What is a Conventional Loan?

A conventional loan—also called a conventional mortgage—is one that’s not guaranteed in part or fully by the government. 

Conventional Loan vs. FHA Loan

Now that you know what a conventional loan is, you might be wondering about FHA loans. An FHA loan is backed by the government. 

Types of Conventional Loans

Conforming mortgage loans. These are loans that meet the standards of Freddie Mac or Fannie May. Jumbo mortgage loans. These are mortgages that exceed conforming loan limits. Subprime conventional loans. These mortgages may be available for those who don’t quite meet credit and financial requirements for a conforming mortgage loan.  

Advantages of Conventional Loans

If you have good credit, conventional loans may offer you the best deal depending on what current interest rates are. This is especially true if you can afford to put 20% down—then you can avoid paying for private mortgage insurance in many cases. 

Conventional loans generally come with a higher bar for approval. That’s because they’re not guaranteed, and the lender is taking on all of the risk. 

Disadvantages of Conventional Loans

Requirements for conventional loans vary by lender, but you typically need to demonstrate credit-worthiness and the ability to make your payment every month.

Conventional Loan Requirements

– Your credit score. In many cases, the bottom cut-off for conventional loan approvals is a credit score of 620. – Your credit history. Mortgage lenders may look more in-depth at your credit than other lenders, and you may be asked to clear up old accounts or negative items before final approval. – Your income and debt. The lender wants to ensure that you’re able to pay the required monthly amount. They’ll look at how much you make, as well as how much debt you already have—the ratio of your debt to your income. The value of the home. Typically, banks won’t approve a loan that’s for more than the value of the home in question.  

Here are some things that conventional mortgage loan lenders might look at: 

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