Looking to buy a new home? Conventional loans are one of the most flexible, affordable, and popular ways to finance your purchase – whether you’re a first-time buyer, moving up, self-employed, or buying an investment property. Explore all of your options, requirements, and advantages here.
What is a Conventional Loan?
A conventional loan is a mortgage that’s not backed by the federal government. Instead, if meets standards set by Fannie Mae and Freddie Mac, which means flexible options, competitive rates, and the freedom to buy a primary residence, second home, or investment property.
Conventional loans are popular whether you’re a first time homebuyer or a seasoned homeowner. 72.5% of all mortgages originated in 2023 were conventional. These loans can actually have lower down payment requirements for first time home buyers compared to FHA loans, and conventional loans avoid costly government loan fees. Estimate your payment with our Conventional Home Loan Calculator.
Why Choose a Conventional Loan to Buy a Home?
Conventional loans come with many advantages, making them the preferred choice for most homebuyers. Conventional mortgage rates and mortgage insurance have risk-based pricing, which means rates will change depending on your credit score and down payment. FHA and VA loans rates change based on credit score, but conventional rates are much more sensitive. For example, conventional rates increase by about 0.25% – 0.5% from 780 credit to 680 credit, compared to 0.125% difference on FHA. FHA mortgage insurance is standardized based on down payment, which means someone with a 500 credit score pays the same as someone with an 800.
For those with great credit, conventional loans offer a lower minimum down payment and avoid high closing costs associated with government loans. For those with lower credit but a larger down payment, conventional loans can still make sense to avoid mortgage insurance. Our preference is to compare the programs side by side.
Wide Range of Loan Programs
Conventional loans are a category, not one program. There are many different conventional programs:
Flexible Guidelines
Conventional loans have flexibility in areas that FHA and VA loans are limiting:
- Income and Employment (especially self employment)
- Additional Properties and Rental Income
- Minimum Down Payment
- Non-Permanent Residents
- Appraisals and Home Condition
Flexible Property Types
- Primary, Second home, and Investment
- Single-family, townhomes, condos, manufactured homes, twin homes, duplex, triplex, and fourplex
- Higher Conventional Loan Limits 2025
Private Mortgage Insurance (PMI) can be removed
Put less than 20% down? PMI may be required, but you can remove it once you build enough equity.
Pros and Cons of Conventional Home Loans
Benefits of Conventional Loans
- Great with 720+ Credit
- Lower Down Payment Requirement for first time homebuyers
- PMI is less expensive and removable
- Works for primary, second, and investment homes
- Flexible Property Requirements
- No Upfront Fees rolled into the mortgage (1-3% on other programs)
- Self-Employed and Overtime, Bonus, and Commission Income Friendly
- Less Documentation required
Drawbacks of Conventional Loans
- Worse for under 700 credit without a large down payment
- Higher Rates compared to FHA, VA, and USDA, even with perfect credit
- No Streamline Refinance program
- Higher Credit Score minimum (620+)
- Lower Debt to Income Ratio requirements
- Harder to Qualify – especially with lower credit and down payment.
FHA vs. Conventional Loans
All of the programs can be overwhelming. This simple chart compares the typical scenarios where conventional or FHA loans are better. Keep in mind, every scenario is unique, and there are multiple programs within FHA and Conventional loans. It’s always worth having an expert review your scenario before making a decision.
| Conventional Loans | FHA Loans | |
|---|---|---|
| Credit Score | 740+ unless large down payment | <720 unless large down payment. <620-660 with large down payment. |
| Down Payment | Great credit and first time homebuyer has lower down payment requirements | 580+ credit has the same down payment requirements. Generally better for <740 credit for minimum down. |
| Occupancy | Primary, Second/Vacation Home, or Investment Property | Primary Residence only |
| Interest Rates | Generally higher, even with perfect credit. Increase more with lower credit and down payment. | Generally lower, and less affected by credit score and down payment. |
| Mortgage Insurance | Required if less than 20% down. Removable. Better rates with better credit. Less expensive with higher down payment and/or 740+ credit. | Standardized for everyone, regardless of credit. Changes based on down payment, but generally not removable. |
| Upfront Fees | Normal Closing Costs | FHA Upfront Mortgage Insurance (1.75%) rolled into the loan |
| Loan Limits | Higher – $806,500 (higher limits in high cost areas) | Lower – fluctuate more based on county. Base limit $524,225 with increases for bigger cities. |
| Buy new home and rent existing | Allows with logical requirements. | Lots of rules. Rarely eligible. |
FHA and conventional loans both have unique guidelines that can come into play. For example, property history, condos, cosigners, gift funds, job gaps, and more have specific guidelines that could make your situation ineligible for either loan program.
Is a Conventional Loan Right for Me?
Conventional loans are best for great credit with low down payments or decent credit with high down payment scenarios. There are also incentives for first time home buyers and low to average income borrowers. If you already own a home, you want to minimize closing costs, or you just want a more simplified loan process, you’ll prefer a conventional mortgage.
If your credit score is lower, or you have a lot of debt, FHA loans will allow for more purchasing power and lower payments.
For Veterans who qualify for VA Home Loans, we generally recommend getting a VA loan. The VA loan is the most powerful mortgage available. However, the VA loan also has a large VA funding fee that needs to be considered. For those with great credit, a large down payment, and this isn’t their first VA loan, it can make more sense to avoid the fees and get a conventional loan. This also saves the veteran’s VA entitlement for a future home. For those with less money down or lower credit, the VA loan is an amazing program if you qualify.
Conventional Loan Home Buying Options
Fannie Mae and Freddie Mac both offer many different programs specific to buying a home that fall under the conventional loan umbrella. These are just the purchase specific programs.
First Time Homebuyer
A first time homebuyer is anyone who has not owned a home in the last 3 years. Most first time buyers also qualify for Affordable Programs.
- HomeOne and Fannie’s 97% Mortgage
- Rate Advantage – Waives all rate adjustments (credit, LTV, condo, etc.) for first time buyers under 100% AMI (or 120% for high cost areas)
Affordable Loans
Affordable loans are based primarily on area median income (AMI).
- TruPath’s 2% grant ($7k max)
- HomeReady, Home Possible and Borrower Smart – 80% AMI. Waived rate adjustments and lower PMI requirements.
- Rate Adjustment Waiver – 100% AMI (or 120% for high cost areas)
Construction and Renovation
Construction and renovation loans have become more popular with rising home costs. Renovation loans can be used for repairs, upgrades, renovations, and even Accessory Dwelling Units (and use the income). These are great to build quick equity.
- One and Two Time Close Construction
- HomeStyle Renovation
- CHOICERenovation
Additional Programs
- Down Payment Assistance – State Housing Programs
- Unique Properties – Cabins, Log Homes, Condos, Co-op, Manufactured, and Accessory Dwelling Unit (ADU) flexibility
- Fixed and Adjustable Rates
- High Balance
- Flex-Term – Choose your exact loan term by year
- Refinance Specific Programs
Conventional Loan Requirements
Conventional loans are approved through automated underwriting systems—specialized software developed by Fannie Mae and Freddie Mac to evaluate risk and eligibility. In some cases, conventional loans can be manually underwritten, where a person reviews your application in detail. However, manual underwriting usually comes with stricter requirements and documentation standards. Generally, you’ll need:
- 620 Credit – Blended Score available. 740+ for best rates
- Under 50% Debt to Income Ratio (lower credit needs lower DTI)
- Loan Amount under 2025 Conventional Loan Limits
- U.S. Residency – either U.S. Citizenship, acceptable Visa, or an acceptable work permit for non-permanent residents.
- Proof of Income and/or Employment – 2 year work history, recent paystub, and last year’s W2s
- Self Employed – 1-2 years of personal and business tax returns
- There are other types of income that are eligible.
- Assets Documented – 1-2 month bank statements
This list is fairly concise, and unique scenarios will have specific requirements.
Start Your Conventional Home Loan Today
Ready to start the home buying process? Get in touch with us today.
Frequently Asked Questions
What credit score do I need for a conventional loan?
Most lenders require a minimum credit score of 620, but higher scores can help you get better rates and terms.
Can I get a conventional loan if I’m self-employed?
Yes! We specialize in helping self-employed buyers and homeowners. You’ll need to provide additional documentation, like tax returns. While each scenario is unique, we are always solutions focused.
How are conventional loans different from FHA loans?
Conventional loans usually have stricter credit and income requirements but can offer more flexibility and no upfront government fees. FHA loans are backed by the government and may be easier to qualify for with lower credit or less down payment.
What are the loan limits for a conventional loan in 2025?
The standard conforming loan limit for 2025 is $806,500 for a single-family home in most areas, but limits may be higher in certain counties.
Can I use gift funds for my down payment?
Yes, many conventional loan programs allow you to use gift funds from family members or approved sources for your down payment and closing costs.