Buying a home is one of the biggest financial decisions most people make in their lifetimes. Getting the right type of mortgage to fit your needs and budget is crucial. Conventional loans are a popular choice for many homebuyers. But not all conventional mortgages are the same. There are several different types of conventional loans, each with their own pros and cons.

In this article, we’ll break down the 6 most common types of conventional loans, how they work, and who they might be suitable for.

What Are Conventional Loans?

Before diving into the different types, let’s quickly review what makes a mortgage a conventional loan.

A conventional loan is a mortgage that is not backed by the government. This contrasts with FHA, VA and USDA loans which come with government insurance to protect the lender.

Conventional loans are issued by private lenders and conform to standards set by Fannie Mae and Freddie Mac. To be eligible, you’ll typically need good credit and a 20% down payment. However, some conventional loans allow down payments as low as 3%.

Pros of conventional loans:

• Lower interest rates than government loans
• Easier to qualify if you have good credit
• Lower mortgage insurance rates

Cons:

• Stricter eligibility requirements
• Typically require larger down payments
• Higher fees than government loans

Now let’s explore the 6 major types of conventional mortgages.

1. Conforming Loans

A conforming loan means the loan amount is at or under limits set by the Federal Housing Finance Agency (FHFA). For 2022, the baseline conforming loan limit is $647,200. But limits are higher in expensive housing markets.

For example, in San Francisco the 2022 conforming loan limit is $970,800. Conforming loans must also meet the underwriting criteria set by Fannie Mae and Freddie Mac.

Pros:

• Lower interest rates than jumbo loans
• Easier to qualify than non-conforming loans
• Can be resold to Fannie Mae or Freddie Mac

Cons:

• Loan amounts limited by conforming loan limits
• Must meet strict underwriting standards

Conforming loans work well for buyers in moderately priced markets who want low rates without the stricter criteria of jumbo loans.

2. Non-Conforming Loans

A non-conforming loan is a conventional loan that doesn’t conform to the standards set by Fannie Mae and Freddie Mac. The most common is a jumbo loan.

Jumbo loans exceed the conforming loan limits in their area, so they are considered non-conforming. For high-cost areas like New York or California, jumbos may be needed to buy larger, more expensive properties.

Pros:

• Finance luxury homes and higher loan amounts
• Fixed rates still lower than other non-conforming loans

Cons:

• Higher interest rates than conforming loans
• Stricter underwriting and higher credit score requirements
• May require larger down payments

Jumbo loans work for affluent buyers who need to borrow above conforming loan limits to buy high-end homes. Expect to provide lots of financial documentation.

3. Fixed-Rate Loans

The majority of conventional mortgages are fixed-rate loans. This means the interest rate stays the same for the entire loan term.

The most popular option is a 30-year fixed-rate loan. But 15-year and 20-year fixed-rate mortgages are also available.

Pros:

• Interest rate never changes
• Predictable monthly payments
• Build equity faster with shorter terms

Cons:

• Higher rate than adjustable-rate mortgages
• Never benefit if rates fall

Fixed-rate loans offer stability and work well if you plan to keep the home long term. Opt for a shorter 15-year term to pay off the loan faster.

4. Adjustable-Rate Mortgages (ARMs)

With an adjustable-rate mortgage, the interest rate fluctuates over time. ARMs start with an initial fixed-rate period of 3, 5, 7 or 10 years. After that, the rate adjusts annually based on an index like the prime rate.

Pros:

• Lower initial rates than fixed-rate mortgages
• Pay less interest if rates fall

Cons:

• Interest rate and payment amount can rise
• Caps limit rate increases/decreases
• More complex than fixed-rate loans

ARMs can make sense if you plan to move before the fixed period expires. But be prepared for payments to potentially increase a lot if rates rise.

5. Low and No Down Payment Loans

Conventional loans allow down payments as low as 3% with HomeReady and Home Possible programs. These “97% LTV loans” require mortgage insurance.

Some lenders even offer 100% financing conventional loans but with stricter eligibility standards.

Pros:

• Put less money down upfront
• Options for first-time buyers with limited funds

Cons:

• Mortgage insurance increases costs
• May need to pay PMI for longer
• Higher interest rates than 20% down loans

Low down payment conventional loans open doors for first-time buyers. Just know you’ll pay more interest over the loan’s life.

6. Renovation Loans

Renovation loans bundle the mortgage to purchase a home with funds to remodel it. Programs like HomeStyle let you finance up to 50% of the home’s as-completed value.

Pros:

• Finance purchase + renovations in one loan
• Only need one closing
• Don’t pay for upgrades upfront

Cons:

• More complex process with extra steps
• Limited to certain remodeling projects
• Home must appraise for expected value after renovations

Renovation loans allow buyers to customize homes to their tastes. But the process requires diligent oversight of contractors and renovation timelines.

Key Takeaways

While conventional mortgages have stricter eligibility standards than government loans, they offer advantages like lower rates for buyers with good credit. Conventional loans come in different flavors to suit your financial situation and goals.

The most popular are conforming fixed-rate loans which offer predictable payments at lower interest rates. But specialized products like jumbos, ARMs and renovation loans serve specific needs for some homebuyers.

Be sure to shop and compare multiple lenders to find the best conventional loan to fit your budget and financial objectives. With hundreds of programs available, there is likely a conventional mortgage suited for your situation.