The offers on this page are from advertisers who pay us. That may influence which products we write about, but it does not affect what we write about them. Here's an explanation of how we make money.

Conventional loan: What it is, how to get one in 2024

Yahoo Personal Finance· Getty Images

Conventional loans are the main engine driving the home mortgage machine — the go-to loan product for most borrowers. More than half of all purchase mortgages were conventional loans in 2022.

Conventional mortgages are not insured by the government and have their own specific requirements on what it takes to qualify.

Because they are the loans lenders make most often, here's what you need to know about conventional mortgages in 2024.

Read more: How to buy a house in 2024

What is a conventional loan?

A conventional loan is not insured or guaranteed by a government agency. It's a technical distinction, though, because Fannie Mae and Freddie Mac, two government-sponsored companies, provide capital to the mortgage market and directly impact the qualifications required for conventional loan approval.

Fannie Mae and Freddie Mac buy conventional mortgages from lenders, freeing up money for mortgage providers to make more loans.

Read more: First-time home buyer in 2024: What you need to know

Who should get a conventional loan?

If you are looking to buy a home or refinance a mortgage and have a decent income, a good credit history, and average debt, a conventional loan is probably right for you.

By contrast, other types of mortgages like FHA and USDA loans cater to those who need a boost to homeownership because of lower credit scores, limited savings, or low-to-moderate income.

Read more: How much house can I afford?

How a conventional loan works

Buying or refinancing a home with a conventional loan allows you a great deal of flexibility:

  • Home buyers with typical credit scores, income, and debt loads will likely qualify.

  • Conventional loan programs such as HomeReady and Home Possible allow down payments as low as 3%.

  • As the most commonly available mortgage, you can shop a variety of lenders for the best mortgage rate.

  • In addition to fixed-rate mortgages, conventional loans are available as adjustable-rate mortgages. ARMs typically have a lower initial fixed interest rate, which converts to a variable rate that adjusts every six months or annually.

  • Conventional mortgages also come in a variety of payback periods. While 30-year loans have historically been the most common, you can choose a 20-, 15- or 10-year loan term.

Tip: While your mortgage payment will be higher, shorter mortgage terms allow you to pay off the loan faster and significantly reduce the amount of interest you pay. You will also gain home equity more quickly.

Read more: What all the best mortgage lenders have in common

Conforming loan vs. jumbo loans

Conventional loans have one other important variation: conforming or non-conforming.

Conforming mortgages are issued for loan amounts under $726,200, though higher limits are available in areas with the most expensive real estate.

Non-conforming loans, or jumbo loans, are for financing homes over the conforming loan limit.

How to qualify: conventional loan requirements

Specific loan requirements vary by lender, but generally, conventional loans require a borrower to:

  • Have a debt-to-income ratio of 50% or less. However, most lenders are looking for a DTI of 41% or less.

  • Provide a down payment of 3% or more if you're a first-time home buyer. Some lenders even offer 1% down payment programs for first-time buyers. Otherwise, 5% is an entry-level down payment, though you will be required to purchase private mortgage insurance or PMI.

  • Have a FICO credit score of 620 or higher.

Read more: The credit score needed to buy a house in 2024

Pros and cons of conventional loans

Pros

  • Down payment as low as 3% for first-time home buyers and just 3% equity for qualified loan refinancing.

  • You can opt for a variable-rate mortgage.

  • With a down payment of 20% or more, you can forego private mortgage insurance.

  • Available as jumbo loans for the purchase of higher-priced properties.

  • Flexible terms are available to first-time home buyers and Native Americans.

  • Can also finance home renovations, energy-efficient improvements and the purchase of manufactured homes.

Read more: Why a mortgage preapproval matters so much in 2024

Cons

  • Higher credit score requirements than with FHA or USDA loans.

  • With a down payment of less than 20%, you'll be required to pay private mortgage insurance.