What Is a Conventional Loan?

A conventional loan, also called a conventional mortgage, is a type of loan offered through a private lender, like a bank, credit union or mortgage company. Many conventional loans are purchased by Fannie Mae and Freddie Mac, which requires lenders to assess borrowers based on these organizations’ requirements.

Unlike government-backed loans like FHA, VA or USDA loans, which are available to specific buyers based on certain criteria, conventional loans aren’t limited to borrowers based on factors like income, location or military status. If you meet the lender’s qualification requirements, you will be eligible for a conventional mortgage.

How does a conventional loan work?

Since a conventional loan is not backed by a government agency, like FHA or VA loans, most private lenders offer this type of mortgage. You'll need a 20% down payment to avoid private mortgage insurance (PMI). However, most first-time buyers can qualify with as little as 3% with PMI. You can apply for a conventional loan directly with any qualified mortgage lender. Conventional loan requirements may vary by lender. You can purchase almost any type of property, including a primary residence, vacation home, or investment property, as long as the home is within the conforming loan limits for the area. Conventional loans offer both fixed and adjustable rates and flexible repayment periods, such as 15- and 30-year terms.

Conventional loan requirements

Conventional loans typically require larger down payments and stronger credit scores than non-conforming or government loans. Lenders generally have their own loan eligibility requirements, in addition to Fannie Mae and Freddie Mac guidelines. Since qualifications vary, be sure to shop around for a lender that meets your needs.

Here are some general conventional loan requirements for most lenders.

Minimum credit score of 620

The minimum credit score for a conventional loan generally ranges from 620 to 660, but borrowers with credit scores of 720 or better are usually the best qualified for a conventional loan. If your credit is between 680 and 720, compare conventional loan terms against FHA loan terms to determine the ideal program for you. Review the insurance premiums and interest rates of each loan program, since these adjustments can result in a lower monthly payment or an opportunity to reserve more liquid cash for an emergency fund.

Note: The higher your credit score, the more favorable your interest rate will be. Even an interest rate reduction of 0.25% to 0.5% can translate to major savings over the life of the loan. Imagine if you took out a 30-year fixed-rate loan for $300,000 with a 3% down payment and a 6.5% interest rate. Reducing your monthly interest by 0.25% would save you more than $17,000 in loan interest over the life of the loan; a 0.5% reduction in interest rate would save you $34,000.

DTI of 36% to 50%

Your lender will want to ensure you have enough flexibility in your monthly budget to make your mortgage payment. They’ll use a calculation called a debt-to-income (DTI) ratio, which compares your monthly debt obligations (including the estimated mortgage payment of the new home) against your monthly income. Conventional loans typically require a DTI of around 45%. Depending on various factors like credit history, assets and other income-based qualifications, some borrowers may qualify with a DTI as high as 50% or as low as 36%.

Down payment of 3% to 20% of the price of the home

It is possible to acquire a conventional home loan with a down payment as low as 3%, but without 20% down, you’ll be required to make monthly private mortgage insurance (PMI) payments until you have at least 20% equity. If you’re planning for a down payment of less than 20%, keep in mind that the more money you put down, the less you’ll pay in PMI each month. For instance, monthly PMI on 10% down is less expensive than PMI on 5% down.

Your minimum down payment requirement will vary based on whether you’re a first-time buyer, if you plan to live in the home or rent it out, if your interest rate is fixed or adjustable, if it’s a single-family or multi-unit property and how your income compares to the median income in your area.

What do you need for a conventional mortgage?

The process of obtaining a conventional mortgage may begin with an optional pre-approval. During this process, your lender will conditionally confirm you qualify for a loan based on reviewing a number of important documents.

Proof of income

Your lender will ask for three months of pay stubs, your last two W2s and any other proof of income from other sources.

Employment verification

Along with pay stubs, your lender will verify your employment to confirm that you’re currently employed. If you are self-employed, you’ll need to provide additional financial documentation, such as a 1099, to prove you have steady income.

Assets

You’ll be asked to provide bank statements from the last two months, along with statements from any investment accounts. If a friend or relative is helping you with your down payment, you’ll need a gift letter as well.

Proof of identity

You’ll need to prove you are who you say you are. This can be done with a driver’s license and a Social Security number, if you have one.

Credit report

You’ll authorize your lender to run a credit check, which will allow them to review your payment history, other debt obligations and any past financial issues, like unpaid or delinquent debts and bankruptcy.

What is a conforming conventional loan?

Often, the terms conventional loan and conforming loan are used interchangeably, but they’re not quite the same. In fact, a conventional loan can be conforming or non-conforming. A conforming conventional loan is one that meets the guidelines set by Fannie Mae and Freddie Mac, and these loans are considered less risky. Conforming loans include qualification requirements as well as a loan limit — meaning a cap on the amount you’re allowed to borrow. For 2025, the conforming loan limit is $806,500. In some high-cost parts of the country, the conforming loan limit is higher, at $1,209,750.

Remember, individual lenders may have their own qualification criteria above and beyond Fannie Mae and Freddie Mac guidelines. That’s why it’s important to get quotes from at least three lenders before choosing one. You can get pre-qualified for a conventional loan with us as Zillow Home Loans.

Non-conforming loans

A non-conforming loan is one that doesn’t meet the qualifications made by Fannie Mae or Freddie Mac. It’s also not a government-backed loan (like an FHA, USDA or VA loan). The most common type of non-conforming, conventional loan is a jumbo loan, because the loan amount exceeds the conforming loan limits. 

The loan limit changes annually based on market changes, and is higher in more expensive parts of the country. Other non-confirming loans include specific programs for people with poor credit, high debt, bankruptcy or those borrowing with a high loan-to-value ratio. If you have questions about non-conforming loans, talk to a lender. If you’re considering a non-conforming loan program, get a second opinion from another lender to prevent falling victim to any predatory lending practices.

Pros and cons of conventional loan

Each loan type offers different benefits and drawbacks, depending on your unique financial needs and situation. However, here are a few widely accepted pros and cons of conventional loans.

Pros of conventional loans

For borrowers with established credit and high credit scores, conventional loans have many upsides, including: 

• Down payments as low as 3% (with PMI)
• Flexibility, with fixed and variable rate options and multiple loan terms, up to 30 years
• Ability to use for second homes or investment properties 
• Ease of removing mortgage insurance down the road — you can typically cancel your PMI once your principal loan balance reaches 80% of the original home value

Cons of a conventional loan

The biggest downside to conventional loans is the lower flexibility in qualification criteria. Lenders will closely review your financial profile and deny any applicant with low credit scores or high debt-to-income ratios. Also, if you put less than 20% down, you’ll be saddled with paying monthly PMI, at least in the near term.

How to get a conventional loan

To start the process of getting a conventional loan, you have two options. If you’re just testing the waters and aren’t sure you’re ready to buy, a pre-qualification is a good first step, as it gives you a feel for which types of loans you might qualify for. And, it doesn’t require a hard credit pull.

Alternatively, you can go the pre-approval route, where you provide all of your financial documents and allow the lender to perform a hard credit check. This step gives you a conditional approval to borrow a certain sum of money — an important first step if you’re serious about buying in the near future.

Once you’re under contract on the home you want to buy, you’ll complete the loan application with your preferred lender. Then, your interest rate may be locked in, your loan will go through the underwriting process and, assuming everything goes through, you’ll close on the loan. Then, it will be your responsibility to repay the loan according to its terms.

Conventional mortgage interest rates

The interest rate you’ll qualify for on a conventional mortgage will vary based both on the attributes of the loan itself and your financial profile. The amount you borrow, length of repayment, and whether it’s a fixed or variable-rate loan all factor into your interest rate. Similarly, your credit score, income and debts play a role. More qualified buyers will enjoy lower interest rates, generally speaking. 

If the interest rate you qualify for is too high for your liking, you may consider using mortgage points to buy down your interest rate. One point costs 1% of the loan amount and reduces your interest rate by 0.25%. Points are paid in cash at closing.

Conventional loan closing costs

When you take out a conventional loan, you’ll be required to pay closing costs that range between 2% and 5% of the purchase price. As part of your negotiation with the seller, you can request they pay for some or all of your closing costs. The amount and types of fees and charges they’re allowed to cover depends on the loan program and size of your down payment.

If your down payment is less than 10%, the seller can pay closing costs up to a total of 3% of the loan amount. For down payments of 10% to 24%, the seller can cover up to 6% of the loan. If you have a down payment of 25% or more, your seller is allowed to pay for closing costs up to 9% of the total purchase price.

Deciding which loan type is the right fit can be complicated. A lender can help summarize your monthly payments, determine the overall interest you’ll pay and compare other pros and cons of each loan type.

*An equal housing lender. NMLS #10287