Conforming Loans Versus Conventional Loans

They differ in significant ways. A conforming loan must meet the strict criteria set by Fannie Mae and Freddie Mac; a conventional loan doesn’t have such restrictions, using Fannie and Freddie criteria as a guide. However, most are “conforming conventional” loans that meet these requirements. The differences between conforming and conventional loans include:

• • Loan limits. In 2024, a conforming loan can’t exceed $766,550 in most U.S. housing markets. In some high-cost areas, including San Francisco, the limit is $1,149,825. The amount of a conventional loan, however, can go higher than these conforming limits, no matter the location.
  • DTI. With a conforming loan, a borrower’s debt-to-income (DTI) ratio usually must be 36% or lower. With a conventional loan, that percentage can go higher; up to a 43% (sometimes higher) DTI for loan approval is common.
  • Credit score. With a conforming loan, a borrower must have a credit score of at least 620. The same is often true for a conventional loan, but there could be cases in which a borrower with a lower score might qualify.
  • Down payment. With a conforming loan, the lowest down payment amount is 3% of the home’s price, or 5% home equity in the case of refinancing. Conventional loans don’t have this requirement. However, in both cases, the home buyer will likely need to put down more than 3%. Nationally, the average down payment on a house is 14.4%. With both conforming and conventional loans, a down payment of 20% eliminates the need for private mortgage insurance.

Who can benefit from a conventional loan program?

As conventional loans are versatile, offering a variety of terms, they can benefit a range of people. Options include:

• • 30-year fixed rate. Planners who take the long view, such as paying off their home to coincide with their retirement, often choose 30-year fixed-rate mortgages. This popular loan can also suit people looking for the most affordable monthly payments, which are usually lower than payments for other loan types. And for people who want peace of mind – the interest rate and monthly payment amount never change with a 30-year fixed-rate mortgage.
  • 15-year fixed rate. Savers gravitate toward 15-year fixed-rate mortgages, which offer a form of forced savings. With this conventional loan option, monthly payments are higher compared to a 30-year fixed-rate mortgage. That extra money goes into home equity each month. Instead of putting your money in, for example, the stock market or a money market account, you’re investing in your home. That investment will almost certainly appreciate in the long run.
  • 5-year adjustable rate. Up-and-comers and professionals with job mobility often choose adjustable-rate mortgages. If you don’t plan on being in the home for up to 10 years, low initial down payments make this option attractive. Market-watchers who expect interest rates to drop (with refinancing in mind) may choose adjustable-rate mortgages. Real estate investors also like both 5-year and 7-year adjustable-rate mortgages, each available with conventional mortgage loans.

What are the requirements for a conventional mortgage?

Exceptions aside, most borrowers will need to have a FICO score of 620 or higher. The mortgage professional will probably do a thorough income-verification check that includes tax information to ensure you can afford the loan. The borrower may need to have up to 20% or more of the home’s purchase price for a down payment.

In some cases, a mortgage professional may wish to see cash or similar liquid assets that can cover the first year of mortgage payments. Issues such as foreclosures and past short sales will likely impact qualification.

The Pros and Cons of Conventional Mortgages

Some of the benefits include:

• • Higher loan limits. If a borrower can prove creditworthiness, they may be able to finance up to $2 million with a conventional mortgage.
  • Mortgage insurance. With most FHA loans, the borrower has to pay a mortgage insurance premium (MIP) at closing and annual insurance premiums over the life of the loan. With a conventional mortgage, however, insurance payments stop when you reach 20% home equity.
  • Flexibility. You can use a conventional loan to finance an owner-occupied home, a second home, or an investment property, ranging from single-family residences to multi-unit properties and more.

Some potential drawbacks to consider include:

• • Credit score requirement. With a government-backed mortgage, such as a VA loan, a borrower might get approved with a FICO score as low as 580. That’s higher with a conventional loan.
  • Interest rates. Conventional loans can come with attractive interest rates, especially for borrowers with good credit scores. But less-risky government-backed loans often have lower rates compared to conventional mortgages.