The Ultimate Guide to Conventional Loans: Everything You Need to Know About This Flexible Mortgage Option

Nov 1, 2024 | Conventional Loan

(Updated 1/2/25)

Making the leap from renting to owning a home is a major milestone—congratulations! When it comes to financing, conventional loans are among the most popular choices. Unlike FHA, VA, or USDA loans, conventional loans aren’t backed by the government. Instead, private lenders fund these mortgages, offering flexibility and competitive rates for those who qualify. Here’s everything you need to know about conventional loans and how they can help you achieve your dream of homeownership.


What Is a Conventional Loan?

A conventional loan is a mortgage offered by private lenders, such as banks and credit unions, without federal insurance or guarantees. This distinction means you’ll need to meet the lender’s specific requirements, but it also opens the door to benefits like lower interest rates, faster closings, and more property options.

There are two main types of conventional loans:

  1. Conforming Loans: These adhere to guidelines set by Fannie Mae and Freddie Mac, including borrowing limits. In 2025, this limit is $806,500 in most areas.
  2. Non-Conforming Loans: These exceed conforming limits or have unique qualifications. Jumbo loans, for example, are a common non-conforming option.

Why Choose a Conventional Loan?

Conventional loans offer a variety of advantages, making them a top choice for many buyers:

  • Competitive Interest Rates: For borrowers with good credit, these loans often have lower rates compared to government-backed options.
  • Flexible Loan Terms: Choose from fixed-rate stability or adjustable-rate flexibility.
  • No Ongoing Mortgage Insurance with 20% Down: Avoid costly mortgage insurance premiums if you can put down at least 20%.
  • Quick Closings: With fewer government processes involved, conventional loans can close faster.
  • Versatile Property Options: Use conventional loans to finance primary residences, vacation homes, or investment properties.

Do You Qualify for a Conventional Loan?

To qualify for a conventional loan, you’ll need to meet specific financial criteria:

  • Credit Score: A minimum score of 620 is typically required, but 740 or higher qualifies for the best rates.
  • Debt-to-Income Ratio (DTI): Most lenders prefer a DTI of 45% or lower.
  • Down Payment: First-time buyers may qualify with as little as 3% down, but a 20% down payment eliminates PMI.
  • Employment Stability: Consistent income over at least two years in the same field is a key factor.
  • Cash Reserves: Many lenders require two to six months’ worth of mortgage payments in savings.

Types of Conventional Loans

Conventional loans come in different forms to suit a variety of needs:

  • Fixed-Rate Mortgages: Lock in your interest rate and enjoy predictable payments for the life of the loan.
  • Adjustable-Rate Mortgages (ARMs): Start with a lower rate that adjusts over time—ideal if you plan to sell or refinance within a few years.
  • Jumbo Loans: These non-conforming loans cover high-priced properties that exceed conforming limits.
  • Interest-Only Loans: Pay only interest for an initial period, which can lower your early payments but requires careful financial planning.

Steps to Secure a Conventional Loan

Getting started with a conventional loan is straightforward:

  1. Check Your Credit Report: Review for errors and take steps to improve your score if needed.
  2. Get Pre-Approved: This shows sellers you’re serious and helps define your budget.
  3. Compare Lenders: Look for the best rates and terms by shopping around.
  4. Organize Documentation: Gather pay stubs, tax returns, and bank statements to streamline the application process.
  5. Complete the Appraisal: Ensure the property’s value supports the loan amount.
  6. Close the Deal: Sign your paperwork, pay closing costs, and get your keys!

FAQs About Conventional Loans

Q: Can I remove PMI with a conventional loan?
A: Yes! Once you reach 20% equity in your home, you can request PMI removal.

Q: Are there special programs for first-time buyers?
A: Yes, options like Fannie Mae’s HomeReady and Freddie Mac’s Home Possible programs allow for low down payments and flexible terms.

Q: How much can I borrow with a conventional loan?
A: Loan limits depend on your credit and income, with conforming loans maxing out at $806,500 in most areas.


Tips for Securing the Best Loan Terms

  • Boost Your Credit Score: Pay down debt, avoid new inquiries, and resolve any report errors.
  • Save for a Larger Down Payment: A bigger down payment lowers costs and can help you avoid PMI.
  • Lock Your Rate Early: Protect yourself from rising rates during the application process.
  • Choose the Right Loan Term: A 15-year loan offers lower rates but higher monthly payments compared to a 30-year term.

Why Conventional Loans Make Sense for Homebuyers

Conventional loans provide a flexible and reliable path to homeownership, whether you’re buying your first home or expanding your real estate portfolio. With competitive rates, fewer restrictions, and multiple loan options, these mortgages cater to a wide range of needs.

Take the first step today by exploring your options, getting pre-approved, and finding the lender that best matches your financial goals. Homeownership is within reach—let a conventional loan open the door!

Scott Gentry
Author: Scott Gentry

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