What Is a Conventional Mortgage or Loan?

A conventional mortgage is a homebuyer’s loan made through a private lender. Compared to a Federal Housing Administration (FHA) loan, a conventional loan often offers a higher interest rate. It can also require a higher credit score to qualify. Conventional loans are not offered or secured by a government entity. Instead, these mortgages are available through private lenders, such as banks, credit unions, and mortgage companies. However, some conventional mortgages can be guaranteed by the two government-sponsored enterprises (GSEs): the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac).

Key Takeaways

  • A conventional mortgage or conventional loan is a homebuyer’s loan that is not offered or secured by a government entity.
  • It is available through or guaranteed by a private lender or the two government-sponsored enterprises (GSEs): Fannie Mae and Freddie Mac.
  • Potential borrowers need to complete an official mortgage application and supply required documents, their credit history, and current credit score.
  • Conventional loan interest rates tend to be higher than those of government-backed mortgages, such as Federal Housing Administration (FHA) loans.

Understanding Conventional Mortgages and Loans

Conventional mortgages typically have a fixed rate of interest, which means that the interest rate does not change throughout the life of the loan. Conventional mortgages or loans are not guaranteed by the federal government and, as a result, typically have stricter lending requirements by banks and creditors. There are a few government agencies that secure mortgages for banks, such as the Federal Housing Administration (FHA), which offers low down payments and no closing costs. Two other agencies are the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture’s (USDA’s) Rural Housing Service, neither of which requires a down payment. However, there are requirements that borrowers must meet to qualify for these programs.

Upfront fees on Fannie Mae and Freddie Mac home loans changed in May 2023. Fees were increased for homebuyers with higher credit scores, such as 740 or higher, while they were decreased for homebuyers with lower credit scores, such as those below 640. Another change: Your down payment will influence what your fee is. The higher your down payment, the lower your fees, though it will still depend on your credit score. Fannie Mae provides the Loan-Level Price Adjustments on its website.

Example of Conventional Mortgage

If you meet the relatively strict requirements to qualify for a conventional mortgage, this can be an inexpensive way to borrow money to buy property. If, for example, you took out a conventional mortgage to buy a home worth $500,000, had a $100,000 down payment (that’s 20%), and a good credit score of 650, you might be able to get a conventional mortgage with a locked-in rate of 3.4% (as of July 2022). This would equate to a monthly payment of around $2,500 on a 30-year loan: $1,800 in principal and interest payments, and around $700 in taxes and insurance.

Conventional Mortgage vs. FHA Mortgage

The primary difference between conventional and FHA mortgages is that FHA loans are designed to make homeownership possible and easier for low- to moderate-income borrowers who may not otherwise be able to get financing because of a lack of or a poor credit history, or because they have limited savings.

Those who qualify for an FHA loan require a lower down payment. And the credit requirements aren’t nearly as strict as other mortgage loans—even those with credit scores below 580 may get financing. These loans are not granted by the FHA itself. Instead, they are advanced by FHA-approved lenders.

In contrast, to qualify for a conventional loan, consumers typically must have stellar credit reports with no significant blemishes and credit scores of at least 680. Conventional loan interest rates vary depending on the amount of the down payment, the consumer’s choice of mortgage product, and current market conditions.

Conventional vs. Conforming

Conventional loans are often erroneously referred to as conforming mortgages or loans. While there is overlap, the two are distinct categories.

A conforming mortgage is one whose underlying terms and conditions meet the funding criteria of Fannie Mae and Freddie Mac. Chief among those is a dollar limit, set annually by the Federal Housing Finance Agency (FHFA). In most of the continental United States, a loan must not exceed $647,200 in 2022 (up from $548,250 in 2021).

So, while all conforming loans are conventional, not all conventional loans qualify as conforming. For example, a jumbo mortgage of $800,000 is a conventional mortgage but not a conforming mortgage—because it surpasses the amount that would allow it to be backed by Fannie Mae or Freddie Mac.

In 2020, there were 8.3 million homeowners with FHA-insured mortgages. The secondary market for conventional mortgages is extremely large and liquid. Most conventional mortgages are packaged into pass-through mortgage-backed securities (MBS), which trade in a well-established forward market known as the mortgage to be announced (TBA) market. Many of these conventional pass-through securities are further securitized into collateralized mortgage obligations (CMOs).

Types of Conventional Mortgages

There are several types of conventional mortgage, and the terms used to refer to them can be confusing. Here are the most common types.

  • Conforming conventional loans: As mentioned above, conforming conventional loans are loans that adhere to the standards set by Fannie Mae and Freddie Mac.
  • Jumbo loans: Jumbo loans allow you to borrow more than the maximum lending limit for conforming loans. However, they typically require a higher credit score, lower debt-to-income (DTI) ratio, and larger down payment.
  • Portfolio loans: A portfolio loan is a conventional loan that a lender chooses to keep in its own portfolio rather than selling it on the secondary market.
  • Subprime loans: Conforming loans require that you have a DTI below 50% and a credit score of 620 or higher. But if your credit isn’t quite there, you may qualify for a subprime mortgage loan.
  • Amortized conventional loans: These loans are fully amortized, giving homebuyers a set monthly payment from the beginning to the end of the loan repayment period.
  • Adjustable-rate loans: With an adjustable-rate mortgage, you’ll get a fixed interest rate for a set period, typically three to 10 years. After that, your interest rate can vary each year.

Required Documents for a Conventional Mortgage

In the years since the subprime mortgage meltdown in 2007, lenders have tightened the qualifications for loans—“no verification” and “no down payment” mortgages have gone with the wind, for example—but overall, most of the basic requirements haven’t changed.9 Potential borrowers need to complete an official mortgage application (and usually pay an application fee), then supply the lender with the necessary documents to perform an extensive check on their background, credit history, and current credit score. No property is ever 100% financed. In checking your assets and liabilities, a lender is not only looking to see if you can afford your monthly mortgage payments, which usually shouldn’t exceed 28% of your gross income.10 The lender is also looking to see if you can handle a down payment on the property (and if so, how much), along with other up-front costs, such as loan origination or underwriting fees, broker fees, and settlement or closing costs, all of which can significantly drive up the cost of a mortgage. Among the items required are:

1. Proof of Income

These documents will include but may not be limited to:

  • Thirty days of pay stubs that show income as well as year-to-date income
  • Two years of federal tax returns
  • Sixty days or a quarterly statement of all asset accounts, including your checking, savings, and any investment accounts
  • Two years of W-2 statements (Borrowers also need to be prepared with proof of any additional income, such as alimony or bonuses.)

2. Assets

You will need to present bank statements and investment account statements to prove that you have funds for the down payment and closing costs on the residence, as well as cash reserves. If you receive money from a friend or relative to assist with the down payment, you will need gift letters, which certify that these are not loans and have no required or obligatory repayment. These letters will often need to be notarized.

3. Employment Verification

Lenders today want to make sure they are loaning only to borrowers with a stable work history. Your lender will not only want to see your pay stubs but also may call your employer to verify that you are still employed and to check your salary. If you have recently changed jobs, a lender may want to contact your previous employer. Self-employed borrowers will need to provide significant additional paperwork concerning their business and income.

4. Other Documentation

Your lender will need to copy your driver’s license or state ID card and will need your Social Security number and your signature, allowing the lender to pull your credit report.

Interest Rates for Conventional Mortgages

Conventional loan interest rates tend to be higher than those of government-backed mortgages, such as FHA loans (although these loans, which usually mandate that borrowers pay mortgage insurance premiums, may work out to be just as costly in the long run).

The interest rate carried by a conventional mortgage depends on several factors, including the terms of the loan—its length, its size, and whether the interest rate is fixed or adjustable—as well as current economic or financial market conditions. Mortgage lenders set interest rates based on their expectations for future inflation; the supply of and demand for mortgage-backed securities also influences the rates. A mortgage calculator can show you the impact of different rates on your monthly payment.

Calculate Your Monthly Payment

Your monthly mortgage payment will depend on your home price, down payment, loan term, property taxes, homeowners insurance, and interest rate on the loan (which is highly dependent on your credit score). Use the inputs below to get a sense of what your monthly mortgage payment could end up being.

When the Federal Reserve makes it more expensive for banks to borrow by targeting a higher federal funds rate, the banks, in turn, pass on the higher costs to their customers, and consumer loan rates, including those for mortgages, tend to go up.

Typically linked to the interest rate are points, fees paid to the lender (or broker). The more points you pay, the lower your interest rate. One point costs 1% of the loan amount and reduces your interest rate by about 0.25%.

The final factor in determining the interest rate is the individual borrower’s financial profile: personal assets, creditworthiness, and the size of the down payment that they can make on the residence to be financed.

A buyer who plans on living in a home for 10 or more years should consider paying for points to keep interest rates lower for the life of the mortgage.

Special Considerations for a Conventional Mortgage or Loan

These types of loans are not for everyone. Here’s a look at who is likely to qualify for a conventional mortgage and who is not.

Who May Qualify

People with established credit and stellar credit reports who are on a solid financial footing usually qualify for conventional mortgages. More specifically, the ideal candidate should have:

  • A fair or better credit score. A credit score is a numerical representation of a borrower’s ability to pay back a loan. Credit scores include a borrower’s credit history and the number of late payments. A credit score of at least 620 and possibly higher can be required for approval. Also, the higher the score, the lower the interest rate on the loan, with the best terms being reserved for those with an excellent score.
  • An acceptable debt-to-income (DTI) ratio. This is the sum of your monthly debt payments, such as credit cards and loan payments, compared to your monthly income. Ideally, the DTI ratio should be around 36% and no more than 43%. In other words, you should spend less than 36% of your monthly income on debt payments.
  • down payment of at least 20% of the home’s purchase price readily available. Lenders can and do accept less, but if they do, they often require that borrowers take out private mortgage insurance and pay its premiums monthly until they achieve at least 20% equity in the house.

In addition, conventional mortgages are often the best or only recourse for homebuyers who want the residence for investment purposes or as a second home, or who want to purchase a property priced over $500,000.

Who May Not Qualify

Generally speaking, those who are just starting out in life, those with a little more debt than normal, and those with a modest credit rating often have trouble qualifying for conventional loans. More specifically, these mortgages would be tough for those who have:

  • Suffered bankruptcy or foreclosure within the past seven years
  • Credit scores below 650
  • DTI ratios above 43%
  • Less than 20% or even 10% of the home’s purchase price for a down payment

However, if you’re turned down for the mortgage, be sure to ask for the reasons in writing. You may qualify for other programs that could help you get approved for a mortgage.

For example, if you have no credit history and are a first-time homebuyer, you may qualify for an FHA loan. FHA loans are tailored specifically for first-time homebuyers. As a result, FHA loans have different qualifications and credit requirements, including a lower down payment.

What’s the Difference Between a Federal Housing Administration (FHA) Loan and a Conventional Loan?

FHA loans are designed to make homeownership possible and easier for low- to moderate-income borrowers with poor credit history or limited savings. Conventional loan interest rates tend to be higher than those of government-backed mortgages, such as FHA loans, and you will need a higher credit score and down payment to qualify.

Is It Better to Go FHA or Conventional?

A conventional loan is often better if you have good or excellent credit because your mortgage rate and private mortgage insurance (PMI) costs will go down. But an FHA loan can be perfect if your credit score is in the high 500s or low 600s. For lower-credit borrowers, FHA is often the cheaper option. However, it’s worth checking both options, because the best way to borrow can depend on many factors.

What Credit Score Do I Need for a Conventional Loan?

Fannie Mae says conventional loans typically require a minimum credit score of 620, but it can vary by lender. Banks may be more willing to lend to people with a significant down payment.

The Bottom Line

A conventional mortgage or conventional loan is a homebuyer’s loan that is not offered or secured by a government entity. They are often compared to FHA loans, which are designed to allow low-income families, or those with low credit scores or little savings, to access mortgage loans. Conventional mortgages are available via private lenders or the two government-sponsored enterprises (GSEs): Fannie Mae and Freddie Mac. Potential borrowers need to complete an official mortgage application, supply required documents, credit history, and current credit score. Conventional loan interest rates tend to be higher than those of government-backed mortgages, such as FHA loans, unless you have an excellent credit rating.

Conforming Loans

What Is A Conforming Loan?

Conforming loans are the most common type on the market today and the most beneficial for both lenders and buyers. If you’re in the market to buy a home, it pays to learn how you can qualify for a conforming loan and save the most on your mortgage financing.

Conforming loans are mortgages that meet Fannie Mae and Freddie Mac guidelines. Conforming lenders underwrite and fund the loans and then sell them to investors like Fannie Mae and Freddie Mac. Once securitized, the loans are sold to investors on the open markets. Because of their liquidity and the government regulations, conforming loans often have lower interest rates than non-conforming loans.

High-Balance Loans

What Is a High-Balance Loan?

A high-balance loan — also referred to as a conforming high-balance loan or a super-conforming loan — is given to home buyers in high-income areas. It exceeds national conventional loan limits but meets local loan limits. Unlike jumbo loans, high-balance loans are backed by Fannie Mae and Freddie Mac. High-balance loans vary by county, and limits are set by the Federal Housing Finance Agency (FHFA). If you’re looking for a home in a high-income area, you may qualify for a high-balance loan. In this post, we’ll cover everything you need to know about high-balance loans.

How Are High-Balance Loan Limits Calculated?

The maximum conforming loan limit does vary from county to county and may be higher depending on median home value. In counties where 115% of the local median home value exceeds the baseline CLL, the maximum loan limit will be higher than the baseline loan limit.

What Are the Qualifications for a High-Balance Loan?

To qualify for a high-balance loan, applicants must:

  • Have a credit score of at least 620
  • Be able to make a down payment of 5% of the property’s appraised market value
  • Have a debt-to-income (DTI) ratio of lower than 45%

Special Criteria to Qualify for a High-Balance Loan

  • Must be applying for a loan in a high-cost area

High-Balance vs. Jumbo Loans: The Differences

A jumbo loan is a non-conforming loan that may be taken out if a home buyer is interested in purchasing an expensive or luxury home or taking out a large mortgage in a highly competitive market. Jumbo loan applicants should be in a high-income earning bracket and have a credit score of 700 or more. Jumbo loan interest rates and down payments are typically higher than conforming loans and requirements are stricter, which may make it more challenging to qualify for.


What is a jumbo loan?

A jumbo loan is a mortgage used to finance properties that are too expensive for a conventional conforming loan. The maximum amount for a conforming loan in 2023 is $726,200 in most counties, as determined by the Federal Housing Finance Agency (FHFA). Homes that exceed the local conforming loan limit require a jumbo loan.

Also called non-conforming conventional mortgages, jumbo loans are considered riskier for lenders because these loans can’t be guaranteed by Fannie Mae and Freddie Mac, meaning the lender is not protected from losses if a borrower defaults. Jumbo loans are typically available with either a fixed interest rate or an adjustable rate, and they come with a variety of terms.

Qualifying for a jumbo loan:

Underwriting criteria for jumbo loans are stricter because the loans are larger and riskier for lenders.

  • Credit score: Lenders may require your FICO score to be higher than 700, and sometimes as high as 720, to qualify for a jumbo loan.
  • Debt-to-income ratio: Lenders will also consider your debt-to-income ratio (DTI) to ensure you don’t become over-leveraged, though they may be more flexible if you have plentiful cash reserves. Some lenders have a hard cap of 45% DTI, however.
  • Cash reserves: You’re more likely to be approved for a jumbo loan if you have ample cash in the bank. It’s not uncommon for lenders to ask jumbo loan borrowers to show they have enough cash reserves to cover one year of mortgage payments.
  • Documentation: To prove your financial health, you’ll need extensive documentation, perhaps more than for a conforming loan. You should be prepared to hand over your full tax returns, W-2s and 1099s when applying, in addition to bank statements and information on any investment accounts.
  • Appraisals: Some lenders may require a second home appraisal for the property you’re planning to purchase.

Jumbo loans vs. conforming loans:

The key difference between a jumbo mortgage and a conforming loan is the size of the loan. For a thorough look at the two, and the pros and cons of each, read about the differences between conforming and nonconforming loans.

Among the other factors that differentiate jumbo loans from conforming loans:

  • Heftier down payment: While low down payments are fairly common on conforming loans, jumbo loans are more likely to require a down payment of at least 20%, though some lenders may go as low as 10%.
  • Potentially higher interest rates: Jumbo mortgage rates may be slightly higher than those on conforming loans, depending on the lender and your financial situation. However, many lenders can offer jumbo loan rates that are competitive with rates on conforming loans — and some may even offer slightly lower rates depending on market conditions, so make sure to shop around.
  • Higher closing costs and fees: Because jumbo loans are bigger and there are some extra qualifying steps, expect higher costs at the closing table.
  • Loan limits: The loan limit for conforming loans varies by county because some real estate markets are much pricier than others. For 2023, the conforming loan limit for one-unit homes in most counties nationwide is $726,200. However, in “high-cost areas,”conforming loan limits are expanded to $1,089,300 — and even higher in a few other places.

Ways to get the best jumbo mortgage rates

When you’re shopping for a jumbo loan, it’s smart to make sure your finances are in as good a shape as possible. This means bolstering your savings and pulling your credit reports from the three main credit reporting agencies — Experian, Equifax and TransUnion — then addressing any errors you find. You might also pay down any larger balances.

Because jumbo loans tend to have stricter requirements than conventional or government-backed loans, anything you can do to improve your financial profile will also likely improve your rate offers.

Once you’re feeling confident about your application, compare mortgage rates between at least three jumbo lenders. Even small differences in the rate you pay could save you — or cost you — thousands of dollars over the term of a home loan.

If the rates you’re quoted for jumbo loans are higher than those for conventional loans, consider increasing your down payment — if you’re able — to avoid taking out a jumbo loan altogether. If your savings don’t support this, an 80-10-10 could help you get there.

HomeReady Loans

What Is a HomeReady Mortgage?

If you are a low-to-moderate income borrower with good credit seeking a new home, it may be worth looking into the HomeReady mortgage sponsored by Fannie Mae. This mortgage, similar to the Home Possible program offered by Freddie Mac, allows for a 3% down payment versus the standard 20% one. The pricing provided on a HomeReady mortgage is better than or equal to standard pricing on a mortgage.

Ideal HomeReady Borrowers

  • Low income
  • First-time or repeat homebuyers
  • Limited cash for down payment
  • Supplemental boarder or rental income
  • Looking to purchase or refinance

Home Possible Loans

What is a Home Possible Mortgage?

The Freddie Mac Home Possible® mortgage offers more options and credit flexibilities than ever before to help your very low-to low-income borrowers attain the dream of owning a home. In addition to its down payment requirement of as little as 3%, Home Possible now offers more options to responsibly increase homeownership for more of your borrowers. Co-borrowers who do not live in the home can be included for a borrower’s one-unit residence, borrowers are permitted to have another financed property, and more –all with competitive pricing and the ease of a conventional mortgage.

Home Possible Mortgage Features:

  • Flexible Sources of Down Payments: Down payment can come from a variety of sources, including family, employer-assistance programs, secondary financing, and sweat equity.
  • Income Limits: Qualifying income is limited to 80% of Area Median Income (AMI), effective July 28, 2019. There are no geographic limits on loan amounts. Use the Home Possible Income & Property Eligibility Tool to see income limits for specific properties or submit to Loan Product Advisor® to determine Home Possible income eligibility.
  • Maximum LTV Ratios: Low down payment with a maximum of 97% LTV, 105% TLTV with Affordable Seconds®, and 97% HTLTV for 1-unit properties.
  • Mortgage Insurance: Mortgage insurance (MI) on 1-unit properties can be canceled after loan balance drops below 80% of the home’s appraised value and cancellation criteria are met. MI coverage requirements are reduced for LTV ratios above 90%.
  • Pricing: Credit fees are capped and less than standard fees for all loans over 80% LTV.
  • Property Type/Eligible Properties: 1-4 units, condos, co-ops and planned-unit developments; manufactured homes are eligible with certain restrictions.
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