What Is a Conventional Loan?
If you’re shopping for a home, you’ve probably heard the term conventional loan more times than you can count. But what does it actually mean, and is it the right mortgage for you?
This guide breaks down everything you need to know, including how conventional loans work, what you’ll need to qualify, how they compare to FHA and VA loans, and how to decide if one makes sense for your situation.
What Is a Conventional Loan?
A conventional loan is a mortgage that isn’t backed or insured by a federal government agency. Unlike FHA loans (backed by the Federal Housing Administration), VA loans (guaranteed by the Department of Veterans Affairs), or USDA loans, conventional loans are offered directly by private lenders — banks, credit unions, and mortgage companies like First Heritage Mortgage.
That said, most conventional loans aren’t entirely without government involvement. The majority are what’s called conforming loans, meaning they meet the guidelines set by Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation) — two government-sponsored enterprises that buy and guarantee mortgages in the secondary market.
When a loan meets Fannie Mae and Freddie Mac’s standards, lenders can sell it on the secondary market, which frees up capital to keep making new loans. That’s good for borrowers: it generally means lower interest rates and more flexible terms.
Conforming vs. Non-Conforming Conventional Loans
Not all conventional loans are created equal. The two main types are:
Conforming loans
These meet the standards set by Fannie Mae and Freddie Mac, including loan size limits set annually by the Federal Housing Finance Agency (FHFA). Conforming loan limits are updated every year. In 2026, the baseline conforming loan limit for a single-unit home in most parts of the country is $832,750. In designated high-cost areas (like parts of Northern Virginia and the D.C. metro), the limit rises to $1,249,125.
Conforming loans typically come with the most competitive rates and the broadest range of repayment terms.
Non-conforming loans (jumbo loans)
If you need to borrow more than the conforming loan limit, you’re looking at a jumbo loan. These are still conventional (not government-backed), but they carry stricter requirements — typically a higher credit score, a larger down payment, and more cash reserves — because lenders can’t sell them to Fannie Mae or Freddie Mac.
Conventional Loan Requirements
Qualifying for a conventional loan depends on several factors. Here’s a snapshot of what lenders typically look for:
| Requirement | Minimum | Ideal |
|---|---|---|
| Credit score | 620 | 740+ |
| Down payment | 3% (first-time) / 5% | 20% (avoids PMI) |
| Debt-to-income ratio | Up to 49% | 36% or below |
| Loan limit (2026) | Up to $832,750 | Varies by county |
| Employment history | 2 years same field | Stable, documented |
Minimum
620
Ideal
740+
Minimum
3% (first-time) / 5%
Ideal
20% (avoids PMI)
Minimum
Up to 49%
Ideal
36% or below
Minimum
Up to $832,750
Ideal
Varies by county
Minimum
2 years same field
Ideal
Stable, documented
Credit score
Most lenders require a minimum credit score of 620 to qualify for a conventional loan. But your score does more than just determine whether you qualify — it directly affects your interest rate and, in some cases, your down payment requirement. Borrowers with scores of 740 or higher tend to get the best rates and the most flexibility.
Down payment
One of the most common misconceptions about conventional loans is that you need 20% down. You don’t. Here’s how it actually works:
- 3% down for first-time homebuyers through programs like Fannie Mae’s HomeReady or Freddie Mac’s Home Possible
- 5% down is the standard minimum for most repeat buyers
- 20% down lets you avoid private mortgage insurance (PMI) entirely
If you put down less than 20%, you’ll pay PMI — but it’s not permanent. Once you reach 20% equity in your home, you can request that it be removed. (More on that below.)
Debt-to-income ratio (DTI)
Your debt-to-income ratio compares your total monthly debt payments to your gross monthly income. Lenders use this to gauge how much of a mortgage payment you can reasonably carry. For conventional loans, most lenders prefer a DTI at or below 36%, though Fannie Mae and Freddie Mac guidelines allow up to 49% in some cases.
To calculate yours: add up all your monthly debt payments (car loan, student loans, credit cards, etc.), divide by your gross monthly income, and multiply by 100. If your total monthly debts are $2,000 and you earn $6,000/month, your DTI is 33% — solid.
Employment and income
Lenders want to see at least two years of stable, consistent employment history — either with the same employer or within the same field. For self-employed borrowers, lenders typically look at two years of tax returns to verify income.
What is Private Mortgage Insurance (PMI)?
If your down payment is less than 20%, your lender will require private mortgage insurance. PMI protects the lender — not you — in the event you stop making payments. It’s typically added to your monthly mortgage payment.
PMI costs vary based on your credit score, loan-to-value (LTV) ratio, and loan type, but you can generally expect to pay between 0.5% and 1.5% of the loan amount annually. On a $400,000 loan, that’s roughly $2,000–$6,000 per year.
The good news: PMI is temporary on conventional loans. You can request removal once you reach 20% equity, and lenders are required to automatically cancel it when you reach 22% equity — something that doesn’t apply to FHA loans, where mortgage insurance can last the life of the loan.
Conventional Loan vs. FHA vs. VA: How Do They Compare?
Choosing between a conventional, FHA, or VA loan depends heavily on your credit profile, how much you can put down, and whether you’ve served in the military. Here’s a side-by-side look:
| Feature | Conventional | FHA | VA |
|---|---|---|---|
| Min. credit score | 620 | 500–580 | No minimum (lender varies) |
| Min. down payment | 3% (first-time) / 5% | 3.5% | 0% |
| Mortgage insurance | PMI (removable) | MIP (often permanent) | Funding fee only |
| 2026 loan limit | $832,750 (standard) | $524,225 (standard) | No cap for eligible |
| Best for | Strong credit, 20% down | Lower credit scores | Eligible veterans |
Conventional
620
FHA
500–580
VA
No minimum (lender varies)
Conventional
3% (first-time) / 5%
FHA
3.5%
VA
0%
Conventional
PMI (removable)
FHA
MIP (often permanent)
VA
Funding fee only
Conventional
$832,750 (standard)
FHA
$524,225 (standard)
VA
No cap for eligible
Conventional
Strong credit, 20% down
FHA
Lower credit scores
VA
Eligible veterans
In general, conventional loans are a great fit if you have a credit score above 680 and can make a meaningful down payment. FHA loans tend to be the better option for borrowers with lower credit scores or limited savings. VA loans are hard to beat if you’re eligible — they offer 0% down and no mortgage insurance.
2026 Conventional Loan Limits
Conforming loan limits vary by location, and if you’re buying in the D.C. metro area, you’ll likely have access to higher limits.
The Federal Home Financing Agency (FHFA) updates the conforming loan limits every year. Here’s where things stand in 2026:
- National Baseline: $832,750
- High-Cost areas: Up to $1,249,125
If your loan exceeds these limits, you’ll need a jumbo loan, which comes with different underwriting standards. Not sure which category you fall into? A First Heritage Mortgage loan officer can walk you through the specifics for your county.
Frequently Asked Questions (FAQ) About Conventional Loans
Yes. If you’re a first-time homebuyer, programs like HomeReady (Fannie Mae) and Home Possible (Freddie Mac) allow down payments as low as 3%. You’ll typically need a credit score of at least 620, and you should expect to pay PMI until you reach 20% equity.
Most lenders prefer a DTI of 43% or below, though Fannie Mae and Freddie Mac guidelines permit ratios as high as 49% for qualified borrowers with strong compensating factors (like a high credit score or significant cash reserves).
The timeline varies, but most conventional loans close in 30–45 days from application. Working with a lender who offers a pre-approval upfront can speed things up considerably, especially in competitive markets.
Yes, but the requirements are stricter. Investment properties typically require at least 15–20% down and a stronger credit profile. Interest rates on investment property loans are also generally higher than on primary residences.
A conventional loan tends to be the best fit if you have a credit score above 620, can make a down payment of at least 5%, and have a stable income history. If your down payment is 20% or more, you’ll skip PMI entirely and likely get a very competitive rate.
That said, the right loan depends on your full financial picture. The best way to know for sure is to talk with a mortgage professional who can look at your specific situation.
Are you ready to explore your options? Whether you’re buying your first home or your fifth, the team at First Heritage Mortgage is here to help you find the loan that makes sense for your life — not just your credit score.
Get started with one of our expert loan officers today.
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The included content is intended for informational purposes only and should not be relied upon as professional advice. Additional terms and conditions apply. Not all applicants will qualify. Consult with a finance professional for tax advice or a mortgage professional to address your mortgage questions or concerns. This is an advertisement. Originally prepared 05/29/2020. Updated on 06/15/2026.
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