Conventional Loan: How does a conventional mortgage work?

Just flip from page to page to learn about conventional loans.

Beautiful suburban homeThe term “conventional loan” refers to a mortgage loan that is not backed by the federal government. USDA, VA, and FHA loans are guaranteed or insured by the federal government.

The conventional loan, sometimes called a conforming loan, is not federally insured. Conventional loans are provided to borrowers indirectly through the Federal Home Loan Mortgage Corporation or Federal National Mortgage Association (Fannie Mae). The following explains how conventional loans work.

Fannie Mae and Freddie Mac are publicly listed companies that buy mortgage-backed securities and resale them to investors. This allows banks and other financial institutions to lend to a wider variety of customers, since their capital is not tied to long-term debt.

Fannie Mae and Freddie Mac have strict loan purchase requirements. A conforming loan is a mortgage that conforms with the lending criteria of Freddie Mac and Fannie Mae. It is common to hear the terms conforming and conventional used interchangeably.

Fannie Mae and Freddie Mac have similar loan requirements for loan approval. Loans that do not comply or conform to conventional lending criteria are referred to as non-conforming loans. Non-conforming loans are often loans that exceed the lending cap set by the Federal Housing Finance Agency (FHFA).

Conventional Loan Down Payments

When you are buying a home, one of the most important factors to consider is the down payment. How much do you need to put down in order to buy a house?

Conventional loans require a minimum down payment of 5%. However for low to moderate or first time home buyers, the HomeReady and Conventional 97 loan programs only require a 3% down payment.

Some mortgage lenders may require a higher down payment for a conventional loan, especially if your credit score is not very high. But typically, 3% is the minimum amount required.

Conventional Loan Limits

A conventional loan is a mortgage that is not guaranteed or insured by the federal government. The maximum amount you can borrow with a conventional loan varies by location. In most places, the 2022 limit is $647,200 for a single-family home. However, in some high-cost areas, the limit is as high as $970,800. Read more

Credit Score for a Conventional Loan

A credit score is a three-digit number that lenders use to help them decide whether to lend you money and at what interest rate. The higher your credit score, the more likely you are to be approved for a loan and to receive a lower interest rate. Your credit score is based on your credit history, which is based on your credit activity.

To get a conventional loan, you'll need a credit score of at least 620. However, the higher your credit score, the better your terms will be. If your credit score is below 620, you may still be able to get a conventional loan, but you'll likely have to pay a higher interest rate and may need to put down a larger down payment.

Minimum Down Payment for a Conventional Loan

When purchasing a home, there are many things to consider, such as the monthly mortgage payment, interest rate, and down payment. A down payment is a percentage of the home's purchase price that the buyer pays upfront. A conventional loan typically requires a minimum down payment of 3%. This means that the buyer must pay at least 3% of the home's purchase price as a down payment.

There are several ways to come up with a down payment. Some buyers use savings, while others may get help from family or friends. There are also programs available that offer assistance for low- and moderate-income buyers. These programs may provide money for the down payment or offer lower interest rates.

A conventional loan is a mortgage that is not backed by the government. Conventional loans typically have higher interest rates than government-backed loans, such as FHA (Federal Housing Administration) loans and VA loans.

Jumbo Vs. Conventional Loan

House with a sold signWhen you are looking for a mortgage, you will likely come across the terms "jumbo" and "conventional." Jumbo loans are mortgages that are larger than the conforming loan limit set by Fannie Mae and Freddie Mac. The conforming loan limit is the maximum size of a mortgage that Fannie Mae and Freddie Mac will buy from lenders. Currently, the conforming loan limit is $647,200 for a single family dwelling. If your mortgage is larger than this amount, it's a jumbo mortgage.

Jumbo mortgages typically have higher interest rates than conventional mortgages. This is because they are seen as riskier by lenders. Jumbo mortgages are also harder to qualify for. You will likely need a higher credit score and more money saved up for a down payment to get approved for a jumbo mortgage.

Debt to Income Ratio for a Conventional Loan

The debt to income ratio is an important consideration for anyone applying for a conventional loan. This ratio is simply the total amount of debt you have divided by your total income. Lenders use this ratio to determine how much money you can borrow and how risky you are as a borrower.

Generally, lenders want to see a debt to income ratio of no more than 36% for manually underwritten conventional loans. This means that your total monthly debt payments should not be more than 36% of your monthly income. There are some exceptions to this rule. If the borrower satisfies the credit score and reserve conditions outlined in the
Eligibility Matrix, the maximum can be increased by up to 45 percent.

In order to qualify for a conventional loan, you will need to meet certain income requirements. Your income must be high enough to cover your monthly debts and still leave enough money left over for living expenses.

Conventional Loan With PMI

Private mortgage insurance graphicA conventional loan with PMI is a mortgage that is not backed by the government (like FHA, USDA or VA loans), but does require private mortgage insurance (PMI) if you put less than 20% down. Private mortgage insurance is insurance that compensates lenders or investors for losses due to borrower default. PMI is typically required on conventional loans when the borrower makes a down payment of less than 20%. PMI is typically paid by the borrower. If you are required to pay PMI on a conventional loan, it will be an additional monthly cost added to your mortgage payment. Read more about PMI

How much is the mortgage insurance premium?

Mortgage insurance premiums on conventional loans are usually lower than on other types of loans, such as FHA loans. The premium is calculated as a percentage of the loan amount and is generally 0.5% to 2% of the loan amount.

When does a conventional loan PMI expire?

A conventional loan PMI typically expires when your loan-to-value ratio reaches 78%. That is, if you have a $250,000 mortgage on a home worth $300,000, once you pay down $22,500 in principal, your loan-to-value ratio will be at 78%. At this point, you can contact your lender and request that they cancel your PMI.

Conventional Loan Types

Happy home buyersThere are a variety of conventional loan types available to borrowers, each with its own benefits and drawbacks. The most common type of conventional loan is the fixed-rate mortgage. These loans offer a stable interest rate for the life of the loan, making budgeting easier. However, they typically require a larger down payment than adjustable-rate mortgages.

Adjustable-rate mortgages offer a lower interest rate in the beginning, but that rate can change over time based on the market conditions. This makes them a riskier option for some borrowers, as their monthly mortgage payments could go up significantly if rates rise. However, these loans often require a smaller down payment than fixed-rate mortgages.

Finally, there are low-down-payment options available for first-time homebuyers who don't have much saved up for a down payment.

Conventional Loan Closing Costs

Closing cost graphicClosing costs are one of the expenses that come with getting a mortgage. They can vary depending on the lender, but typically include fees for an appraisal, credit report, underwriting and origination. There may also be costs for title search, title insurance and recording fees.

The good news is that many of these costs can be negotiated. For example, the lender may be willing to lower or waive the origination fee. Or, if you're using a real estate agent, you may be able to get them to pay for some or all of the closing costs.

It's important to remember that closing costs are generally required and must be paid in full at settlement. So make sure you have enough money saved up to cover them.

Conventional Loan for an Investment Property

When you are thinking of buying an investment property, a conventional loan is often the best option. A conventional loan is a mortgage that is not guaranteed or insured by the federal government. This makes it a good choice for those looking to buy an investment property. In order to qualify for a conventional loan, you will need to have a good credit score and meet the minimum down payment requirements.

Conventional loans for investment properties require a down payment of 15% to 25% (depending on the kind of property being purchased), and credit score requirements are higher than those for government programs. Only one to four unit dwellings are permitted.

Read more about investment property financing

Conventional Loan for Manufactured Home

When buying a manufactured home, there are a few different types of mortgages you can use. The most common is the conventional mortgage. This type of loan is available through most lending institutions and is the simplest form of mortgage. It usually has a lower interest rate than other types of mortgages, and the terms are usually for 10-30 years. The down payment on a conventional mortgage for a manufactured home can be as low as 3-5%, and there are no prepayment penalties.

Conventional Loan Gift Funds

Gift fundsPeople looking to purchase a home often turn to gift funds as a way to help them obtain the financing they need. A conventional loan gift fund is when the money given to the home buyer is not a loan, but a gift. This type of transaction is generally used when the family or friends of the homebuyer are contributing money towards the purchase of the home. There are some specific guidelines that must be followed in order for a conventional loan gift fund to work.

The first step is to make sure that you are eligible for a conventional loan. Not all borrowers qualify for this type of mortgage. Next, you will need to document the source of your gift funds. This means that you will need to provide evidence such as bank statements or letters from family and friends stating that they are giving you the money as a gift and not as a loan. Read more about gift funds

Conventional Loan Benefits

Home buyers at settlementThere are many benefits to choosing a conventional loan. Perhaps the biggest benefit is that you will have more loan options when it comes to buying a home. With a conventional loan, you can choose between a fixed-rate or adjustable-rate mortgage. You also have the option of a 10, 15, 20, 25, and 30-year mortgage term. This gives you more flexibility when it comes to your home purchase.

Another benefit of a conventional loan is that you can cancel the monthly mortgage insurance after attaining 20 to 22% equity.

Conventional Loan Second Home

The government loans, FHA, VA and USDA loans do not finance second homes. The conventional/conforming mortgage will accommodate the purchase or refinance a second home. The down payment for a second home is only 10%. Read more about second home financing

Read more questions and answers about conventional loans


In conclusion, a conventional loan is a loan that is not insured or guaranteed by the federal government. It is a loan that is offered by a private lender and is based on the borrower's credit score and income. A conventional loan can be used to purchase a home, refinance a mortgage, or for home improvement projects.