for buyers purchasing homes in eligible rural and suburban areas. Like VA loans, they can offer low-cost financing for borrowers who meet the program’s requirements.

Major differences include:

• Property location: USDA loans can only be used for primary residences in qualifying rural areas. Conventional loans have no location restrictions.
• Income limits: USDA financing has household income caps that vary by region. In 2024, limits are typically $110,650 for households of up to four people, and $146,050 for households of five to eight.
• Credit score: USDA doesn’t set a specific minimum, but most lenders look for a score of at least 620. Conventional loans usually require the same baseline.
• Down payment: USDA loans don’t require a down payment. Conventional loans generally start at 3% down.
• Debt‑to‑income ratio: USDA lenders prefer a DTI of 41% or less, which may limit flexibility for some borrowers.
• Mortgage insurance: USDA loans don’t require private mortgage insurance, even with zero down.
• Interest rates: USDA loans often offer lower interest rates than conventional mortgages, depending on market conditions.

Applying for a conventional loan means showing a lender that you can repay what you borrow. That comes down to your paperwork, credit history and income stability.

Here’s what to expect:

Lenders will ask for documents that confirm who you are, how much you earn and what assets you have. Having these ready can help speed up the process.

• Identification: A government‑issued ID, such as a driver’s license or passport. Some lenders may also request your Social Security number or card.
• Proof of income: Most lenders ask for recent pay stubs and W‑2s, along with copies of your tax returns to verify earnings.
• Asset information: Statements from bank accounts, investment accounts and retirement accounts like a 401(k) or IRA.
• Debt details: Information on existing loans and credit cards, including student loans, auto loans and other mortgages.

Most conventional loans require a minimum credit score of around 620. The higher your score, the better your chances of qualifying and securing a lower interest rate or cheaper private mortgage insurance.

Ways to improve your credit include:

• Paying down balances on credit cards and other revolving debt
• Disputing errors on your credit report
• Making all payments on time
• Avoiding new credit applications before you apply
• Asking for a credit‑limit increase, if appropriate

Lenders typically want to see at least two years of consistent income. They’ll verify this using pay stubs, bank statements, tax returns and W‑2s.

If you’re self‑employed, expect to provide two years of personal and business tax returns.

Income that can count toward qualification includes:

• Salary and hourly wages
• Bonuses, commissions and overtime
• Contract, freelance or part‑time income
• Alimony or child support (if documented)
• Retirement income or Social Security

This story was updated April 28.