Conventional Mortgage Loans: Understanding the Basics and Key Features

A conventional mortgage loan is a type of home loan that is not insured or guaranteed by the federal government. It is one of the most common types of mortgages in the United States, used by homeowners to purchase or refinance properties. Conventional mortgages are offered by private lenders such as banks, credit unions, and mortgage companies. These loans are not backed by any government entity, such as the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the U.S. Department of Agriculture (USDA), which makes them distinct from government-backed loans.

This article explores the concept of conventional mortgage loans, their types, advantages, eligibility criteria, and how they compare to other loan types. Understanding these key aspects is crucial for prospective homebuyers or homeowners looking to refinance or purchase a new property.

What is a Conventional Mortgage Loan?

A conventional mortgage loan is simply a loan for buying or refinancing a home that is not insured or guaranteed by a government program. In other words, these loans follow the guidelines set by Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), which are two government-sponsored enterprises (GSEs) that play an important role in stabilizing the housing market by buying and selling mortgages. Fannie Mae and Freddie Mac set specific loan limits and underwriting criteria that lenders use to evaluate whether an applicant qualifies for a conventional mortgage.

Conventional loans are offered by private lenders and do not have the same government backing as FHA, VA, or USDA loans. Because they are not insured or guaranteed by the government, conventional loans often have stricter requirements, and the terms can vary widely depending on the lender.

Types of Conventional Mortgage Loans

There are two main types of conventional mortgage loans: conforming and non-conforming.

1. Conforming Loans

Conforming loans are those that meet the specific guidelines set by Fannie Mae and Freddie Mac. These guidelines include limits on the loan amount, borrower creditworthiness, and other key factors. Conforming loans can be further broken down into two categories based on the size of the loan:

Conventional Conforming Loans: These loans meet the criteria set by Fannie Mae and Freddie Mac in terms of loan limits, borrower income, and credit requirements. These are the most common type of conventional mortgage loans.
High-Balance Conforming Loans: Also known as “jumbo conforming loans,” these loans exceed the typical loan limits set by Fannie Mae and Freddie Mac but are still eligible for purchase by these agencies. They are typically used in areas where housing prices are higher than the national average.

2. Non-Conforming Loans

Non-conforming loans do not meet the criteria set by Fannie Mae and Freddie Mac. The most common type of non-conforming loan is the jumbo loan, which exceeds the conforming loan limits. Jumbo loans are used to finance high-value homes, often in luxury or high-demand housing markets. Since these loans cannot be sold to Fannie Mae or Freddie Mac, they typically come with higher interest rates and stricter qualification requirements.

Key Features of Conventional Mortgage Loans

Conventional mortgage loans come with several key features that make them different from government-backed loans. These features include the following:

1. Loan Terms and Interest Rates

Conventional mortgage loans typically offer a variety of loan terms, ranging from 10 years to 30 years, with 15 and 30 years being the most common. The loan term determines how long the borrower will take to repay the mortgage. The interest rate on a conventional loan can either be fixed or adjustable. Fixed-rate loans have an interest rate that remains the same throughout the life of the loan, while adjustable-rate mortgages (ARMs) have an interest rate that can change over time based on market conditions.

Conventional mortgage loans often come with competitive interest rates, especially for borrowers with good credit scores. Borrowers who qualify for a conforming loan with a high credit score may receive lower rates than those who choose a government-backed loan.

2. Down Payment Requirements

Conventional loans typically require a larger down payment than government-backed loans. While government loans like FHA loans may allow a down payment as low as 3.5%, conventional loans often require a down payment of at least 5% to 20%. A higher down payment may be required for those seeking non-conforming loans or for borrowers with lower credit scores.

In some cases, a borrower can avoid private mortgage insurance (PMI) with a down payment of at least 20%. PMI is an insurance policy that protects the lender if the borrower defaults on the loan, and it is usually required for conventional loans with a down payment of less than 20%.

3. Private Mortgage Insurance (PMI)

Private mortgage insurance (PMI) is a type of insurance that protects the lender if the borrower defaults on the loan. For conventional loans with a down payment of less than 20%, PMI is typically required. The cost of PMI can vary depending on the size of the loan, the down payment, and the lender’s policies.

One of the key advantages of PMI for borrowers is that it allows them to purchase a home with a smaller down payment, which can be beneficial for first-time homebuyers or those without a lot of savings. However, PMI can add to the overall cost of the mortgage, so it is important to factor this into the loan’s affordability.

4. Credit Score and Debt-to-Income Ratio (DTI)

One of the key factors that determine eligibility for a conventional mortgage loan is the borrower’s credit score. Conventional loans generally require a minimum credit score of 620, though some lenders may have stricter requirements. Borrowers with higher credit scores are more likely to receive favorable loan terms, such as lower interest rates.

In addition to a strong credit score, lenders will also evaluate the borrower’s debt-to-income (DTI) ratio, which compares the borrower’s monthly debt payments to their gross monthly income. The lower the DTI ratio, the more likely the borrower is to qualify for a conventional mortgage loan. A DTI ratio of 36% or lower is typically considered favorable, but higher ratios may be accepted in certain circumstances.

5. Loan Limits

Fannie Mae and Freddie Mac set limits on the size of conventional loans they will purchase. These limits vary by location and are adjusted annually. For example, in 2025, the conforming loan limit for a single-family home in most parts of the U.S. is $726,200, but this amount may be higher in certain high-cost areas. Loans that exceed these limits are considered non-conforming, and they may require different terms or qualification criteria.

Advantages of Conventional Mortgage Loans

There are several advantages to choosing a conventional mortgage loan, particularly for borrowers who are financially prepared. Some of the main benefits include:

1. Lower Overall Cost

If the borrower can make a larger down payment and avoid PMI, the overall cost of a conventional mortgage loan can be lower than that of government-backed loans. With competitive interest rates and fewer fees, conventional loans can often result in significant long-term savings.

2. Flexible Loan Terms

Conventional mortgage loans offer a variety of loan terms, including fixed-rate and adjustable-rate options. Borrowers have more flexibility to choose the loan structure that fits their financial situation, whether they are looking for stability or the potential to save money with an ARM.

3. Greater Lender Choice

Since conventional mortgage loans are offered by a wide range of private lenders, borrowers have more options to shop around for the best interest rate, terms, and customer service. This level of competition can lead to better loan terms and a more personalized borrowing experience.

4. No Upfront Fees or Mortgage Insurance for Larger Down Payments

For those who can afford a larger down payment (20% or more), conventional loans do not require PMI, which is a significant cost saving. Additionally, there are no upfront fees or government charges as with FHA loans, making the process more straightforward.

Disadvantages of Conventional Mortgage Loans

While conventional mortgage loans offer several advantages, there are also some disadvantages to consider:

1. Stricter Eligibility Requirements

Conventional mortgage loans generally have stricter eligibility requirements than government-backed loans. Borrowers must have a higher credit score and a lower debt-to-income ratio to qualify for the best rates and terms.

2. Larger Down Payment

Conventional loans often require a larger down payment than government-backed loans. First-time homebuyers may find it more challenging to come up with the necessary down payment, especially if they are looking to purchase a home in an expensive market.

3. PMI for Smaller Down Payments

If a borrower is unable to make a down payment of at least 20%, they will likely be required to pay private mortgage insurance (PMI), which can increase the overall cost of the loan. While PMI can be canceled once the borrower has built enough equity, it can still be an extra burden in the early years of the loan.

Conclusion

Conventional mortgage loans are a popular choice for many homebuyers due to their flexibility, competitive interest rates, and the potential for long-term savings. While they come with stricter qualification requirements and may require a larger down payment compared to government-backed loans, conventional mortgages can be an excellent option for borrowers with strong credit and financial stability. Whether you’re a first-time homebuyer or a seasoned homeowner looking to refinance, understanding the basics of conventional mortgage loans is essential for making informed decisions about your home financing options

Conventional Mortgage Loans: Understanding the Basics and Key Features