What Is a Conventional Loan?
A conventional mortgage loan is a home loan not backed by the government (like FHA or VA loans), but rather by private lenders, often conforming to guidelines set by Fannie Mae or Freddie Mac
Lower interest rates for borrowers with good to excellent credit.
Flexible mortgage insurance options, with mortgage insurance often unnecessary for down payments of 20% or more.
Fewer penalties and fees, offering more favorable terms for qualified borrowers.
Flexible loan terms and occupancy to suit your financial goals. (Primary Residence, Second Home, Investment Property)
Down payments ranging from 3% to 20%, providing options for various budgets.
Conventional loans are a great choice if you’re seeking competitive rates and customizable loan options tailored to your needs.
Conventional Loans vs. FHA Loans: Key Highlights
FHA Loan
An FHA loan is insured by the Federal Housing Administration, making it easier for borrowers with less-than-perfect credit or smaller savings to qualify for a mortgage.
Key Features
Lower Down Payment: Requires as little as 3.5% down for borrowers with credit scores of 580 or higher. Borrowers with scores between 500–579 may qualify but must make a 10% down payment.
Flexible Credit Requirements: Designed for borrowers with lower credit scores, making it accessible for those rebuilding credit.
Higher Debt-to-Income (DTI) Ratios: FHA loans allow higher DTI ratios, ideal for borrowers with student loans or other debts.
Mandatory Mortgage Insurance: Borrowers must pay both upfront and annual mortgage insurance premiums (MIP), regardless of the down payment.
Who Should Consider an FHA Loan?
First-time homebuyers
Borrowers with lower credit scores
Buyers with limited savings for a down payment
Individuals needing more forgiving DTI requirements
Conventional Loan
A conventional loan is not government-backed and typically requires stronger financial credentials. These loans are often more cost-effective in the long run for well-qualified borrowers.
Key Features
Higher Credit Standards: Requires a minimum credit score of 620, with better rates and terms available to those with higher scores.
Down Payment Flexibility: Down payments start as low as 3% for certain programs, but larger down payments (e.g., 20%) can help avoid private mortgage insurance (PMI).
Lower Long-Term Costs: Without mandatory mortgage insurance for borrowers with larger down payments or strong credit, conventional loans often have lower lifetime costs.
Who Should Consider a Conventional Loan?
Buyers with strong credit scores and stable financial histories
Borrowers with significant savings for a larger down payment
Individuals purchasing higher-value homes exceeding FHA loan limits
Borrowers who are looking for 1-4 unit second homes or investment properties
Types of Conventional Loans
When exploring conventional mortgage options, it’s important to understand the distinctions between conforming loans, nonconforming loans, and non-qualified mortgages. Each type caters to different borrower needs and financial situations.
1. Conforming Loans
A conforming loan meets the guidelines set by the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac. These standards ensure that loans meet specific criteria, allowing them to be purchased by these government-sponsored entities (GSEs).
Key Features of Conforming Loans
Loan Limits: In 2025, the conforming loan limit for most locations is $806,500 for 1 unit properties to $1,209,750
Credit Requirements: A minimum credit score of 620 is typically required.
Standardization: Loans must follow FHFA guidelines on loan size, creditworthiness, and income verification.
Why Conforming Loans Matter
Conforming loans are eligible to be purchased by Fannie Mae or Freddie Mac, which then package them into mortgage-backed securities (MBS). This process facilitates liquidity in the mortgage market, enabling lenders to continue offering financing to borrowers.
2. Nonconforming Loans
A nonconforming loan is a type of conventional loan that does not meet FHFA criteria, making it ineligible for purchase by Fannie Mae or Freddie Mac.
Examples of Nonconforming Loans
Jumbo Loans: Mortgages that exceed the conforming loan limit. These loans often have stricter credit and income requirements due to the increased risk.
Unique Borrower Profiles: Loans for borrowers with unconventional financial situations, such as those with high debt-to-income ratios or limited credit histories.
Who Benefits from Nonconforming Loans?
Nonconforming loans cater to borrowers who need larger loan amounts or who have financial profiles that fall outside standard underwriting guidelines. However, these loans often come with higher interest rates and stricter qualification criteria.
3. Non-Qualified Mortgages (Non-QM Loans)
A non-qualified mortgage (non-QM loan) is a conventional loan that does not adhere to the Consumer Financial Protection Bureau's (CFPB) “ability to repay” guidelines. These loans are designed for borrowers with unique financial situations or income streams.
Key Characteristics of Non-QM Loans
Flexible Documentation: Borrowers may qualify using alternative income verification methods, such as bank statements or asset utilization.
Higher Risk: Since these loans fall outside traditional guidelines, they often carry higher interest rates.
Variety of Uses: Popular among self-employed individuals, real estate investors, or those with irregular income.
Examples of Non-QM Loans
Bank Statement Loans: For self-employed borrowers who can provide consistent bank deposit records instead of W-2s or tax returns.
Interest-Only Loans: Allow borrowers to pay only the interest for an initial period, reducing upfront payments.
Debt Service Coverage Ratio (DSCR) Loans: Used by real estate investors to qualify based on property cash flow rather than personal income.
Choosing the Right Conventional Loan
Understanding the distinctions between these types of conventional loans is essential in determining which option aligns with your financial situation and homeownership goals. Whether you're looking for a standard conforming loan, need a higher loan amount with a jumbo loan, or have a unique financial profile that requires a non-QM loan, consulting with a knowledgeable mortgage advisor can help you make an informed decision.
INPUT YOUR INFORMATION TO HAVE A NO OBLIGATION CONVERSATION WITH MARK SMITH
VISIT US ON FACEBOOK, LINKEDIN OR APPLY ONLINE
What Is a 40-Year Mortgage Term?
A 40-year mortgage is a type of non-QM loan that extends the repayment period from the standard 15- or 30-year term to 40 years. This longer term can significantly lower monthly mortgage payments, making homeownership more affordable, particularly in a high-interest rate environment.
