What Is a Conventional Loan?

With all the specialized loan programs out there—FHA, VA, etc.—it’s easy for the standard, conventional loan to get lost in the shuffle. After sifting through all these programs, you may find yourself stepping back and asking, “Wait, just what is a conventional loan?”

The word “conventional” simply means the loan is not part of a specific government program like FHA and VA loans are. Instead, they’re offered by mortgage companies, banks, and credit unions. Conventional loans that follow specific guidelines set by Fannie Mae and Freddie Mac—two federally backed companies that buy and guarantee mortgages—are known as conforming loans.

Conventional mortgages that don’t meet Freddie and Fannie’s guidelines are called non-conforming loans. An example of a non-conforming loan would be a jumbo loan, as it exceeds the conforming loan limits.

Now, let’s get into the details of what a conventional loan is.

Down Payment

Down payments on conventional loans can be as low as 3% if you’re a first-time homebuyer. This is a huge perk compared to other mortgages that require 10% to 20% down. The down payment requirement for a conventional loan tends to vary based on your financial situation and whether this is your first home.

If you’re not a first-time homebuyer, or if you make less than 80% of your area’s median income, your down payment requirement will likely be 5%. If you’re buying a second home, this rate might be 10%. Those who opt for an adjustable-rate mortgage (ARM) over a fixed rate will also typically find that their rate is 5%.

Those hoping to secure a jumbo loan can do that through a conventional mortgage, though the down payment requirement might be 20% or higher.

Private Mortgage Insurance (PMI)

Here’s the thing with putting less than 20% down on a home with a conventional loan: You’ll likely have to pay private mortgage insurance as part of your mortgage payment. It’s the lender’s way of protecting itself in case of default since there isn’t a lot of skin in the game with a low down payment.

PMI can be rolled into your monthly mortgage payment, or it can be paid as an upfront fee. Depending on your credit score and down payment size, you’ll usually pay between $40 and $80 per month for every $100,000 you borrowed. The good news about PMI is that it automatically falls off once you’ve accumulated a 22% equity stake in your home. This is a direct benefit of conventional loans, since PMI on FHA loans remains for the life of the loan.

Loan Size

For a conforming loan, you need to stay within the loan limits set by Freddie and Fannie. Though this number changes every year, it is $647,200 in 2022. If your loan falls outside this range, it is considered non-conforming and would qualify as a jumbo loan.