What is a conventional mortgage loan?
A conventional home loan is a type of mortgage that’s not directly insured by a government agency. Instead, these loans are supported by government-sponsored entities (GSEs) like Fannie Mae and Freddie Mac. These GSEs ensure the stability of the mortgage market by purchasing loans, allowing banks the flexibility to extend credit to new home buyers.
Conventional loans are one of the most popular loan options for home buyers with strong financial standing, generally requiring a good credit score and a down payment of 3% to 20%. Typically, conventional mortgages follow the down payment and income requirements set by Fannie Mae and Freddie Mac as well as the loan limits determined by the Federal Housing Finance Agency (FHFA).
How do conventional mortgage loans work?
When you think of a standard mortgage, conventional loans likely come to mind. But did you know they come in all shapes and sizes? Let’s check out the most common types, which can range in structure, loan terms and borrower requirements.
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Knowing how much home you can afford can help you quickly narrow down your loan options. Check out our Affordability Calculator and see where your house-hunting budget lands.
Conforming loans
These mortgages follow criteria set at the government level by Fannie Mae, Freddie Mac and the Federal Housing Finance Agency. If a loan meets the down payment, income and price limits, it’s considered a conforming loan and often comes with the perks of lower interest rates.
Nonconforming loans
Also known as portfolio loans, nonconforming loans don't meet Fannie Mae and Freddie Mac guidelines and are held by the lender. They offer flexibility for unique financial situations, but they may have higher interest rates and down payments.
Jumbo loans
As the name suggests, these nonconforming loans are reserved for higher-priced homes. Jumbo loans exceed conforming loan limits, meaning they can finance pricier properties if the borrower has good credit and solid savings.
Fixed-rate vs. Adjustable-rate mortgages (ARMs)
These loan types offer different payment structures. A fixed rate provides stability over the life of the loan because you pay one interest rate over the entire term, no matter how long it is (typically 15 or 30 years).
An adjustable-rate mortgage is less predictable—it starts with a low, fixed rate during the introductory period, but transitions to a variable rate that fluctuates with market conditions. Fixed-rate mortgages are ideal if you’re looking for a consistent mortgage payment, and ARMs work well if you plan on refinancing or selling the property in a few years—before the adjustable rate kicks in.
Low and no down payment options
If you’re a first-time home buyer or have low or moderate income, you may be able to obtain a loan with little down payment, such as a HomeReady® loan.
Nonqualified mortgages
These loans have different eligibility criteria and can help borrowers with nontraditional income or unique financial situations.
Interested in looking at providers for conventional mortgage loans? Citi provides competitive interest rates and loan terms, making it easier to find a mortgage that fits your financial situation.
Conventional loan requirements
You already know that conventional loans come in many forms, and since they’re not backed by the government, lenders have the freedom to set their own standards when assessing potential borrowers. That said, most lenders follow similar guidelines when evaluating loan candidates. Here’s what you generally need:
- Credit score of 620+
- Down payment of 20% preferred (sometimes as low as 3%)
- Debt-to-income (DTI) ratio of ≤36%
- Private mortgage insurance (PMI) required with <20% down
Credit score
Typically, lenders like to see a credit score of 620 or more for conventional loans. If you’re not at 620 now, you can work to improve your score by making payments on time and paying off some of your larger debts. Excellent scores of 740 and above may help you secure better interest rates.
Income and employment
Lenders require proof of a stable and consistent income. They typically require at least two years of employment history and will want to see some financial paperwork, including W2s, pay stubs and bank statements. If you’re self-employed, you may need to show additional documentation, like profit-and-loss statements or tax returns.
Down payment
While many conventional loans require a down payment of 20% or more, some conventional loan programs, like HomeReady, offer down payments as low as 3% for first-time home buyers and low- to moderate-income borrowers.
Debt-to-income (DTI) ratio
Lenders often prefer a debt-to-income (DTI) ratio of 36% or lower for conventional loans. So, what is DTI and what does it have to do with loans? Your DTI ratio compares your total monthly debt payments to the amount you earn each month, demonstrating how well you handle debt. A low ratio shows lenders that you’re good at managing debt, which may help you get a great rate and lower monthly payments. If your DTI needs a little work, you can move the needle by paying down your high-interest debts.
Private mortgage insurance (PMI)
If you purchase a home with less than 20% down, private mortgage insurance is often required. This type of mortgage insurance protects the lender against default, which is when the loan cannot be repaid. The PMI premium you owe is established in part by your credit score and other factors. PMI is tacked onto your monthly payment until you reach 20% equity in the home, at which point, in some cases, you can request that private mortgage insurance be cancelled.
Conventional mortgage loan limits and interest rates
Conventional loan limits fall into two categories: conforming and nonconforming. Conforming loan limits are set by the Federal Housing Finance Agency (FHFA) and vary by location. To qualify for a conforming loan, your home’s purchase price must fall within the local loan limit. If you’ve set your sights higher, you’re looking at a nonconforming loan—commonly known as a jumbo loan. These loans come with stricter requirements, including a bigger down payment, stellar credit and a good chunk of savings.
The interest rate lenders offer you will depend on several factors: current market conditions, the type of loan and term you have and your financial profile (including your credit score and DTI ratio). Lenders evaluate all these details to assess risk, and that assessment plays a big role in determining your rate.
PRO TIP
The state of the housing market influences the size of the down payment you'll need. In a seller's market, where demand exceeds supply, a small down payment can make it harder to secure a loan or make a successful offer. In a buyer's market, where there are many homes available and not as much competition, a smaller down payment may do the trick.
How conventional mortgage loans compare to other loan types
Here’s how conventional loans stack up against popular government-backed mortgage options.
Conventional loan vs. FHA loan
If you have a lower credit score or a smaller down payment, an FHA loan may offer the option you need.
| Feature | Conventional loans | FHA loans |
|---|---|---|
Down payment | Minimum 3%, but often higher | Minimum of 3.5% required |
Mortgage insurance | PMI required if down payment is less than 20% | Upfront and annual premiums required |
Interest rates | Usually higher, influenced by credit score | Generally lower than conventional loans if credit is good |
Credit score requirements | Typically, 620+ required | Minimum 580 in most circumstances |
Purpose | Generally for consumers with higher credit and income | To help lower- or moderate-income borrowers become homeowners |
Conventional loan vs. VA loan
While conventional loans are open to anyone, VA loans help veterans, service members and surviving spouses. VA loans are packed with advantages, including lower rates, zero down payments and no mortgage insurance.
| Feature | Conventional loans | VA loans |
|---|---|---|
Down payment | Minimum 3%, but often higher | Zero down payment with 100% VA Loan Guaranty Benefit |
Mortgage insurance | PMI required if down payment is less than 20% | No PMI required, but includes funding fee |
Interest rates | Usually higher, influenced by credit score | Lowest average rates on the market, not as credit-dependent |
Credit score requirements | Typically, 620+ required | Typically, 620, but lower scores can be accepted |
How to improve your chances of qualifying for a conventional mortgage loan
While conventional loans offer great flexibility, they also come with stricter qualification standards than government-backed options. If you're stressing about whether your financial profile isn’t quite ready for a conventional mortgage, don't panic. With a little strategic planning, you can strengthen your application and boost your eligibility.
Here are three actionable areas to focus on before you apply.
Polish your credit score
Your credit score is often the first thing lenders check. Since conventional loans typically require a minimum score of 620, getting your score in top shape is crucial.
- Check for errors: Request a free copy of your credit report from the major bureaus. Look for any inaccuracies, such as payments marked late that were actually on time, and dispute them immediately.
- Pay down balances: High credit card utilization can drag your score down. Aim to keep your balances below 30% of your credit limit.
- Avoid new credit: Opening or closing credit cards or taking out auto loans right before applying for a mortgage can temporarily lower your score and signal risk to lenders.
Strategic saving for a down payment
While you don’t necessarily need 20% down, a larger down payment strengthens your application. It reduces the lender's risk and lowers your monthly payments.
- Automate your savings: Set up an automatic transfer to a dedicated high-yield savings account every payday. You can't spend money you don't see in your checking account.
- Cut non-essential costs: Temporarily dial back on subscriptions, dining out or entertainment. Redirecting these funds can help you accumulate cash surprisingly fast.
- Look for windfalls: Direct any tax refunds, work bonuses or cash gifts directly into your house fund rather than spending them on lifestyle upgrades.
Lower your debt-to-income (DTI) ratio
Lenders want to ensure you aren't overextended. A DTI ratio below 36% is ideal for conventional loans, though some lenders may stretch higher with strong compensating factors.
- Target high-interest debt: Focus on paying off debts with the highest interest rates or the highest monthly payments first. Eliminating a large monthly car payment or credit card bill can significantly drop your DTI.
- Consolidate debt: If you have multiple smaller debts, a debt consolidation loan with a lower interest rate might lower your total monthly obligation, improving your ratio.
- Increase your income: If paying down debt is slow going, consider boosting the “income” side of the equation. A side hustle or a raise at work improves your DTI just as effectively as paying off a loan.
How do I apply for a conventional mortgage loan?
Whether you’re starting to hit open houses or ready to hit the “Apply Now” button, you should understand the homebuying process and how to apply for a mortgage step by step.
- Check your credit score
Before applying, look up your credit report to see where you may stand with lenders and which loans you could qualify for. - Gather necessary documents
You need to provide official documents including your SSN, proof of income, tax returns, employment verification and a list of assets and liabilities. - Get pre-approved
Before you get your heart set on a home, get pre-approved for a loan amount. A lender reviews your financial documents and determines how much you may be able to borrow. A pre-approval letter can give you a leg up with sellers, showing that you’re a serious buyer with financing lined up. - Submit your application
Once you’ve found a home you love and have your pre-approval letter, submit your application along with all required documentation. A lender has three business days to review your completed application and give you a Loan Estimate: a disclosure of your projected loan amount, type, interest rate and additional mortgage costs. - Undergo loan processing
The lender formally reviews your application, performs a credit check and appraises the property to ensure everything is in order. Be ready to field questions from your lender and be sure not to disturb your credit score—avoid major purchases or new lines of credit. - Wait for underwriter’s decision
Once your information is verified, the underwriter completes their risk assessment by examining your loan-to-value ratio, credit history, DTI, employment history and home valuation to determine if you’re a good fit. - Close the loan
If all goes well, you get the seal of approval! Your lender sends the Closing Disclosure three business days before your closing date, outlining the final costs in detail. Compare it to the Loan Estimate and ask about any discrepancies. If all looks good, you sign the paperwork and handle the closing costs. Closing costs typically range from 2% to 6% of the loan amount and can be paid as a lump sum or rolled into the total cost of the loan.