What Is a Conventional Loan?
A conventional loan is a mortgage that is not insured or guaranteed by a government agency (unlike FHA, VA, or USDA loans). These loans conform to guidelines set by Fannie Mae and Freddie Mac — two government-sponsored enterprises that buy mortgages from lenders — which is why they're also called "conforming loans."
Conventional loans are the most widely used mortgage product in the United States, offering competitive rates and flexible terms for borrowers with good credit.
Types of Conventional Loans
Conforming Loans
Loans that fall within the conforming loan limits set by Fannie Mae and Freddie Mac. For 2023, the baseline limit is $726,200 for a single-family home (higher in high-cost areas).
Non-Conforming (Jumbo) Loans
Loans that exceed conforming limits. These have stricter qualification requirements but allow you to finance higher-priced properties.
Fixed-Rate vs. Adjustable-Rate
- Fixed-rate: Interest rate stays the same for the life of the loan (15, 20, or 30-year terms)
- Adjustable-rate (ARM): Rate is fixed for an initial period (5, 7, or 10 years), then adjusts annually
Credit Score Requirements
The minimum credit score for a conventional loan is 620, but higher scores unlock better rates and terms:
| Credit Score | What It Means | |-------------|---------------| | 740+ | Best rates and terms | | 700-739 | Good rates, most options | | 680-699 | Acceptable, slightly higher rates | | 620-679 | Minimum range, higher rates and PMI | | Below 620 | May not qualify — consider FHA |
Down Payment Requirements
One of the biggest myths about conventional loans is that you need 20% down. In reality:
- Minimum down payment: 3% (for first-time buyers or low-to-moderate income borrowers)
- Standard minimum: 5% (for most borrowers)
- Investment properties: 15-25% down
- Second homes: 10% down
Private Mortgage Insurance (PMI)
If you put down less than 20%, you'll pay PMI — but unlike FHA mortgage insurance, PMI can be removed once your loan-to-value ratio reaches 80%. You can request PMI removal, and it automatically drops off at 78% LTV.
Debt-to-Income (DTI) Ratio
Your DTI ratio measures how much of your monthly income goes toward debt payments. For conventional loans:
- Ideal DTI: 36% or lower (max 28% for housing costs)
- Maximum DTI: Up to 45-50% with strong compensating factors
- Compensating factors: High credit scores, substantial reserves, low housing payment relative to income
Income and Employment Requirements
Employment History
- 2 years of steady employment in the same field (preferred but not always required)
- Gaps in employment may require explanation and documentation
- Career advancement with income growth is viewed positively
Income Documentation
- W-2 employees: 2 years of W-2s + recent pay stubs
- Self-employed: 2 years of personal and business tax returns + year-to-date profit & loss
- Investment/retirement income: Award letters and statements
- Rental income: Lease agreements and tax returns
Property Requirements
Conventional loans can be used for:
- Primary residences
- Second homes
- Investment properties (1-4 units)
- Condos, townhomes, and single-family homes
The property must meet the appraiser's condition standards. Unlike FHA, conventional appraisals are generally less strict about minor property issues.
Conventional Loan Benefits
- Lower overall cost compared to FHA (no upfront mortgage insurance, removable PMI)
- More property types — primary, secondary, and investment
- Flexible terms — 15, 20, or 30-year options
- Higher loan limits — up to conforming limits (and jumbo options above)
- No occupancy restrictions — can be used for investment properties
- Competitive rates — typically the lowest rates available for qualified borrowers
When Conventional Might Not Be the Best Fit
Conventional loans may not be ideal if:
- Your credit score is below 620 (FHA may be better)
- You have a high DTI ratio (FHA allows up to 50%)
- You can only afford 3.5% down (FHA's 3.5% is available at 580+ credit)
- You're buying a property that needs significant repairs (FHA 203k or renovation loan)
How to Improve Your Chances of Approval
- Check your credit — Review your report and fix any errors
- Save for down payment + closing costs — Aim for 5% down plus 2-5% for closing costs
- Reduce your debt — Lower your DTI by paying down credit cards and loans
- Gather documents early — W-2s, pay stubs, bank statements, tax returns
- Avoid new credit — Don't open new accounts or take on new debt before applying
- Build reserves — Having 2-6 months of payments in savings strengthens your application
Ready to Apply?
If you have a credit score of 620+ and can put down at least 3-5%, a conventional loan could be your best path to homeownership. Our team at ASB Capital Loan Funding can help you compare conventional and government-backed options to find the right fit.
Start your application today — one application covers every loan program we offer.
