What Is a Conventional Loan and How Does It Work?

A Conventional loan is any mortgage offered by a private lender, without backing from an agency of the federal government. Depending on your credit and financial situation, you can use a conventional loan to purchase a variety of home types, such as a primary residence, vacation home, or a rental/investment property.

What Is a Conventional Loan?

A conventional loan allows you to borrow money to buy or refinance a home. Conventional loans can have varying loan terms, including your interest rate and how long you have to repay the loan. The main difference between conventional loans and other loan types is they aren't government-backed and typically carry stricter credit requirements, but fewer guidelines to be eligible.

Types of Conventional Loans

There are two types of conventional loans you should know about during your homebuying journey:

• Conforming loans: These are loans that conform to the guidelines set by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, and don't exceed Federal Housing Finance Agency (FHFA) loan limits.
• Non-conforming loans: These are loans that don't meet the guidelines set by Fannie Mae and Freddie Mac and may exceed FHFA loan limits, such as with a jumbo loan.

How Does a Conventional Loan Work?

Conventional loans are the most widely used mortgages in the U.S. and provide the operating standard for mortgages in our country. Like other loan types, conventional loans have specific requirements for eligibility, though they are almost always less than other mortgages. Generally speaking, the process goes like this:

• You submit a loan application to a lender like Freedom Mortgage for the amount needed for your home purchase.
• The lender reviews the application, confirms if you qualify for the loan, and approves or denies the loan.
• Once the loan is approved and the home is closed on, you will make monthly payments on the loan until it is paid off.

Conventional Loan Requirements: How to Qualify

To qualify for a loan, you'll need to meet some requirements, which can vary depending on your lender. At Freedom Mortgage, the requirements for a conventional loan are as follows:

• Financials: To get your loan approved, you must complete an application and meet income, credit, and debt-to-income ratio (DTI) requirements.
• Credit score: You can qualify for a conventional loan with a minimum credit score of 620. Higher credit scores can help you enjoy lower interest rates and more favorable loan terms.
• Down payments: Generally speaking, you must make a minimum 5% down payment to qualify for a conventional home loan. A down payment of 20% or more exempts you from having to pay private mortgage insurance (PMI).
• Conventional loan limits: In 2025, the maximum conventional conforming loan limit for a single-family home throughout most of the United States is $806,500.
• Closing costs: Conventional loans require customers to pay closing costs and fees that may include, but aren't limited to, appraisal fees, origination fees, title insurance and fees, homeowners insurance, mortgage discount points (if you choose points), and property taxes.

Conventional Loan Benefits and Considerations

When thinking about whether a conventional loan is right for you, take the following key benefits into account:

• If you don't have a 20% down payment, you can request PMI removal after you've built up 20% equity in your new home.
• You can use a conventional loan to buy or refinance a primary home, a vacation home, a rental property, and even an investment property.
• Conventional loans offer the potential for lower interest rates if you have strong financial qualifications and typically have less upfront costs than government-backed loans.
• Conventional loans can allow for higher loan limits than government-sponsored loan programs.

Keep in mind that conventional loans tend to have slightly higher minimum down payment and credit score requirements than other loan options, such as an FHA loan. But for those with a strong credit score, steady income, and enough saved for a down payment, the potential financial advantages of a conventional loan make it the most popular choice for American homeowners.

Conventional Loan Terms

Another aspect of mortgages, including conventional, is loan terms. Customers will commonly have the choice between a short-term loan (such as 15 years) or a long-term loan (such as 30 years). Shorter-term loans have higher monthly payments and lower interest rates, allowing you to pay much less over the life of the loan.

Conventional Loans vs. Other Home Loans

A conventional loan isn't the only option available when it comes to financing a home. There are also VA loans, FHA loans, and USDA loans, each with pros and cons. Compared to government-backed loans, here's where conventional loans stand out:

• Usually require larger minimum down payments than government-backed loans
• Often require higher credit scores
• Allow you to request PMI removal once you hit 20% home equity
• Aren't government-backed but offered by private lenders
• Have more affordable and favorable loan terms for well-qualified applicants
• Are available to help you purchase a variety of property types
• Can help buyers save a lot of money if they contribute a large down payment and have a healthy credit score to secure a low interest rate

Every loan product has its advantages and disadvantages, so it's recommended to consider what's most important to you. And remember, you don't have to do it alone. Our loan advisors are just a call or click away to help you navigate your options.

Conventional Loan FAQs

Have more questions about a conventional loan? We're here to support you with answers to frequently asked questions:

Is It Better to Have a Conventional Loan or an FHA Loan?

Whether it's better to have a conventional loan or an FHA loan will depend on your wants and needs. For example, conventional loans can offer savings to those with strong credit and funds for a large down payment. FHA loans can be ideal for first-time homebuyers with weaker credit and less money to put down.

Do All Conventional Loans Require 20% Down?

No, most conventional loans don't require a down payment of 20%. Some lenders accept down payments as low as 3%. That said, down payments of less than 20% of the purchase price require you to pay private mortgage insurance (PMI).

What Is the Maximum Conventional Loan Limit for 2025?

Conventional loans with limits on the amount of money you can borrow are often called "conforming" loans. In 2025, the maximum conventional conforming loan limit for a single-family home in most areas is $806,500. Certain high-cost areas (such as Hawaii and Alaska) may have higher limits.

How Often Do Conventional Loan Limits Change?

Conventional loan limits are generally reviewed every year and can change based on the average price of homes in the U.S. The FHFA sets these conventional loan limits for each calendar year and usually announces changes a month or two before they take effect

A Summary on How to Get a Conventional Loan

Whether you're looking to move into a new primary residence, buy a vacation home, or start developing your real estate investment property portfolio, conventional loans can be a great financial solution. If you're ready to take the next step with a conventional loan, get prequalified today.