When you’re looking to buy a home, one of the first decisions you’ll face is what type of mortgage to choose.
While there are several loan options available, conventional loans remain one of the most popular choices in the United States — and for good reason.
If you’re wondering what is a conventional loan and whether it’s the right fit for your financial situation, this guide breaks down everything you need to know, including how it works, who qualifies, and why it might be a smart move for your next home purchase.
What is a conventional loan?
A conventional loan is a type of home mortgage that’s not insured or guaranteed by the federal government.
That makes it different from government-backed loans like FHA (Federal Housing Administration), VA (Veterans Affairs), or USDA (U.S. Department of Agriculture) loans.
Conventional loans are offered by private lenders — such as banks, credit unions, and mortgage companies — and they follow standards set by Fannie Mae and Freddie Mac, the two government-sponsored enterprises that buy and guarantee most mortgages in the U.S.
There are two main types of conventional loans:
- Conforming loans, which meet the loan limits and guidelines of Fannie Mae and Freddie Mac
- Non-conforming loans, which do not meet those limits (such as jumbo loans for more expensive properties)
How do conventional loans work?
Conventional loans typically require the borrower to:
- Have a good credit score (usually 620 or higher)
- Make a down payment of at least 3% (though 5–20% is more common)
- Show proof of stable income and employment
- Maintain a debt-to-income (DTI) ratio below 43%
If your down payment is less than 20%, lenders usually require private mortgage insurance (PMI) to protect themselves in case you default on the loan.
Once your home equity reaches 20%, PMI can often be canceled — which helps lower your monthly payment.
The repayment term is most commonly 15 or 30 years, and you can choose between a fixed-rate or adjustable-rate mortgage, depending on your financial goals and how long you plan to stay in the home.
Who qualifies for a conventional loan?
Conventional loans are best suited for borrowers with:
- Strong credit (typically 680 or above for the best rates)
- Steady income
- Low to moderate debt levels
- Enough savings to make a down payment and cover closing costs
While it’s possible to qualify with a credit score as low as 620, you’ll generally get better terms and lower interest rates with a higher score.
That’s why many borrowers use a conventional loan as a reward for building good credit and saving responsibly.
It’s also a solid option for repeat buyers, self-employed individuals, and people purchasing investment properties — situations where government loans may not be available or practical.
What are the pros and cons of a conventional loan?
Pros:
- Lower overall cost for borrowers with good credit
- Flexible down payment options, starting at 3% for first-time buyers
- No upfront mortgage insurance fee, unlike FHA loans
- PMI can be removed once you reach 20% equity
- Can be used for a variety of property types (primary residence, second home, rental)
Cons:
- Higher credit standards than FHA or VA loans
- PMI required for down payments under 20%
- May not be ideal for borrowers with poor credit or limited savings
- Stricter documentation requirements
Conventional loan vs. government-backed loan: what’s the difference?
| Feature | Conventional Loan | FHA Loan | VA Loan |
| Backed by | Private lenders | Federal government | Federal government |
| Credit score | 620+ (usually) | 580+ | Varies (no minimum) |
| Down payment | As low as 3% | As low as 3.5% | 0% (for qualified vets) |
| PMI | Required < 20% down | Required | Not required |
| Ideal for | Borrowers with good credit | First-time buyers | Military service members |
If you have a strong credit profile, a conventional loan could save you money over time compared to government-backed loans. However, FHA or VA loans may be more accessible if you’re still building your financial footing.
Why a conventional loan might work for you
A conventional loan gives you more control and flexibility — especially if your credit is solid and you’ve built up some savings.
You’ll often benefit from lower interest rates, reduced insurance costs over time, and the freedom to shop among various lenders for the best deal.
This type of loan is particularly attractive if:
- You want to avoid long-term mortgage insurance
- You plan to stay in your home long enough to build equity
- You want to finance a second home or rental property
- You’re refinancing an existing mortgage and now meet the stricter requirements
It’s also worth noting that many first-time homebuyer programs now offer conventional loans with reduced requirements and low down payment options, making them more accessible than ever.
Is a conventional loan right for you?
Conventional loans offer a balanced blend of affordability, flexibility, and long-term savings — but they’re not right for everyone.
If you have strong credit, reliable income, and at least a modest down payment, a conventional loan can be a smart and cost-effective path to homeownership.
Before committing, compare loan options, speak with a mortgage advisor, and consider your long-term financial goals.
With the right preparation, a conventional loan might be exactly what you need to unlock the front door to your next home.