What Are Conventional Home Loans: Who Qualifies and Key Requirements

Written by: Kim PinnelliPosted in: Financial Know-How
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One of the most common types of mortgages is the conventional home loan. But what does that actually mean? And is it the right choice for you?

In this post, we’ll explain everything you need to know about conventional loans in simple terms. We’ll cover how they work, who can qualify, their pros and cons, and how to apply.

Ready to find your best fit? Keep reading!

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What is a Conventional Home Loan?

A conventional home loan is a mortgage offered by private lenders, such as banks or credit unions. It isn’t insured or backed by government programs, such as FHA loans or VA loans. Most of these loans are conforming, meaning they follow rules set by Fannie Mae and Freddie Mac.

These loans can fund primary residences, vacation homes, rental properties, or investments. Compared to government-backed options, conventional loans require higher credit scores and stricter qualifications.

They also offer flexible terms, but you might need private mortgage insurance (PMI) if your down payment is below 20%.

Types of Conventional Home Loans

Conventional loans come in various forms, each meeting different needs. They vary by interest structure, loan size, and qualification rules… giving you options to match your goals.

1. Fixed-Rate Mortgages

Fixed-rate mortgages lock in your interest rate for the entire loan term. This means your monthly principal and interest payments stay predictable. Loan terms usually range from 10 to 30 years.

For example, as of November 21, 2025, a $405,000 loan with a 25% down payment has rates as low as 5.250% for a 10-year fixed or as high as 5.990% for a 30-year fixed.

These loans don’t have prepayment penalties, unlike those offered by Space Coast Credit Union (SCCU). You can use them to buy or refinance property without worrying about fluctuating mortgage rates over time.

Keep in mind that taxes and insurance aren’t included in these payments; they will raise your total costs.

2. Adjustable-Rate Mortgages (ARMs)

ARMs start with a fixed interest rate for a set period, like 7 or 10 years. After this, the rate adjusts every six months. For example, a 10/6 ARM means your rate stays fixed for 10 years and then may change twice a year.

A common benefit of ARMs is lower initial rates than those of fixed-rate loans. As of November 2025, a $405,000 loan with a 25% down payment has rates of 6.125% for a 10/6 ARM or 5.875% for a 7/6 ARM.

They are ideal if you plan to sell or refinance before the adjustment starts. Good credit can help you secure better rates; typically, lenders prefer FICO scores above 740 for conventional mortgages and above 680 for FHA loans.

Discount points allow you to buy down the interest rate by paying upfront costs equal to about 1% of your loan amount per point.

3. Jumbo Loans

Jumbo loans are for borrowers who are taking out amounts above conforming loan limits. For 2025, this limit is $806,500 in most areas across the U.S. These loans help finance luxury properties or homes in high-cost markets.

They often come with stricter rules. You’ll likely need a higher credit score and a larger down payment compared to other mortgage types. Rates can be slightly higher, too. For example, as of November 21, 2025, a $940,000 jumbo loan with 25% down might have rates as high as 5.875% for a 10/1 ARM or as low as 5.500% for a shorter-term 5/1 ARM.

Since Fannie Mae or Freddie Mac doesn’t back these, lenders may offer more custom options, but still expect strict qualifications to ensure repayment ability.

4. Conforming Loans

Conforming loans follow rules set by Fannie Mae and Freddie Mac. These rules include loan limits, credit score requirements, and income guidelines. In 2025, the limit for a single-family home is $806,500.

This amount can reach $1,209,750 in places like Alaska or Hawaii.

These loans often offer better interest rates and terms than non-conforming loans. You can get one through banks, credit unions, or mortgage lenders. If you build 20% equity in your home, you can request to cancel PMI.

Loan limits are updated yearly by the Federal Housing Finance Agency (FHFA).

5. Non-Conforming Loans

Non-conforming loans don’t meet Fannie Mae or Freddie Mac requirements. These loans exceed conforming loan limits or have unique terms. If you need a larger mortgage, like a jumbo loan, this option may work for you.

Lenders often charge higher interest rates and fees due to added risks. You might also need a bigger down payment and strong credit. Non-conforming loans can help if you’re buying unique properties or have unusual financial situations.

Terms vary by lender, so comparing options is key before choosing one.

How to Choose the Right Conventional Loan

Finding the right conventional loan starts with knowing your financial goals and comparing options.

Assessing Your Financial Situation and Goals

Review your credit report for mistakes. Use AnnualCreditReport.com to check for errors that could hurt approval chances. Aim for a credit score of at least 620 since most conventional loans require this minimum.

Calculate your debt-to-income (DTI) ratio by dividing your monthly debts by your income. Keep it below 45% to improve approval odds. Plan your down payment, with as little as 3% possible if you’re a first-time homebuyer.

Decide how long you’ll stay in the home, and consider its use, such as a primary residence or an investment property. Set clear goals for building equity or saving on interest over time.

Comparing Lender Offers

Compare interest rates, APRs, and monthly payments from different lenders. For example, a $405,000 loan with 25% down may show how costs vary. Look at lender fees like closing costs and mortgage points too; one point equals about 1% of your loan amount.

Check each lender’s credit score and down payment requirements. Some accept lower scores, such as Rocket Mortgage (580) and NBKC Bank (620), both of which allow as little as 3% down. Also, explore special offers, such as SCCU’s rate discounts for frontline workers.

Read customer reviews to see if their service meets your needs.

Estimating Closing Costs and Total Loan Costs

Closing costs usually range from 2% to 5% of the loan amount. For a $300,000 loan, this means you might pay between $6,000 and $15,000 at closing. Costs include appraisal fees, title insurance, and lender charges.

Some first-time buyers can find no-closing-cost loans if savings are limited.

Points are another factor to consider. Paying one point typically lowers your interest rate by about 0.25%. At $250,000 in borrowed funds, one point costs roughly $2,500 upfront. Private mortgage insurance (PMI) is required for down payments below 20%, which also impacts total expenses.

Use a mortgage calculator to accurately gauge monthly payments and long-term interest costs!

Who Qualifies for a Conventional Loan?

Getting approved for a conventional loan depends on specific rules. Lenders check your credit, income, and financial history to decide if you qualify.

Minimum Credit Score Requirements

Most lenders require a FICO score of at least 620 for conventional loans. For example, SCCU sets this as their minimum standard out of 850 points. Rocket Mortgage stands out by offering loans with scores as low as 580, while Better requires a score of at least 640.

Some lenders, like Rate, aim higher and ask for a minimum score of 680.

Your eligibility also depends on the lender you choose. Figure approves applications with a credit score of 600 or higher. Meanwhile, FourLeaf Federal Credit Union may prefer borrowers with scores of 670 or higher.

Starting November 16, 2025, Fannie Mae and Freddie Mac will no longer have specific credit score requirements; they’ll assess your overall credit risk instead.

Acceptable Debt-to-Income (DTI) Ratios

Lenders often prefer a debt-to-income (DTI) ratio below 45%. Some may accept up to 50%, but lower ratios improve your chances of approval. To calculate DTI, divide your monthly debts by your gross monthly income before taxes.

This includes credit card payments, student loans, car loans, and other recurring debts.

Conventional loans have stricter limits compared to FHA or USDA loans. While FHA loans may allow DTIs up to 57%, conventional mortgages usually stay in the 45%-50% range. Keeping non-mortgage debts low can help meet these requirements and give you more borrowing power.

Down Payment Guidelines

For first-time buyers, down payments can go as low as 3% with a conventional mortgage. If it’s not your first home purchase, you may need at least 5%. Putting down less than 20% requires private mortgage insurance (PMI) to provide extra protection for the loan.

Help is available if you’re struggling to save. Some government or community programs offer assistance for eligible buyers. Loan-to-Value (LTV) ratios also affect the amount of cash required upfront.

For homes within the 2025 conforming loan limit of $806,500, these rules apply. Other types of loans, like VA or USDA, require no down payment at all!

Employment and Income Verification

Lenders check your job and income to approve a conventional loan. You need to show pay stubs, W-2s, bank statements, and tax returns. They look for at least two years of steady work history.

Income sources like salary, bonuses, commissions, or self-employment count too. Other sources of income, such as alimony or investments, may also help. If you have gaps in your job history or income changes, you may need additional proof.

Requirements for a Conventional Loan

Lenders need proof that you can repay the loan. Be ready to provide financial details and meet set rules.

Income and asset verification

You need to show proof of steady income. This includes two recent pay stubs, two years of W-2s or tax returns, and bank statements. If you’re self-employed, prepare additional documents, such as profit-and-loss statements or 1099 forms.

Assets such as savings accounts, investments, and retirement funds must also be documented. These help prove you can cover the down payment and closing costs. Any gift funds used for a down payment must include proper paperwork explaining their source.

Large deposits in your account will also require backup documentation to explain their source.

Employment and job history

Lenders usually check at least two years of steady job history. Stable income is a key part of getting approved for a conventional mortgage. Gaps in work may require additional paperwork or written explanations.

Consistent paychecks and staying in the same field can help your application.

If you are self-employed, be ready to share tax returns and other proof of income. Recent graduates may use their education as proof if they have limited work experience. Job promotions or raises show reliability and improve your profile, too.

Lenders often call employers to confirm current details about your job.

Property appraisal

A property appraisal sets the home’s market value. This step confirms the loan-to-value (LTV) ratio, which impacts your private mortgage insurance (PMI) needs. If the appraised value falls short of the agreed price, it may delay or block your loan approval.

The lender hires an appraiser to inspect and assess the home. They check for repairs or problems that could affect its worth. Appraisals must meet strict accuracy standards set by lenders and investors such as Fannie Mae or Freddie Mac.

The cost, usually part of closing costs, helps prevent lenders from lending more than a property’s actual value. For jumbo loans or non-conforming loans, you might need a second appraisal, too.

Loan limits and regulations

Loan limits for conventional mortgages depend on where you live. For 2025, the Federal Housing Finance Agency (FHFA) set the maximum conforming loan limit at $806,500 for most U.S. areas. In high-cost regions like Alaska and Hawaii, this limit can reach $1,209,750.

These limits are adjusted each year.

If you need a larger loan that exceeds these amounts, it’s considered a jumbo loan. Jumbo loans don’t follow FHFA rules but often have stricter requirements. To qualify for a conforming loan, your credit and property must meet the standards set by Fannie Mae or Freddie Mac.

Always check with lenders about specific caps in your area before applying.

How to Apply for a Conventional Loan

Applying for a conventional loan can feel overwhelming without the proper steps. Learn how to prepare and move closer to owning your dream home.

Getting Preapproved

Getting preapproved helps show sellers you’re serious. Lenders review your credit score, income, and debts to decide how much they can lend you. Most lenders need a FICO score of at least 620 for this step.

You’ll need paperwork like ID, pay stubs, W-2s, tax returns, and bank statements. A preapproval letter is typically valid for 60 to 90 days. It speeds up the loan process once an offer is accepted, but doesn’t guarantee final approval.

Selecting the Right Lender

Choose a lender that fits your needs. Compare loan programs, interest rates, and fees. Credit unions often offer better rates than banks. For example, SCCU offers low fees and special programs, such as the Hero Mortgage Program, which provides a 0.25% discount for frontline workers.

Check customer ratings for lenders like Veterans United or NBKC. Both score highly on service and options. Consider minimum credit score requirements too; Figure accepts scores as low as 600, while Rate requires 680 or higher.

If you live in one of 14 states, including California or Texas, New American Funding might assist with down payment help!

Documents You’ll Need

Bring a government-issued ID, such as a driver’s license or passport. Lenders will also request recent bank statements, pay stubs, W-2s, and 2 years of tax returns. These documents help confirm your identity and income.

You may need to provide details about assets, debts, or financial obligations. If you’re self-employed, expect to share additional forms, such as profit-and-loss statements. For down payments from gifts, gift letters are required.

Getting everything ready early speeds up the mortgage process.

From Approval to Closing

After approval, you move toward finalizing your loan. This step involves signing the official loan documents. Closing costs usually range between 2% and 5% of your loan amount. These include lender fees, appraisal fees, title services, taxes, and insurance payments.

At closing, you pay your down payment and any remaining costs. Some lenders may offer no-closing-cost options for first-time buyers with limited savings. The entire process can take anywhere from 30 to 60 days, depending on the complexity of the transaction.

Once everything is complete, monthly mortgage payments begin as agreed in the terms of your home mortgage contract.

Tips for Getting Approved

Boost your chances of approval with better credit, substantial savings, and careful planning, learn simple ways to make lenders say yes!

Improve your credit score

Check your credit report for mistakes. Request free reports from AnnualCreditReport.com to spot errors quickly. Fixing inaccuracies can raise your score fast.

Lower credit card balances to keep usage below 30%. Pay more than the monthly minimum when possible. Keep old credit cards open, even if unused, as they contribute to a longer history.

Stay consistent with on-time payments to build trust with lenders. Maintain a debt-to-income (DTI) ratio under 45% to show financial stability.

Reduce existing debt

Pay off credit cards and other revolving debt first. High-interest balances increase your debt-to-income (DTI) ratio, hurting your chances of mortgage approval. Aim to lower your DTI below 43%, as many lenders prefer this level for conventional loans.

Focus on fixed debts, such as personal or car loans, next. Reducing these payments shows you manage money well and boosts your credit score. Use a debt payment plan or allocate extra income toward principal payments to speed up progress.

Save for a higher down payment

A larger down payment can save you money in the long run. Putting at least 20% down eliminates private mortgage insurance (PMI), lowering your loan costs. Even a slightly higher amount, like 10%, reduces interest rates, saving you thousands over time.

First-time buyers may qualify for as low as 3% down, but aiming higher shows sellers you’re serious. A strong credit score, combined with a larger down payment, also helps secure better loan terms.

This increases lender trust and boosts your chances of approval.

Advantages of Conventional Home Loans

Conventional loans offer lots of perks that can save you money over time. They also give you more control and choices based on your needs.

More Flexible Property Choices

You have more options with these loans. They work for primary homes, second houses, and investment properties. Unlike FHA or VA loans, they don’t limit the type of property you can buy.

Condos, duplexes, and even manufactured homes could qualify, depending on your lender’s approval. There are no rural or income limits, as with USDA loans. You can pick a home almost anywhere that fits your lifestyle or goals!

Potentially Lower Overall Costs

Conventional loans often have lower costs compared to government-backed loans. You don’t pay an upfront mortgage insurance premium, unlike an FHA loan, which charges 1.75% of the loan amount.

If you reach 20% home equity, private mortgage insurance (PMI) cancels automatically, which can save thousands over time.

Borrowers with strong credit may secure favorable interest rates and reduce total interest paid. There are no additional fees, such as VA funding fees or USDA guarantee fees. This makes conventional mortgages an affordable option for long-term buyers focusing on expense savings.

No Upfront Mortgage Insurance Premium

You don’t need to pay an upfront mortgage insurance premium with a conventional loan. This can save you thousands of dollars at closing compared to FHA loans, which require an upfront MIP of 1.75% of the loan amount.

No additional funding fees apply either, unlike VA or USDA loans. Without extra costs at the start, you’ll need less cash up front. It lowers your barrier to entry and simplifies the process for buyers who have limited savings.

Options to Cancel PMI

You can cancel Private Mortgage Insurance (PMI) after you reach 20% home equity. This happens when your loan-to-value ratio (LTV) drops to 80%. Write a request to your lender to cancel.

They may require an appraisal to confirm your home’s current value.

Lenders must automatically cancel PMI once your LTV reaches 78%, provided you’re up to date on payments. Canceling PMI saves you money by lowering monthly mortgage costs. This option isn’t available for government-backed loans like FHA mortgages, which often keep insurance for the life of the loan.

Competitive Interest Rates for Creditworthy Borrowers

Lenders reward strong credit scores with lower interest rates. If your FICO score is 740 or higher, you could secure some of the best rates available. For example, as of November 21, 2025, a $405,000 loan at a fixed rate for 30 years can offer an interest rate as low as 5.990% (6.146% APR).

A similar loan with a 15-year fixed term might have an even better rate at 5.490% (5.723% APR).

Choosing conventional loans often means more affordable borrowing compared to non-conforming options like jumbo loans. Lower annual percentage rates reduce the total cost over time by lowering overall interest payments.

Some credit unions and programs, such as SCCU’s Hero Mortgage Program for frontline workers, may offer additional discounts, like 0.25%, helping you save even more on your mortgage loan over time!

Frequently Asked Questions (FAQs)

You might still have questions about conventional mortgage loans, like credit scores or refinancing options. This section answers common concerns, making it easier for you to understand your choices.

What Credit Score Is Required?

Most lenders need a credit score of at least 620 for a conventional loan. Some, like Rocket Mortgage, may accept scores as low as 580. If your score is higher, such as 680 or above, you’ll likely get better rates from places like Rate.

Different lenders set their own rules. For example, the Figure requires a minimum score of 600, whereas Better requires a minimum score of 640. Fannie Mae and Freddie Mac won’t need specific scores after November 16, 2025.

Still, individual lenders can set stricter standards based on other factors as well.

Can I Get a Loan with a Low Down Payment?

Yes, you can get a loan with a low down payment. Some conventional mortgages allow as little as 3% down, especially for first-time homebuyers. Private Mortgage Insurance (PMI) is required if your down payment is less than 20%.

This extra cost protects the lender but adds to your monthly expenses.

A credit score of at least 620 is typically needed for approval. Lenders also review your Debt-to-Income (DTI) ratio and prefer it to stay under 45%. Programs may offer assistance to help cover the upfront costs.

A smaller down payment keeps more cash in hand, but larger payments reduce monthly bills and remove PMI faster!

Are Conventional Loans Assumable?

Conventional loans are usually not assumable unless the lender approves the assumption. This means the buyer cannot automatically take over your loan. Lender policies and specific loan agreements often decide if they allow this.

Government-backed loans, such as FHA or VA loans, are more likely to be assumable than conventional mortgages. If you want to transfer a traditional loan, check with your lender first.

Always review the terms of your mortgage agreement to clarify this option.

Can I Refinance a Conventional Loan?

You can refinance a conventional loan to change your mortgage terms or get a better interest rate. This process could help lower monthly payments or shorten the loan term. To qualify, you need strong credit and a good debt-to-income ratio.

If your equity is less than 20%, you may need private mortgage insurance (PMI).

An appraisal will confirm your home’s current value during refinancing. Fixed-rate and adjustable-rate mortgages are available for this option. Review market conditions and your finances before deciding if it suits you best.

The Bottom Line

Conventional home loans offer flexibility and excellent benefits. They give you options like fixed or adjustable rates, plus lower costs for many borrowers. With strong credit and a steady income, you can enjoy competitive rates and fewer restrictions.

Choosing the right loan helps make your dream home a reality. Take time to weigh your needs, compare lenders, and plan wisely!

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