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What Is A Conventional Home Loan?

A Conventional home loan is a mortgage that is not insured or guaranteed by the government. Conventional home loans are typically offered by private home loan lenders, such as banks, credit unions, and mortgage brokers.

Conventional loans are generally available to borrowers with good to excellent credit, have competitive mortgage rates, and a down payment of at least 3% of the purchase price (or 3% equity if it’s a refinance).

You can use a Conventional home loan to buy a single-family home, a condominium, a manufactured home, or a multi-family property (such as a duplex or triplex) as your primary residence, secondary residence, or investment property. You cannot use a conventional loan to buy a commercial property.

Conventional Home Loan Requirements

Here is a list of Conventional home loan requirements;

  • 620 credit score (or higher)
  • 3% down or if it’s a refinance 3% equity
  • Debt-To-Income ratio at or below 50%
  • Loan amounts up to $3,500,000
  • Appraisal waiver option on select Conventional home loan programs
  • Single Family Residences, Condominiums, Manufactured homes, and Multi-Unit properties are all eligible for financing
  • Purchase, refinance, and cash-out refinance options
  • Fixed and adjustable-rate loan programs
  • Some Conventional loans can have a pre-payment penalty
  • Lender-paid and borrower-paid private mortgage insurance (for home loans that are above an 80% Loan-To-Value ratio).

Obtaining a Conventional loan approval from an underwriter is a multi-step process. Working with an experienced Loan Officer will make a big difference in navigating underwriting requirements.

Requirements differ from lender to lender so it’s important you discuss the requirements of your Conventional loan with your Loan Officer to ensure there are no surprises at closing.

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Conventional Loan Programs

Conventional loans are available in a variety of loan programs, including fixed-rate loans, adjustable-rate loans, and hybrid loans (such as a 2-1 buydown home loan). Fixed-rate loans have a fixed interest rate for the entire loan term, while adjustable-rate loans have an interest rate that can change over time. 

Examples of fixed-rate loans

  • 30-year fixed rate
  • 20-year fixed rate
  • 15-year fixed rate

Examples of adjustable-rate loans

  • 5/1 adjustable rate
  • 7/1 adjustable rate
  • 10/1 adjustable rate

For a 5/1 adjustable rate loan, your interest rate is fixed for five years and then adjusts each year after that (for the next 25 years). A 7/1 adjustable rate means the rate is fixed for seven years and a 10/1 adjustable rate means the rate is fixed for ten years. Most adjustable-rate loans are for a total of 30 years however some are shorter or longer.

Also, some lenders offer a 5/6 adjustable rate, which means the rate is fixed for five years and then adjusts every six months.

Hybrid loans

Hybrid loans are a combination of fixed-rate and adjustable-rate loans, and they typically start with a fixed interest rate for a certain number of years, then switch to a different rate.

The Pros and Cons of a Conventional Home Loan

Here is a list of the pros and cons of a Conventional home loan. It’s important to consider both the positives and negatives when deciding if a Conventional loan is for you.

The Conventional Home Loan Pros

Low down payment: Conventional loans typically require a down payment of at least 3%, which can be a more affordable option for borrowers who may not have a large down payment saved. Some Conventional loans require at least 10% down; if you have a low score, you might be required to put down 20%.

Flexible loan programs: Conventional loans are available in a variety of loan programs, so borrowers can choose the loan that best meets their needs. 30-year fixed, 15-year fixed, 10/1 ARM, and 7/1 ARM are just some of the options available. Also, depending on which type of Conventional loan you are obtaining and your credit score, underwriting guidelines are fairly flexible especially if you have a large down payment.

Low home loan rates: Conventional loans have low-interest rates, which can make them more affordable for borrowers. The lowest Conventional loan interest rates are Conforming home loan rates. At times a Jumbo might dip below a Conforming loan interest rate but that is not the norm.

The Conventional Home Loan Cons

Higher credit score requirement: Conventional home loans typically require a higher credit score than other types of loans, such as an FHA home loan or VA home loan. This can make it more difficult for borrowers with lower credit scores to qualify for a Conventional loan.

Tougher underwriting requirements: A Conventional loan usually has a more stringent set of underwriting guidelines for those that don’t have great credit (when compared to an FHA home loan or a VA home loan). If you have a below 700 credit score be prepared for a bit more work if you obtain a Conventional home loan.

Private mortgage insurance: Conventional loans require private mortgage insurance (PMI) if the down payment is less than 20% of the purchase price. PMI can increase the overall cost of the loan. There is also something called “lender-paid” PMI. This is where the lender pays the PMI by increasing the interest rate you lock in.

We do not suggest going with a lender-paid PMI program for this simple reason; once your LTV dips below 78% you will still have the higher lender-paid PMI rate you locked in.

If you did the borrower paid PMI, you would be able to get rid of the PMI and have an overall lower monthly payment.

Pre-payment penalty: Some Conventional loans come with a pre-payment penalty, such as bank statement loans. If a Conventional home loan has a pre-payment penalty it can be as short as one year or as long as five years.

Usually, it’s between two and three years.

Is A Conventional Loan A Conforming Loan?

It can be but it doesn’t have to be. A Conforming home loan is a mortgage that “conforms” to the underwriting and loan limit requirements of Fannie Mae and Freddie Mac.

For example, a Jumbo home loan is a Conventional home loan but not a Conforming home loan. Another example similar to a Jumbo loan is a bank statement home loan. Some examples of Conventional loans also being a Conforming home loan include Fannie Mae and Freddie Mac home loan products.

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Conventional Loans, Are They For you?

Conventional loans are a great option for most homebuyers and homeowners. Low rates, low down payment requirements, and various terms available make Conventional home loans a great product for those looking to buy a home or refinance a current mortgage.

When you are evaluating your options it’s important to consider all the pros and cons of a home loan product you are considering. To help you do this it’s important you work with a seasoned Loan Officer who works for a top-rated mortgage company.

Loan Officer Kevin O'Connor

About The Author

Loan Officer Kevin O'Connor has over 17 years of experience as a Mortgage Loan Originator and is a trusted resource for mortgage education and information. He's licensed by the state of California and the Nationwide Mortgage Licensing System. He has a top rating with the Better Business Bureau, Google, Yelp, and Zillow. You can contact him at 1-800-550-5538. CA DRE #01499872 / NMLS #247447