Pros and Cons of a Conventional Loan

A cell phone is displaying the words Fannie MaeAre you looking for a reliable and flexible financing option to achieve your homeownership dreams? Conventional loans can be an excellent choice for those seeking stability and competitive interest rates. In this article, we will explore the benefits and features of conventional loans, as well as the eligibility requirements and application process. Whether you're a first-time homebuyer or considering refinancing your existing mortgage, understanding conventional loans will empower you to make informed decisions about your financial future.

Here are the most frequently asked questions about conventional loans:

1. What is a conventional loan?

A conventional loan is a mortgage that the government does not back. Instead, it is offered through private lenders and banks. These loans are available to borrowers who meet specific requirements, such as credit scores and income.

Conventional financing can be used for various purposes but is most commonly associated with buying a home. Conventional home loans come in two types: conforming conventional loans and non-conforming conventional loans. The former must adhere to specific guidelines Fannie Mae or Freddie Mac set, including conforming loan limits, and non-conforming conventional loans do not follow these guidelines.

To be approved for a conventional loan, the borrower must have a good credit history and sufficient income to repay the debt. Additionally, they may need to provide proof of employment or assets. Unlike government-backed loans that offer more lenient requirements for low-income borrowers or those with poor credit scores, conforming loans must follow strict lending standards established by consumer financial protection agencies.

2. What are the requirements for a conventional loan?

Conventional loans are available through private lenders and banks and can be used to finance various property types. These loans are distinct from government-backed loans in that the federal government does not insure or guarantee them. Instead, conventional mortgage loan lenders rely on the creditworthiness of borrowers to determine whether they qualify for financing.

Applicants must meet specific credit score requirements to qualify for a conventional mortgage loan. Generally speaking, borrowers should have a credit score of at least 620 or higher to qualify. Lenders will also consider other factors, such as the debt-to-income ratio, when deciding whether to approve an application.

In addition to meeting minimum credit score requirements, applicants may need proof of income and assets to be approved for a conventional loan. Interest rates on these loans can vary depending on market conditions and other factors such as the borrower's credit history and down payment amount. Borrowers with good credit scores may be able to secure lower interest rates than those with poor or fair credit histories.

3. How do conventional loans differ from government-backed loans?

Unlike government-backed loans like FHA and VA loans, conventional loans do not have government support. Instead, private lenders offer conventional loans that follow guidelines set forth by Fannie Mae and Freddie Mac, two government-sponsored entities that buy mortgages from lenders.

One key difference between conventional and government-backed loans is the down payment requirement. While FHA loans require a minimum 3.5% down payment, some conventional loan programs allow borrowers to put down as little as 3%. However, if you put less than 20% down on a conventional loan, you will likely have to pay for private mortgage insurance (PMI) until your equity in the home reaches at least 20%.

Another difference is the credit score requirement. While FHA loans require a minimum credit score of 580 with a 3.5% down payment or a minimum credit score of 500 with a 10% down payment, most fixed-rate conventional loan programs require a minimum credit score of at least 620. Additionally, first-time homebuyers may find more lenient qualification standards for government-backed programs than traditional financing options.

Overall, while both types of mortgages offer their unique benefits and drawbacks depending on individual circumstances and qualifications required by each lender's or program's underwriting criteria, it's essential to weigh all options available before making any final decisions about which type best suits your financial situation and goals moving forward in your homeownership journey!

4. What is the interest rate for a conventional loan?

Conventional loans are a popular choice for borrowers who want to get a conventional loan. The interest rates for these loans can vary depending on several factors, including the borrower's credit score and the amount of money they're borrowing. Generally, if you have good credit and meet the guidelines set by Fannie Mae or Freddie Mac, you'll be able to get a conventional loan with a lower interest rate than government-backed loans.

One thing that sets conventional loans apart from government loans is that there are no limits on how much you can borrow with a conventional loan. This means that if you have enough home equity or income to support your mortgage payments, you may be able to get a larger home loan than you would with a government-backed loan. However, remember that higher credit scores usually result in lower interest rates and better terms.

Qualifying for one is still possible if you're considering getting a conventional loan but don't have excellent credit. However, lenders will likely require higher down payments and charge higher interest rates for those with lower credit scores. It's essential to shop around and compare offers from multiple lenders before deciding which suits your needs.

Overall, when it comes to getting a home loan, it's essential to research and understand your options. Choosing a government-backed or conventional loan depends on your unique financial situation and goals.

By following the guidelines set by Fannie Mae or Freddie Mac and having a good credit history and other requirements such as employment history, etc., you may find yourself eligible for low-interest rate options through traditional lending institutions like banks or mortgage companies regulated by the Housing Finance Agency (HFA).

5. How much can I borrow with a conventional loan?

When it comes to borrowing with a conventional loan, the amount you can borrow will depend on several factors. One of these is the loan limit that the federal government sets, which varies depending on where you live and whether or not your property is in a high-cost area. In general, however, most borrowers can expect to be able to borrow up to $726,200 (2023) with a conventional loan.

Another factor that affects how much you can borrow with a conventional loan is your credit score. Lenders typically require borrowers to have good credit to qualify for larger loans. Lenders may also consider other factors, such as your income and debt-to-income ratio, when determining how much they are willing to lend.

It's worth noting that if you need to borrow more than the limits set by the federal government allow, you may want to consider getting a jumbo loan instead. Jumbo loans are similar to conventional loans but allow borrowers to borrow larger amounts of money.

However, because jumbo loans represent more risk for lenders than conventional loans, interest rates on them tend to be higher over the life of the loan and often require additional insurance coverage.

6. Can I get a conventional loan with a low credit score?

Conventional loans are a popular option for borrowers with good credit scores and stable incomes. However, getting approved for a conventional loan may be challenging if you have a low credit score. While it is possible to get a conventional loan with a low credit score, there are specific requirements that you need to meet.

One of the main factors lenders consider when approving conventional loans is your credit score. Generally, most lenders require a minimum credit score of 620 or higher to qualify for this type of mortgage. However, some lenders may offer loan programs that accept lower scores under specific circumstances. It's essential to speak with your loan officer about what options are available.

If you're struggling with bad credit but still want to pursue a conventional loan option, improving your financial situation can help increase your chances of approval. This includes consistently paying off outstanding debts and bills and reducing any high balances on revolving accounts like credit cards.

Additionally, saving up for a down payment can improve your chances since many conventional loans do not require private mortgage insurance (PMI) if you put at least 20% down.

Although it may be more difficult to receive funding through traditional channels when dealing with a poor credit history or other financial difficulties, there are various loan options available based on the borrower's needs and credentials.

These include loans offered by non-traditional lenders such as online peer-to-peer platforms or alternative finance firms that specialize in subprime lending solutions designed specifically for individuals seeking second-chance opportunities to obtain homeownership through unconventional means rather than traditional bank channels, which often require strict eligibility criteria before considering extending financing offers.

7. How much down payment is required for a conventional loan?

Conventional loans require a down payment—the money you pay upfront to secure the mortgage. The minimum down payment for a conventional loan is typically 3%–5%, but some lenders may require more depending on your credit score and other factors. However, if you can put down at least 20% of the home's purchase price, you can avoid paying monthly mortgage insurance premiums.

One advantage of conventional loans over government-backed loans is that they often come with lower interest rates for borrowers with good credit scores. This means that if you have a higher credit score, you may be able to get a lower interest rate on your conventional loan than you would with an FHA or VA loan.

However, getting approved for a conventional loan may be more difficult if your credit score is lower than average. Lenders typically prefer borrowers with higher credit scores because they are seen as less risky to lend money to. If your credit score falls below their minimum requirements, they may deny your application or charge you a higher interest rate.

Ultimately, how much of a down payment and interest rate you qualify for will depend on your income level, debt-to-income ratio (DTI), employment history, and overall financial health. It's essential to shop around and compare offers from multiple lenders before choosing one that works best for your unique situation.

8. How long does it take to get approved for a conventional loan?

When applying for a conventional loan, one of the most important factors is how long it will take to get approved. The timeline for approval can vary depending on several factors, including the lender you choose and your financial situation.

It would be best if you first found a reputable mortgage lender before applying for a conventional mortgage loan. This can be done in person or online, but regardless of where you go, it's essential to research and compare rates from multiple lenders before making any decisions.

Once you have found a potential lender that offers competitive mortgage rates and terms that fit your needs, the next step is to begin the application process. To qualify for a conventional loan, you will typically need good credit (a score of at least 620), a stable income and employment history, and enough money saved up for a down payment (usually between 5% and 20%).

You may also be required to pay private mortgage insurance if your down payment is less than 20%. Depending on these factors and others unique to each borrower's situation, getting approved for a conventional loan could take days or weeks.

9. What are the fees associated with a conventional loan?

Conventional loans are a type of mortgage that comes with fees associated with them. One of the most common fees is an origination fee, which ranges from 0.5% to 1% of the loan amount. This fee covers the lender's costs for processing and underwriting your loan application.

Another fee associated with conventional loans is private mortgage insurance (PMI). If you put down less than 20% on your home purchase or refinance, you must pay PMI until you reach a certain equity threshold in your home. The rate for PMI varies based on factors such as credit score and down payment amount, but typically ranges between 0.3% and 1.5% of the original loan amount annually.

It's crucial to keep in mind that not all conventional loans, including those with Fannie Mae or Freddie Mac backing or those with a sizable down payment and a high credit score, require PMI. Additionally, other types of government-backed loans, like VA loans or USDA loans, may come with upfront mortgage insurance rates set by each agency.

10. Can I use a conventional loan for a second home or investment property?

Yes, you can use a conventional loan to purchase a second home or investment property, but the requirements may be different than for a primary residence. Generally, lenders will require a larger down payment and a higher credit score for a second home or investment property loan.

The property may also need to meet specific eligibility criteria, such as being in a desirable area or having solid rental income potential. Discussing your options with a lender to determine if a conventional loan is a suitable choice for your second home or investment property purchase is essential.


In conclusion, conventional loans offer a wide range of advantages for individuals looking to buy or refinance a home. With their competitive interest rates, flexible down payment options, and potential to avoid private mortgage insurance (PMI), conventional loans can be an attractive choice for many borrowers. However, it's important to evaluate your financial situation and consult with a trusted mortgage professional to determine if a conventional loan is the right fit for you. By understanding the ins and outs of conventional loans, you can navigate the home financing process with confidence and embark on your homeownership journey.