What’s a Conventional Mortgage?

If you are starting your home-buying journey, one of the biggest decisions you’ll make is choosing which type of loan to use. Options include federally-backed loans like FHA and USDA. Alternatively, you can apply for a conventional loan. 

But what’s a conventional mortgage? You aren’t the only one asking this question. Here’s everything you need to know. 

What is a conventional mortgage?

Many new homebuyers wonder, “What’s a conventional mortgage exactly?” 

A conventional mortgage is a home loan that is not backed or insured by the government. Instead, it’s a standard home loan funded by private lenders. These lenders include credit unions, banks, and mortgage companies. 

These loans still follow guidelines set by organizations like Fannie Mae and Freddie Mac, but the federal government does not directly insure them. 

Since it's not federally-backed, a conventional loan typically has stronger credit requirements. Traditionally, lenders required 20% down for a conventional loan, although there are several lower down payment options ranging from 3% to 20%. 

How it differs from government-backed loans

Other types of mortgages are backed by the U.S. government, but conventional loans are not. Government-backed loans include:

• FHA
• VA
• USDA 

While all of these loans are privately funded, the government reduces risk for lenders by providing insurance or guarantees. That’s why the credit score or down payment requirements tend to be more lax. If a borrower defaults, lenders usually avoid eating the losses themselves. 

The government does not insure a conventional mortgage. Lenders take on all of the risk, which is why they typically require you to pay for private mortgage insurance if you put less than 20% down. 

Pros and cons of a conventional mortgage

There are pros and cons to any financial product, including conventional mortgages. 

Advantages

The potential advantages include:

• Lower costs over time due to competitive interest rates
• No upfront mortgage insurance fee
• Flexible property options
• Cancelable private mortgage insurance

Once you reach 20% equity, you can usually request to have PMI removed, which can save you a few hundred dollars per month. 

Disadvantages

The downsides of conventional loans include:

• Higher credit score requirements, usually around 620, compared to 580 for FHA loans
• Larger down payment expectations for weaker applicants 
• Stricter debt-to-income ratios

If you have a thin or rebuilding credit history, qualifying for a conventional loan can be more challenging. 

Types of conventional mortgages

There are two main categories of conventional loans. 

Conforming loans

A conforming loan meets the borrowing limits and underwriting guidelines set by Fannie Mae and Freddie Mac. The limits vary by location and are adjusted annually based on inflation and home prices. 

Non-conforming/jumbo loans

Non-conforming loans do not meet Fannie Mae or Freddie Mac guidelines. The most common example is a jumbo loan, which:

• Exceeds conforming loan limits
• Often requires higher credit scores
• May require a larger down payment
• Involves stricter underwriting

They are commonly used in high-value real estate markets. 

How to qualify for a conventional mortgage

Now that you know “What’s a conventional mortgage?" here are some tips for qualifying for this type of home loan. 

Saving for a down payment

While some conventional loans allow you to put as little as 3% down, putting down more helps you lower your monthly payment and increases your approval odds. If you can put 20% down, you won’t have PMI. Even if 20% is out of reach, work on building your savings to demonstrate that you have strong cash reserves. 

Reducing debt-to-income ratio

Your debt-to-income (DTI) ratio compares your monthly recurring debt payments to your gross monthly income. Most lenders prefer a DTI below 43%, though lower is better. Focus on paying down credit cards, avoiding new debt, and increasing your income where possible. 

Improving credit score 

Credit score plays a major role in qualifying for a conventional loan. You should aim for a FICO score of at least 620. Scores of 700+ will qualify you for the best rates. 

Conclusion

Want to boost your score and become a stronger applicant? Creating a Kikoff account is free. Our platform includes a variety of other free services to help you build your score, such as verified rent reporting. Adding rent payments to your credit report will make you a more appealing applicant.

Take a step toward stronger credit habits with Kikoff.