What is a Conventional Home Loan?

Unlike USDA loans, FHA loans, or VA loans, a conventional loan is not backed by a government agency, so a private mortgage lender is assuming the risk. Buyers can use a conventional mortgage for a primary residence, vacation home, or even income property, and offer more flexibility, depending on the lender. This is the most common type of loan with nearly three-quarters of buyers using them for new home sales in 2018.


Requirements for Conventional Loans

While the lender can set the requirements, to an extent, there are some fairly universal requirements to be eligible for this type of mortgage.

Down Payment

While most lenders allow a down payment as low as 5 percent, anything below 20 percent requires private mortgage insurance (PMI). PMI is an insurance that protects the lender if you default on your loan and adds an additional cost to your monthly payment.

Credit Scores

Conventional home loans often require a higher credit score than government-backed mortgages. Typically, a credit score of at least 620 is necessary to be approved.

Property Type

Any type of property, including single family homes, duplexes, condos, and vacation homes can be financed through a conventional mortgage. It can also be used as a primary or secondary residence, or even as income property.

Debt-to-Income Ratio

Like an FHA loan, lenders will look at the debt-to-gross income ratio with a mortgage included. This means that your debt plus mortgage should not go over 43 percent of your income.

 Advantages of a Conventional Loan:

  • Borrow for primary, secondary, vacation or investment properties
  • Designed for borrowers with strong credit and down payment
  • No requirements for upfront mortgage insurance premiums or funding fees
  • Private Mortgage Insurance (PMI) cancels when the loan-to-value ratio is less than 80%.
  • Flexible terms, including fixed-rate, adjustable-rate, and more options for the length of the loan
  • Refinance up to 125% loan-to-value ratio on declining valued property through Home Affordable Refinance Program (HARP)