Conventional Mortgage Loans: A Comprehensive Guide for Homebuyers
When buying a house, most Americans will choose some kind of conventional mortgage loan. But there are many types of conventional mortgage loans, each offering flexibility for different financial situations.
Unlike government-backed loans — like FHA, VA, or USDA — conventional mortgages are not insured or guaranteed by the federal government. Instead, they are available through private lenders including banks, credit unions, and mortgage companies.
For many home buyers, this difference can work to their advantage, but it depends on their needs.
What is a conventional mortgage loan?
A conventional mortgage loan is any home loan not backed by a government agency.
Private lenders offer these loans and typically follow the guidelines set by the Federal National Mortgage Association (commonly known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (also known as Freddie Mac). These two government-sponsored enterprises help ensure a steady flow of mortgage funds.
Conventional loans offer flexible terms, competitive rates, and different loan types to suit varying borrower needs.
Types of conventional mortgage loans
Borrowers can choose from several conventional mortgage loan types, each with advantages depending on their financial situation and homeownership goals.
Conforming loans
Conforming loans are any conventional mortgages that meet the lending limits and guidelines set by Fannie Mae and Freddie Mac.
The 2024 conforming loan limit is $766,550 for a single-family home in most areas, though it may be higher in high-cost regions. If your loan amount falls within these limits and meets other requirements, it’s a conforming loan.
Benefits
- Typically lower interest rates compared to nonconforming loans
- Easier to qualify if you meet Fannie Mae and Freddie Mac’s standards
- Available with down payments as low as 3% for qualifying buyers
Best for: Borrowers with good credit who want to secure a loan within conforming loan limits
Fixed-rate conventional loans
A fixed-rate mortgage provides a stable interest rate throughout the life of the loan, making it one of the most predictable types of conventional loans.
Borrowers can choose from a range of terms — typically 15, 20, or 30 years — with consistent monthly payments over the loan’s duration.
Benefits
- Predictable monthly payments
- Protection against interest rate increases over time
Best for: Borrowers seeking long-term stability and who plan to stay in their homes for an extended period
Adjustable-rate conventional loans (ARMs)
An adjustable-rate mortgage (ARM) begins with a fixed interest rate for several years —usually 5, 7, or 10. After that, the interest rate can change periodically based on market conditions.
ARMs usually offer lower interest rates during the fixed period than fixed-rate loans.
Benefits
- Lower interest rates for the introductory period
- Potential for lower monthly payments early in the loan term
Best for: Buyers who plan to sell or refinance their homes before the adjustable period begins or who are comfortable with the possibility of fluctuating payments
Low down payment conventional loans
The required down payment for conventional loans can be as little as 3-5% for eligible borrowers. These loans are helpful for first-time homebuyers or those with moderate income, providing an accessible path to homeownership without requiring a large upfront payment.
Programs like Fannie Mae’s HomeReady® and Freddie Mac’s Home Possible® offer low down payment options; some even allow borrowers to receive down payment assistance.
Benefits
- Lower upfront costs
- Can make homeownership possible for borrowers with limited savings
Best for: First-time buyers or those hoping for a smaller down payment to qualify for a loan
Conventional loan refinance
Refinancing a conventional mortgage is an option for homeowners looking to lower their interest rate, shorten their loan term, or access home equity.
A conventional refinance replaces your existing mortgage with a new one, adjusting the terms to better suit your financial goals.
Benefits
- Reduce monthly payments or shorten your loan term
- Access cash through a cash-out refinance
Best for: Homeowners who want to improve their loan terms or tap into equity for other financial needs
Pros and cons of conventional mortgage loans
Pros
- Flexibility: Conventional loans offer various terms and loan structures.
- Lower costs: Unlike FHA or VA loans, there are no upfront mortgage insurance premiums.
- Competitive rates: Especially favorable for borrowers with good credit.
Cons
- Private mortgage insurance (PMI): Required if your down payment is less than 20%, increasing your monthly mortgage payment.
How to choose the right conventional loan
When selecting a conventional loan, consider your financial situation, plans, and homeownership goals.
- Loan amount: A nonconforming loan may be necessary if you need a larger loan.
- Interest rate stability: A fixed-rate mortgage offers predictable payments, while an ARM may be better if you plan to move soon.
- Down payment: A down payment above 20% can help you avoid PMI, but low down payment options are also available.
- Future plans: When choosing between a fixed-rate or ARM loan, consider how long you plan to stay in your home.
Conventional loans offer versatility for a range of homebuyers
Not all types of conventional mortgage loans are alike, so there will likely be one that best suits your financial picture. The next step is to explore your options and decide which benefits matter most to you.
