We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free – so that you can make financial decisions with confidence.
Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover.
Searching for your dream home? If so, you’ll need to finance the purchase with a mortgage loan. When exploring mortgage options, conventional loans should be at the top of your list. Keep reading to learn about the key benefits of conventional mortgages.
What is a Conventional Loan?
A conventional loan is a mortgage that is not insured or guaranteed by the federal government These loans are given by private lenders like banks and credit unions. Conventional loans that meet the requirements of Fannie Mae and Freddie Mac are called conforming loans
Conventional mortgages come in a variety of terms with 10 15, 20, and 30 year options being the most common. They also offer fixed and adjustable interest rates. Borrowers need to meet credit score and debt-to-income requirements to qualify for a conventional loan. Down payments are typically at least 3-5%.
Now let’s explore the top 8 reasons why a conventional mortgage could be the right choice for your home purchase.
1. More Options
Conventional loans offer more flexibility than government-backed mortgages. You’ll have options for loan terms, fixed or adjustable rates, and types of properties you can buy. Conventional loans can be used to purchase single-family homes, condos, townhomes, and even 2-4 unit properties.
You can also use conventional financing to buy a second home or investment property. Options are more limited with FHA and VA loans.
2. Higher Loan Limits
The baseline conforming loan limit for a conventional mortgage in 2023 is $726,200. However, limits are higher in certain high-cost areas like major cities. The max loan amount for a conforming conventional loan is $1,089,300 in places like San Francisco and New York City.
Government-backed loans have lower limits. The baseline limit for FHA loans is $420,680 and VA has a max of $647,200. So conventional financing allows you to buy a more expensive home.
3. Flexible Interest Rates
Conventional loans are offered with both fixed and adjustable interest rates. The most common terms are 10/1, 15/1, and 30/1 adjustable-rate mortgages (ARMs). The first number indicates the years the rate stays the same, and the second number is how often it adjusts after that.
ARMs start with lower rates than fixed mortgages. However, keep in mind the trade-offs if rates rise. Government programs only offer fixed-rate loans.
4. Lower Mortgage Insurance Payments
With a down payment under 20%, you’ll need to pay mortgage insurance. On a conventional loan, this is called private mortgage insurance (PMI). PMI is generally cheaper than the mortgage insurance on FHA and VA loans.
For example, with a 3% down payment on a $300,000 conventional loan, your PMI may be around $75/month. On an FHA loan, it would be $162. PMI also falls off your conventional loan once you reach 20% equity.
5. Low Down Payment
It’s possible to buy a home with as little as 3% down using a conventional loan. While you can get into a property with 0% down using a VA loan, FHA requires at least 3.5%.
The caveat is that with under 5% down on a conventional mortgage, you’ll have a higher interest rate. But rates are still competitive. And you have more home options than government loans allow.
6. Access to Your Loan Amount Faster
Closing a real estate transaction takes time. But conventional loans can provide access to your funds before you formally close using early funding options. This allows you to pay for closing costs or make a competing offer.
Government-backed loans don’t allow early funding. So you won’t have access to the loan amount until after closing. This limits your flexibility during the home buying process.
7. Slightly Higher Interest Rates
Government loans typically have lower interest rates because they are insured by the government. For example, right now average 30-year fixed rates are about 6% for conforming conventional loans and 5.5% for FHA.
However, be sure to weigh rate differences against the big picture. The lower monthly mortgage insurance, faster closing timeline, and increased buying power of conventional loans often outweigh the rate factor.
8. May Require Mortgage Insurance
As mentioned above, you’ll need private mortgage insurance with less than 20% down on a conventional loan. One exception is a “piggyback loan” where you pair an 80% first mortgage with a 10% second. This avoids PMI while still allowing a low down payment.
All government-backed loans require mortgage insurance no matter how much you put down. Conventional financing gives a path to cancel PMI and eventually stop paying the premium.
Should You Choose a Conventional Mortgage?
Now that you know the key benefits, you may be wondering if a conventional loan is the right move for your mortgage needs. Here are some factors to consider:
-
Credit score – Need a 620 minimum for conventional. Can be as low as 500 for FHA.
-
Down payment – Conventional allows 3-5% down. FHA needs 3.5% minimum. VA requires none.
-
Property type – Conventional lets you buy just about anything. Government loans limit options.
-
Loan size – Conventional has higher limits if you need jumbo financing.
-
Interest rates – Government loans feature lower rates but conventional pricing stays competitive.
While government-backed loans work for some, conventional mortgages offer more flexibility and options. If you value choice and have qualifying credit, a conventional loan likely aligns with your home buying goals.
Next Steps to Getting a Conventional Mortgage
If you want the benefits of conventional financing, here are the next steps:
-
Check your credit score to ensure it’s over 620.
-
Save up enough for a 3-5% downpayment plus closing costs.
-
Get pre-approved by applying with multiple lenders to compare options.
-
Make an offer when you find the right home.
-
Provide documents for your loan application like pay stubs, tax returns, and bank statements.
-
Complete an appraisal and inspection of the property.
-
Finally, close on your conventional mortgage and get the keys to your new home!
The conventional loan process does take some legwork. But the payoff is well worth it when you can choose from an array of options to finance your dream home. Take the first step and apply today to enjoy the key benefits of conventional mortgages.
What is a conventional loan?
A conventional loan is a mortgage that’s available through and backed by a private sector lender. Government-insured loans, by comparison, are backed or guaranteed by a federal agency. These include FHA loans, VA loans and USDA loans. Mortgage Conventional conforming mortgages were the most common mortgage type in Q4 of 2023, making up 44.8% of all originated mortgages, according to the
Conventional mortgages are available through different types of mortgage lenders, including banks, credit unions and online mortgage companies. They come in two main types: fixed-rate or adjustable-rate.
- Fixed-rate mortgages: Your interest rate never changes. You have the same monthly principal and interest payment for the length of the loan.
- Adjustable-rate mortgages: You’ll have a fixed introductory rate for the first three to 10 years of the loan. Then, the rate will change at preset intervals, such as every year or six months, based on an index rate plus a margin determined by the lender.
To be approved for any type of mortgage, you’ll need to meet the lender’s requirements around your financials, including your credit score, income and debts. Conventional loan requirements tend to be stricter than government-backed loan requirements. Specific qualifications include:
- Credit score: Mortgage lenders require a minimum score of 620 to qualify for a conventional loan. With a higher score, you’re more likely to get a better interest rate and terms.
- Debt-to-income (DTI) ratio: Your DTI ratio factors in other debts you have to pay each month, such as auto loans, student loans and credit card debt. Most lenders don’t want this ratio to exceed 43 to 45 percent.
- Down payment: While 20 percent down is the standard, many fixed-rate conventional loans for a primary residence allow for a down payment as small as 3 percent or 5 percent.
- Private mortgage insurance (PMI): If you put down less than 20 percent, you’ll have to pay PMI, an additional fee added to your payments. The average monthly cost of PMI is 0.46 percent to 1.5 percent of the loan amount, according to the Urban Institute.
- Loan size: Most conventional loans are also conforming loans: that is, they conform to Federal Housing Finance Agency (FHFA) limits on how much you can borrow. These limits vary based on where the property is located. In most of the U.S., the limit for 2024 is $766,550. Certain states (like Alaska and Hawaii) and higher-priced areas (including parts of California) have limits of $1,149,825.
Conventional loans vs. government loans
FHA loans, insured by the Federal Housing Administration (FHA), are ideal for borrowers with less-than-perfect credit, but they come with a less-than-ideal cost: mortgage insurance that cannot be removed – unless you make a down payment of 10 percent or more. Even then, you’ll have to wait 11 years until you can cancel it. (This applies to loans originated after 2013. The rules are different for older loans).
- 3% down payment minimum
- 620 credit score minimum
- 45% DTI maximum (in most cases)
- Can cancel mortgage insurance with 20% equity
- 3.5% down payment minimum
- 580 credit score minimum with 3.5% down (500 credit score minimum with 10% down)
- 50% DTI maximum
- Mortgage insurance includes one-time premium upfront and annual premiums
Learn more:
THE BENEFITS OF A CONVENTIONAL MORTGAGE | PROS & CONS
FAQ
What is the downside of a conventional loan?
Why do people prefer conventional loans over FHA?
Who should use a conventional loan?
Why would someone only accept a conventional loan?
What is a conventional loan?
A conventional loan is a type of mortgage for residential property issued by private lenders, such as banks, credit unions, and other lenders. These lenders also service the loans, meaning they collect mortgage payments and pursue foreclosure if a borrower defaults.
Can a home loan be a conventional mortgage?
A home loan can be considered a conventional mortgage if it complies with the lending rules set by Fannie Mae and Freddie Mac. These rules require the loan to meet certain criteria, such as the loan limit for conventional mortgages varying by location. For 2020, the limit in most areas is $510,400, but for higher-cost areas, the limit can be as high as $765,600.
Is a conventional loan better than a government-backed loan?
Compared to a government-backed loan, a conventional loan typically has a stricter credit requirement. It is the most popular type of mortgage in the United States, accounting for approximately 80% of the home loans that closed in August 2021, according to Ellie Mae.
Are conventional loans better than FHA loans?
Conventional loans have stricter credit requirements than government-backed loans like Federal Housing Administration (FHA) loans. You’ll need to meet certain qualification requirements if you want to buy a home with a conventional loan.