August 9, 2020
What Is a Conventional Mortgage?

What Is a Conventional Mortgage?



A conventional mortgage is one of the many loan products you can use to purchase or refinance a house. Conventional mortgages can be a little harder to qualify for than other types of home loans, but they can also offer significant benefits if you’re eligible.

Conventional loan products can be a good choice if you have good credit, want to save on long-term costs, and are looking to avoid mortgage insurance (or at least cancel it later on).

Here’s what you should know about conventional mortgages:

  • What is a conventional mortgage?
  • What are the requirements of a conventional mortgage?
  • How conventional mortgages compare to government-insured loans
  • Is a conventional mortgage right for you?

What is a conventional mortgage?

A conventional mortgage is a home loan that is not insured by a government agency (like FHA, VA, and USDA loans are). Conventional loans can be either conforming or non-conforming. Conforming loans have a balance under the “conforming” loan limit for the county — which is $510,400 in most of the U.S.

Non-conforming loans usually have a balance higher than this limit. These are also called jumbo loans, and because they have a higher balance and are not eligible for purchase by Fannie Mae and Freddie Mac, they often come with higher interest rates than conforming loans do.

What are the requirements of a conventional mortgage?

Qualifying for a conventional loan can generally be a bit harder than it would be for an FHA mortgage or other government-insured loan. Because they lack any sort of government guarantee to protect them from loss, lenders take on more risk with these loans. For this reason, they’re typically pickier about who they’ll lend to.

Here are the typical requirements for a conventional home loan:

  Typical requirements
Min. down payment 3% with PMI
(20% without PMI)
Mortgage insurance
  • No required upfront fees
  • PMI only sometimes required
    (when down payment is less than 20%)
  • Can be canceled when LTV reaches 80% if requested
Min. credit score At least 620
Debt-to-income ratio 50% or less
Property type
  • Primary residence
  • Investment property
  • Second home

Find Out: How to Get a Mortgage Pre-Approval

How conventional mortgages compare to government-insured loans

Conventional mortgages are just one of the four main types of home loans. In addition to a conventional home loan, you can also choose an FHA loan, a USDA loan, or a VA loan.

Here’s a quick look at how those differ from conventional mortgages:

  Conventional FHA VA USDA
Min. down payment 20%
(down to 3% with PMI)
3.5% to 10%
(depends on credit score)
None None
Min. credit score 620 500 to 580
(depends on down payment)
None 580
Max LTV 97% 96.5% 100% 100%
Mortgage insurance
  • Only required with down payments under 20%
  • Can be canceled when you reach 80% LTV
  • Required on all loans
  • Can only be canceled on certain loans after 11 years
None None, but they do come with upfront and annual guarantee fees
Property type
  • Primary residence
  • Vacation / second homes
  • Investment property
Primary residence only Primary residence only Primary residence only
Property type 45% 43% to 45% 41%
(but lenders are free to go higher)
41%

Conventional mortgages vs. FHA Loans

Conventional loans tend to be more affordable than FHA loans, both upfront and over the life of the loan.

For one, they don’t require upfront mortgage insurance, and if you make a large enough down payment, you might not have to pay for mortgage insurance at all. If you do, you can request cancellation of your premiums once your loan hits an 80% loan-to-value ratio. Mortgage insurance is for life on many FHA loans.

There are also smaller down payment requirements on conventional loans, and you can use the funds to purchase any type of property you want — including vacation homes and investment properties. But you’ll need a higher credit score to qualify. FHA loans require at least a 500 to 580 credit score, depending on your down payment.

Read More: First-Time Homebuyer Tips: 10 Mistakes to Avoid

Conventional mortgages vs. VA Loans

The key difference here is that VA loans are reserved for only qualifying military members, veterans, and their spouses. The average homebuyer can’t qualify for these.

If you do meet the requirements for military service set out by the Department of Veterans Affairs, then you’re most likely better off with the VA loan, as these mortgages come with serious benefits:

  • They require zero down payment
  • The seller has to pay a portion of your closing costs
  • There’s no mortgage insurance required
  • They tend to have some of the lowest interest rates

One time you might want a conventional loan over a VA loan is if you’re buying a home priced beyond your VA loan entitlement or some sort of rental or investment property since VA loans can only be used on primary residences.

Learn More: How to Get the Best Mortgage Rates

Conventional mortgages vs. USDA Loans

USDA loans are mortgages designed for rural home purchases only. They can only be used on properties in specific, designated parts of the country, and borrowers’ households have to fall under a certain income threshold, too. (This varies by county. See the full list of income limits here.)

Unlike conventional mortgages, USDA loans don’t require a down payment. They do, however, require mortgage insurance and an upfront guarantee fee. You also can’t use them on investment properties.

Find Out: How to Know If You Should Buy a House

Is a conventional mortgage right for you?

If you’re simply looking for the easiest loan to qualify for though, FHA loans might be your best bet for buying a house. Or if you qualify for a special loan program like a VA loan or USDA loan, these are likely the smartest path forward, as they require no down payment and can allow you to secure a mortgage with low interest rates and favorable terms.

Whatever you decide, make sure you shop around for your loan first. Rates and terms can vary greatly depending on your lender. Credible Operations, Inc. doesn’t offer every type of mortgage loan, but you can use us to compare multiple prequalified rates at once in just a few minutes.

Credible makes getting a mortgage easy

  • Instant streamlined pre-approval: It only takes 3 minutes to see if you qualify for an instant streamlined pre-approval letter, without affecting your credit.
  • We keep your data private: Compare rates from multiple lenders without your data being sold or getting spammed.
  • A modern approach to mortgages: Complete your mortgage online with bank integrations and automatic updates. Talk to a loan officer only if you want to.

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