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A conventional loan is a mortgage that is not backed by a government program, such as the Federal Housing Administration (FHA), the United States Department of Agriculture (USDA) or the Department of Veterans Affairs (VA). It's offered by private lenders and typically follows standard lending guidelines around credit, income and down payments.
Whether you're buying your first home, moving up or refinancing an existing mortgage, understanding how conventional loans work can help you make confident decisions. From basic conventional loan requirements to the loan benefits, below is a breakdown of how this type of financing may fit into your plans.
Types of Conventional Loans
With a conventional loan, borrowers choose between a fixed-rate mortgage and an adjustable-rate mortgage, often called an ARM. Each option works differently over time and can support different financial goals.
Fixed-Rate Mortgages
A fixed-rate mortgage has an interest rate that remains constant for the entire loan term. That means the monthly principal and interest payments are consistent over time. This option is often chosen by borrowers who value payment stability and long-term predictability.
Adjustable-Rate Mortgages (ARMs)
Adjustable-rate mortgages start with a fixed interest rate for an initial period, which is often more attractive than a comparable fixed-rate loan. After that period ends, the rate can change based on market conditions and the loan terms.
ARMs may be a good fit for borrowers who plan to move or refinance within a few years and are comfortable with potential rate changes. Homeowners often factor in how long they expect to stay in the home and choose to refinance into a fixed-rate loan before the rate adjusts.
Jumbo Loans For Higher Priced Homes
Most conventional loans fall within standard loan limits and are considered conforming loans. If you're purchasing a higher-priced home and need to borrow above those limits, a jumbo loan may be an option. Jumbo loans are a type of non-conforming conventional loan and typically have different qualification requirements. Jumbo loans can be either fixed-rate or adjustable-rate.
How Does a Conventional Loan Work?
Conventional loans follow defined standards around credit, income and down payments. If you meet the criteria for their loan type, conventional financing offers predictable structures and options that support a wide range of homebuying or refinancing goals.
Term Lengths and Types
You can choose flexible loan terms ranging from 10 to 30 years and select either a fixed-rate or adjustable-rate mortgage based on your priorities.
Interest Rates
Interest rates on conventional home loans are dynamic, changing daily to reflect evolving economic and market conditions. At the same time, rates for individual home loans also depend heavily on factors including:
- Borrower's credit profile
- Loan amount
- Loan term
- Loan purpose, such as purchase or refinance
- Loan type, including fixed-rate, adjustable-rate or streamline refinance options
Process Overview
To get started, you'll complete a mortgage application and then connect with a loan officer to review your goals and explore available options.
Using a Conventional Loan to Refinance
Conventional loans aren't just for buying a home. They're also commonly used to refinance an existing mortgage. Homeowners may choose a conventional refinance to:
- Adjust their loan term
- Switch from an adjustable-rate to a fixed-rate loan
- Lower their interest rate
- Remove ongoing mortgage insurance as home equity increases
Conventional loans also offer cash-out refinance options, which allow eligible homeowners to access a portion of their home equity while refinancing and updating their loan terms.
Conventional Loan Requirements
Conventional loans follow standard guidelines, but individual lenders may apply additional requirements. These guidelines outline what lenders look for, while qualifying comes down to how your full financial picture fits within them. Reviewing these basics early can help you feel more prepared as you move forward.
Down Payment
Some conventional loans allow down payments as low as 3% for eligible buyers purchasing a single-family home, though the amount required can vary by loan type and situation.
When the down payment is less than 20%, mortgage insurance is typically required. With many conventional loans, that mortgage insurance can be removed once you reach 80% loan-to-value and are current on your payments. This differs from FHA loans, where mortgage insurance generally remains for the life of the loan unless you refinance into a conventional loan, making conventional financing an appealing option for borrowers planning ahead.
Slightly higher down payments may apply if you're not a first-time homebuyer, if you're choosing an adjustable-rate mortgage or if you have significant debt compared to your income. Second homes and multi‑unit properties generally have stricter down payment requirements than many primary residences. For refinances, eligibility is based on loan-to-value (LTV), which compares the loan amount to the home's value.
Credit Score
Most lenders require a minimum credit score of 620 for a conventional loan. Borrowers with higher credit scores may qualify for lower interest rates, lower mortgage insurance costs or access to a wider range of loan types and term lengths.
If your credit score isn't quite there yet, government-backed loans — such as those offered by the Federal Housing Administration (FHA) — may be worth exploring.
Income Stability
Income consistency helps lenders understand how comfortably you can manage monthly mortgage payments over time. Rather than focusing on a single paycheck, lenders look at how steady your income has been and how likely it is to continue.
Debt-to-Income Ratio (DTI)
Lenders also look at your debt-to-income ratio, which compares your monthly debt payments to your monthly income. Generally, a DTI of 45% or lower is preferred for conventional loans, as higher debt levels can signal greater financial risk and impact a borrower's ability to manage monthly payments.
Cash Reserves
Some loans require you to have cash reserves to be approved. The amount depends on factors like your credit profile, debt-to-income ratio, loan-to-value ratio and property details.
Benefits of Conventional Loans
Conventional loans offer several advantages for homebuyers and homeowners, including:
Fewer Program-Specific Requirements
Conventional loans aren't tied to a single government program. Instead, they follow standard lending guidelines, without some of the additional program-specific rules or property requirements that apply to certain government-backed loans.
Competitive Rates
Competitive rates are often available to borrowers who meet conventional lending guidelines. Strong credit, manageable debt and verifiable income help reduce risk for lenders, which can support more favorable rates.
Ability to Compare Lender Fees
Conventional loans are offered by private lenders, and fees are not set by the government. This allows borrowers to compare options across lenders and potentially reduce upfront or long-term costs.
Property and Usage Options
Conventional loans can be used for a variety of property types, including primary residences, second homes and investment properties.
Potential Mortgage Insurance Savings
Many buyers aim to put 20% down to avoid private mortgage insurance, but that isn't always possible. With a conventional loan, mortgage insurance isn't permanent — once enough equity is built, it can be removed, helping lower monthly payments over time.
For refinances, conventional loans can also replace FHA loans that require ongoing mortgage insurance, offering a path to reduce long-term costs as equity grows.
Considerations to Keep in Mind
Conventional loans follow established lending standards, which means eligibility is closely tied to a borrower's overall financial profile. The following are a few things to keep in mind as you explore these loans:
- Your credit profile. Conventional loans typically require stronger credit histories compared to some government-backed options.
- Income and documentation. Lenders look closely at income stability and financial records during the approval process.
- Down payment expectations. While low down payment options exist, higher down payments may be required depending on the loan type or property.
Conventional Loans vs. Other Loan Types
Conventional loans are one option, but they aren't the only one. Depending on your goals and current finances, another loan type may be a better match. Here's how conventional loans compare with FHA, VA and USDA loans.
Conventional vs. FHA Loans
Conventional loans typically require higher credit scores and stricter debt-to-income limits, but they can offer lower long-term costs — especially for borrowers who put 20% down and avoid mortgage insurance. Fees and closing costs can vary by lender, giving you the ability to compare options.
FHA loans are insured by the Federal Housing Administration and are designed to support those with lower credit scores or smaller down payments. In addition to standard closing costs, FHA loans require an upfront mortgage insurance premium and ongoing monthly mortgage insurance, which can increase the overall cost of the loan. If you put down less than 10%, that mortgage insurance typically remains for the life of the loan. With a down payment of 10% or more, mortgage insurance is required for 11 years, and refinancing into a new FHA loan resets that timeline.
Conventional vs. VA Loans
Conventional loans are available to a wide range of borrowers and can be used for primary residences, second homes and investment properties. They typically require a down payment and may include private mortgage insurance when borrowing more than 80% of the home's value. Lender fees and closing costs can vary.
VA loans are available to eligible service members, veterans and certain surviving spouses. While they often allow for no down payment and don't require ongoing mortgage insurance, VA loans may include a one-time VA funding fee. Credit guidelines are generally more flexible, which can help reduce upfront and monthly costs for qualifying borrowers.
Conventional vs. USDA Loans
USDA loans are backed by the United States Department of Agriculture and are designed for eligible low- to moderate-income buyers purchasing homes in qualifying rural and suburban areas. They're limited to primary residences and specific locations, and they require upfront and ongoing mortgage insurance. Conventional loans offer broader property options and the ability to remove mortgage insurance once enough equity is reached. For homeowners who already have a USDA loan, the USDA Streamlined Assist refinance program may offer a simpler path to lower monthly payments, provided eligibility requirements are met.
Is a Conventional Home Loan Right for You?
With a variety of loan options and competitive pricing for qualified borrowers, conventional loans can be a good choice for many homebuyers and refinancers. Since rates, terms and fees can vary by lender, taking time to explore your options can help you find a mortgage that fits your goals.
And if you have questions or want to take the next step, Pennymac is here to help. Connect with a Loan Expert to get started.
Conventional Loan FAQs
What documentation do I need for a conventional home loan?
Your lender will likely require a number of different documents detailing your financial history, current financial situation and eligibility. These may include:
- W2 forms from the past two tax seasons
- Full tax returns, including all pages and schedules (for self-employed borrowers)
- Two most recent pay stubs
- Two most recent asset statements
- Renting history documentation (for borrowers who don't currently own a home)
- Copy of current mortgage statement (for borrowers who do currently own a home)
What credit score do I need to qualify for a conventional loan?
In most cases, lenders won't consider you for a loan if you have a credit score lower than 620. Higher credit scores may help you qualify for better terms and rates.
Do conventional loans require mortgage insurance?
While some conventional loans allow down payments as low as 3%, putting down less than 20% typically requires mortgage insurance. A smaller down payment increases the lender's risk, and mortgage insurance helps protect them if the borrower stops making payments.
Mortgage insurance is usually included in the monthly mortgage payment, though other payment options may be available. Once you reach 20% equity through regular payments, you can request that the insurance be removed.
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