What is a Conventional Loan?

If you want to buy a home, you may have come across the term “conventional loan.” This is something you have to understand to make the best decision for your home purchase. So, what exactly is a conventional loan? Is it something that could be right for you? 

In this post, we’ll break down everything you need to know about conventional loans, including what they are, how they work, and whether or not they might be a good fit for your situation. 

Conventional Loan Explained

When it comes to mortgages, there are two main types: government-backed and conventional. As the name suggests, government-backed loans are backed by the government.

On the other hand, a conventional loan is a mortgage loan that a homebuyer can get from a private lender, such as a bank or credit union. 

The word “conventional” simply means that the government does not back the loan. It is contrary to other types of loans, such as FHA loans and VA loans, which are backed by the government and have different rules and regulations.

How Do Conventional Loans Work?

In the U.S, there are two main types of conventional loans: conforming and non-conforming. Conforming loans conform to guidelines set by government-sponsored enterprises Fannie Mae and Freddie Mac. While the non -conforming loans or “jumbo loans” do not meet these guidelines. However, there are also some guidelines that all conventional loans must meet, such as:

Credit Score

Before you qualify for a conventional loan, you must have a strong credit score. In general, the higher your credit score is, the better interest rate you will get on your loan. The qualifying score should be at least 620, but if you want to get the best interest rate possible, aim for a score of 760 or higher.

Down Payment

For a conventional loan, you will typically require putting a down payment as low as 3%. However, if you give 20% of the purchase price as a down payment, you will not have to pay for private mortgage insurance (PMI).

Loan Limits

There are also limits on how much you can borrow. Conforming conventional loans can go as high as $647,200 for single-family homes in 2022. However, if you live in high-cost areas, such as Hawaii or Alaska, you can get a loan for up to $969,000.

Loan Terms

Conventional loans are typically available in 30-year terms but can also be offered in 15- or 20-year terms.

Interest Rates

When it comes to interest rates, conventional loans tend to have lower interest rates than government-backed loans. This is because the lender takes on more risk with a conventional loan. However, your interest rate will also depend on your credit score and other factors: the higher your credit score, the lower your interest rate.

Conventional Loan Vs. Government of FHA Loans

When conventional and government loans are compared, each has its pros and cons. For example, government-backed loans may be a good option if you have a lower credit score because they tend to have more flexible credit requirements. However, these loans also come with stricter guidelines, such as the need for mortgage insurance.

Conventional loans may be a good option if you have a higher credit score and can afford to give a larger down payment. These loans also have lower interest rates; however, you will need to meet stricter requirements, such as having a debt-to-income ratio below 43%.

Who Can Get a Conventional Loan?

A conventional loan is one of the stricter types of loans out there. In order to qualify, the candidate should be:

Well Established in their Field

Before considering a conventional loan, the candidate should have at least two years of steady employment in the same field. This helps to prove to the lender that they have a reliable source of income.

A Prior Homeowner

Although it is not required, conventional loans are often given to candidates who have owned a home before. This helps to show the lender that the candidate is a responsible borrower.

A Good Credit Score

As mentioned earlier, one of the main requirements for qualifying for a conventional loan is having a good credit score. The minimum credit score for a conventional loan

Existing Bank Customers

In some cases, being an existing bank customer can help you qualify for a conventional loan. The issuing bank may be more willing to work with you if you have a history of responsible banking.

Funds to Pay the Down Payment

On top of a good credit score, the candidate will also need to have enough money saved up for a down payment. As mentioned earlier, the minimum down payment for a conventional loan is typically as low as 3% of the purchase price. However, showing them that you can pay any amount exceeding 3% (up to 20%) will help your case.

How to Apply for a Conventional Loan

If you think a conventional loan is the right fit for you, the next step is to start the application process. Here’s how you can apply for a conventional loan:

  • Get Your Credit Score: The first step is to check your credit score and get it in the best shape possible. This means paying down debt and making on-time payments.
  • Shop Around: Once you have a good credit score, you can start shopping around for lenders. The first thing you need to do is get pre-approved by a lender. This will give you an idea of how much money you can borrow and what interest rate you will get.
  • Presenting of Proofs: You will also need to provide the lender with information about your employment, income, debts, and assets.
  • Submit Your Application: Once you have found a lender and been pre-approved, you can submit your application. The lender will order a home appraisal to ensure the property is worth the amount you borrow. If everything goes smoothly, you will be approved for the loan and can start shopping for a home!
Tips for Getting Approved for a Conventional Loan

There are a few things you can do to increase your chances of getting approved for a conventional loan:

  • Save for a large down payment: The larger your down payment is, the more likely you will be approved. This is because it shows the lender that you have the financial means to make payments on the loan.
  • Get a co-signer: If you have a family member or friend with good credit, you can ask them to co-sign the loan. This will help increase your chances of getting approved.
  • Improve your credit score: As mentioned earlier, a good credit score is one of the main requirements for qualifying for a conventional loan. How can you do that? by paying down debt and making on-time payments.
  • Find a lender that specializes in conventional loans: There are some lenders out there that specialize in conventional loans. This can increase your chances of getting approved since they are more familiar with the process.
Conventional Loan FAQs

What credit score should I have?

You should have a credit score of as low as 620. However, if you show the lender that you have a good credit history, it is possible for you to get approved with a lower score.

What is the maximum debt-to-income ratio for a conventional loan?

The maximum debt-to-income ratio is typically 45%. In order to get qualified, your monthly debt payments should not exceed 45% of your monthly income.

What is the minimum down payment for a conventional loan?

The minimum down payment is typically as low as 3 %. However, proving to the lender that you have the financial means to make a larger down payment may help your chances of getting approved.

Do I have to pay for upfront fee?

No, you should not have to pay any upfront fees when you apply for a conventional loan. Only Federal Housing Administration or FHA loans require an upfront fee.


A conventional mortgage loan is a great option for those with a good credit score and enough money saved up for a down payment. The process is relatively simple, and many lenders can choose. However, do your research before applying to ensure you are getting the best deal possible.