Conventional Mortgage

Conventional loans make up 80% of the mortgage market. They are popular among first-time home buyers (FTHB) in the U.S. The requirements for conventional loans tend to be stricter, but they aren’t uniform because guidelines for conventional loans can vary. Sellers like to work with buyers who use conventional loans because they tend to require less paperwork and close more quickly.

Conventional Loans are Conforming Loans

Conventional loans are private loans that are not insured or guaranteed by the federal government (unlike FHA loans). They are known as “conforming” loans. This means that they “conform” to the requirements needed to be sold to Fannie Mae or Freddie Mac (government-sponsored enterprises that purchase mortgages from lenders to sell to investors).  There are non-conforming conventional loans with differing guidelines, for example, jumbo loans. These are conventional, non-conforming loans because they exceed conforming loan limits  

There are different requirements and guidelines for conventional loans depending on the lender and the loan program. Typically, you’ll need a credit score of at least 620, your debt-to-income ratio (DTI) is ideally no greater than 50%, and your loan size cannot exceed $647,200 (2022 limit). Some areas of the U.S. with higher costs have higher limits.  

Let’s look at some of the requirements for a conventional mortgage.

Down payment:

You can get a conventional loan even if you don’t make a down payment of 20% of the purchase price, but you will have to pay private mortgage insurance (PMI). The minimum down payment is 3%. Other factors may impact the percent you must put down. 

Property Type: A multi-unit property may require 15% down; a second home may require 10% 

First-time home buyer status: If you’re not a FTHB you may have to put down 5% 

Income: If your income is not more than 80% of the median income in your area, you may have to put down 5% 

Type of loan rate: An adjustable-rate mortgage, one where the rate varies during the term of the loan, will require 5% down.  

Issuing Payment by Check

Private Mortgage Insurance and Conventional Loans

PMI is required on conventional loans when buyers do not make a down payment of 20% or more. Lenders are taking a risk when they loan money to borrowers who have made a smaller down payment. PMI is an insurance payment to “cover” that risk. It’s usually tacked onto your monthly mortgage bill. The funds go to the lender and not toward your loan principal or interest. Your PMI amount will depend on your loan type, credit sore and the size of your down payment. If you can afford 15% down, you will likely pay less than someone who makes a minimum down payment of 3%. 

You don’t have to pay PMI for the entire loan term. Once you’ve reached 20% equity in your home (meaning you’ve paid 20% of the loan principal), you can get rid of your PMI by requesting to have it removed. Lenders are required to automatically drop PMI when you reach 22% equity. Another way to reach 20% equity is an increase in value of you’re the property. If your home value has increased due to home improvements or the market, you can request to have it appraised to re-evaluate the PMI requirement.  

Qualifying for a conventional mortgage can make the home buying process easier, but it’s not the only option. Our loan comparison chart shows how conforming conventional loans differ from other government-backed loans and nonconforming jumbo loans.