Conventional Loan

A conventional loan is a mortgage loan that lacks backing from a government agency. Unlike FHA, VA, and USDA loans, conventional loans are available in various forms and sizes, and despite not offering some of the benefits associated with government-backed loans, they remain the most prevalent type of mortgage loan.

Conventional loans typically offer lower interest rates than government-backed loans, more financing options thanks to their wide range of terms and conditions, and fewer restrictions overall, which can make them a better option for borrowers with less-than-perfect credit.

Borrowers generally need a minimum credit score of 620 to qualify with a 20% down payment, or a score of 580 to 619 with a 15% or higher down payment. They must also have sufficient income to afford the monthly payments, enough assets to cover the down payment and closing costs, and a debt-to-income ratio of no more than 50%.

To get a conventional loan, borrowers apply through a lender, who reviews their financial information to determine eligibility. If the borrower qualifies, the lender issues a loan commitment.

A conventional mortgage requires borrowers to meet eligibility standards such as a good credit score, stable employment, and a low debt-to-income ratio, then make a down payment — at least 20% helps avoid private mortgage insurance (PMI). Borrowers can shop among banks, credit unions, and mortgage companies for favorable terms, choosing from options such as 15-year and 30-year fixed-rate terms with consistent monthly payments. If the down payment is below 20%, PMI is typically required until the borrower reaches 20% equity, and lenders require a property appraisal to confirm the home's value before closing. From there, the borrower repays the loan through regular monthly principal-and-interest payments.

The main downsides of a conventional loan include stricter qualification requirements than government-backed programs, such as higher credit scores, lower debt-to-income ratios, and more extensive documentation, along with a typically larger down payment, though it is possible to qualify with as little as 3% down. If the down payment is under 20%, private mortgage insurance adds to the monthly cost, and a low appraisal can affect approval or require renegotiation. Borrowers with lower credit scores may also be offered higher interest rates, increasing costs over the life of the loan.

Lenders typically look for a credit score of 620 or higher, along with stable income and employment history. They'll also assess your debt-to-income ratio, generally expecting 43% or lower, though some lenders accept higher ratios with compensating factors. While lower down payment options exist, a down payment of at least 20% improves your chances of approval and helps avoid private mortgage insurance. The property itself must pass an appraisal, and you'll need to provide documentation such as pay stubs, bank statements, and tax returns to verify your income, assets, and financial history.