Conventional Home Loans

A conventional loan is a mortgage that is not insured or guaranteed by a government agency. Private lenders make these loans, and many follow guidelines set by Fannie Mae and Freddie Mac so they can be sold to those companies after closing. Conventional financing is the most widely used type of home loan, and it covers a broad range of borrowers, properties and purposes.

How conventional loans work

Because there is no government insurance behind a conventional loan, the lender and any investor that buys the loan take on more of the risk. To manage that risk, conventional guidelines look closely at your credit history, income, assets, existing debts and the equity you have in the home. Pricing often reflects those factors, so two borrowers buying similar homes may see different terms.

Conventional loans can finance a primary residence, a second home or an investment property, which sets them apart from several government-backed programs. They can be used to buy a home or to refinance an existing mortgage, including a cash-out refinance where eligible.

Conforming and non-conforming loans

Most conventional loans are conforming. A conforming loan meets Fannie Mae and Freddie Mac guidelines and stays within the conforming loan limit, which FHFA sets each year. Some high-cost counties have higher limits.

Non-conforming loans fall outside those guidelines. The most familiar example is a jumbo loan, which exceeds the conforming loan limit. Other non-conforming loans serve borrowers with complex income, unusual properties or situations that do not fit standard guidelines. Terms for non-conforming loans vary widely from lender to lender, so comparing offers carefully matters even more.

Fixed and adjustable options

Conventional loans come in fixed-rate and adjustable-rate versions, with a range of term options. A fixed-rate loan keeps the same interest rate for the life of the loan. An adjustable-rate mortgage starts with an initial rate for a set period and then adjusts based on a market index, within limits described in your loan documents. Your Loan Estimate will show whether your rate and payment can change after closing.

Mortgage insurance on conventional loans

If your down payment is below the level your lender requires to avoid it, you will usually pay private mortgage insurance, or PMI. PMI protects the lender, not you, and its cost depends on factors such as your credit and the amount of equity in the home.

One advantage of conventional PMI is that it does not have to last forever. Federal law gives you the right to ask your lender to cancel borrower-paid PMI once you reach a certain equity level and meet other requirements, and it generally ends automatically at a later point if you are current on payments. Your lender must explain these rights, and you can ask how they would apply to your loan.

Who conventional loans may fit

• Borrowers with established credit and steady, documented income
• Buyers with savings to put toward the purchase and closing costs
• Buyers of second homes or investment properties
• Homeowners refinancing to change their rate, term or loan type
• Borrowers who want mortgage insurance that can be removed as equity grows
• Buyers whose loan amount exceeds limits on some government programs

Conventional programs also include options with lower upfront cash requirements for qualified buyers, including some first-time buyer programs. Eligibility varies by borrower, property and investor.

What lenders review

Expect a lender to look at your credit reports and scores, your income and employment history, your assets and where your down payment comes from, your monthly debts compared to your income and the appraised value of the property. Self-employed borrowers usually provide additional documentation such as business and personal tax returns. Gift funds from eligible donors are generally allowed with a signed gift letter and proof of transfer.

Conventional compared with government-backed loans

FHA, VA and USDA loans are each backed by a federal agency and come with their own eligibility rules. FHA loans tend to allow more flexible credit. VA loans are for eligible veterans, servicemembers and surviving spouses with a Certificate of Eligibility. USDA loans serve eligible rural areas and income-eligible households. A conventional loan may cost less over time for some borrowers and more for others, depending on credit, equity and market conditions. Comparing Loan Estimates for more than one loan type is the clearest way to see the difference for your situation.

Getting started

Gather your recent pay stubs, tax documents, bank statements and identification, and think about the price range and monthly payment you are comfortable with. Then talk with a licensed loan officer about which conventional options may fit and request a Loan Estimate. All loans are subject to credit approval.

Conventional Loans by state

• Conventional Loans in Florida
• Conventional Loans in New York
• Conventional Loans in New Jersey
• Conventional Loans in Pennsylvania
• Conventional Loans in Connecticut
• Conventional Loans in Virginia

Related guides

• Conventional vs. FHA Loans: Which May Fit You?
• How Mortgage Preapproval Works
• Documents Needed for a Mortgage