What Is a Conventional Loan?

Over the years, we’ve noticed that first-time homebuyers don’t always fully realize how many types of home loans are available to them. Every homebuyer has different needs with unique circumstances, so it’s important to consider different loan programs for a significant investment like a home. One of those loan types is the Conventional loan. You’ve likely heard the name, but here’s the breakdown to help you decide if this loan type is the right fit for you.    

What Is a Conventional Loan?  

A Conventional loan is one of the most common types of mortgage loans used by homebuyers (like you). But unlike government-backed loans such as FHA or VA loans, Conventional loans are not insured by the federal government.

Instead, they’re offered by private lenders like Atlantic Bay and typically come with stricter credit and income requirements. However, they offer flexibility and competitive interest rates for qualified borrowers, making them an extremely attractive option for so many. 

Types of Conventional Loans  

Conventional loans aren't one-size-fits-all. There are two main categories: Conforming and Non-Conforming loans. Each type has its own set of guidelines and understanding them can help you choose the right option for your situation. 

Conforming Conventional Loans 

Conforming loans are Conventional loans that adhere to the loan limits set by the Federal Housing Finance Agency (FHFAAn independent agency that regulates and oversees the Federal Home Loan Banks, Fannie Mae, and Freddie Mac.FHFAAn independent agency that regulates and oversees the Federal Home Loan Banks, Fannie Mae, and Freddie Mac.). These loans also meet the guidelines established by Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs) that purchase mortgages from lenders to free up the money needed to make other mortgage loans, 

Conforming loan limits vary by location and are updated yearly to reflect the latest housing market trends. Most areas of the U.S. share the same limit every year; however, in high-cost areas like California and parts of New York, this limit can increase significantly.  

Expert Tip

Staying within these limits helps buyers secure better loan terms and lower interest rates. Ask Atlantic Bay today about limits in your area.

Non-Conforming Conventional Loans 

Non-conforming loans, on the other hand, aren’t required to meet the guidelines set by Fannie Mae and Freddie Mac. These loans typically cater to borrowers with unique financial situations or those who need to borrow more than the Conforming loan limits allow. 

Jumbo loans are by far the most common type of Non-Conforming loan. If you're looking to finance a luxury home or a property in an expensive area where home prices exceed the Conforming loan limit, you’ll likely need a Jumbo loan. However, some higher-cost areas do offer “high balance” loans that still allow you the same flexible qualification requirements as standard Conventional loans. Ask your Mortgage Banker for more information. 

In short, FHFA guidelines outline how much each homebuyer can borrow. Conforming loans are those that conform to Fannie Mae’s and Freddie Mac’s guidelines and limits, while Non-Conforming loans, simply put, don’t. 

How Conventional Loans Work 

Conventional loans operate like other types of mortgages...mostly. When you apply for a Conventional loan, your Mortgage Banker will carefully evaluate your financial health to determine your eligibility and loan terms. They’ll pay special attention to your credit scorecredit score, debt-to-income ratio (DTI), and the size of your down payment. 

Once approved, you’ll typically choose between a fixed-rate mortgage or an adjustable-rate mortgage (ARM). A fixed-rate mortgage comes with a consistent interest rate for the life of the loan, making your monthly payments predictable – which is ideal if you plan to stay in your home for many years. 

On the other hand, an adjustable-rate mortgage (ARM) starts with a lower interest rate for a specific period—usually 5, 7, or 10 years—before adjusting annually based on market conditions. So ARMs can be a good option if you expect to sell or refinance your home before the rate starts to fluctuate. 

Conventional loans usually require a down payment, which can be as low as 3% of the home’s purchase price.  

Advantages of Conventional Loans 

As we mentioned up top, Conventional loans come with a variety of benefits that can make them an attractive option for homebuyers. But let’s dig in a little more as to what that means.  

No Private Mortgage Insurance (PMI) for Larger Down Payments 

One of the biggest advantages of a Conventional loan is the ability to avoid private mortgage insurance (PMI) if you make a down payment of 20% or more. PMI protects the lender in case you default on the loan, but it adds to your monthly payments. So long as you meet the down payment threshold, you can skip PMI entirely, which helps lower your overall housing costs. 

Expert Tip

However, once your home equity reaches 20%, you can request the cancellation of PMI, unlike with some government-backed loans where PMI lasts for the life of the loan.

Loan Term Flexibility 

Conventional loans are pretty flexible when it comes to choosing your loan term. You can opt for a shorter-term loan of 15 or 20 years, which can help you to pay off your mortgage faster and save on interest. Alternatively, you could choose a longer-term loan, like a 30-year mortgage, to have smaller monthly payments. This flexibility allows you to tailor your loan to your financial situation and long-term saving goals.

Potential Lower Interest Rates 

If you have strong credit or made recent improvements to your score (and meet the other financial requirements), Conventional loans generally offer lower interest rates compared to government-backed loans. This can save you a considerable chunk of change over the life of the loan. Since Conventional loans are not part of any government program, lenders (us) are more likely to offer competitive rates to attract qualified borrowers (you). In short: The better your financial profile, the better the interest rate you’re likely to secure. 

Conventional Loan Drawbacks 

While we’ve discussed Conventional loans’ many advantages, they also come with some drawbacks. 

Conventional loans have stricter credit and income requirements than government-backed loans like FHA or VA loans, typically requiring a credit score of at least 620, though a score of 700+ is preferred for more favorable terms. You’ll also need stable, sufficient income to meet repayment demands, making qualification tougher for those with less-than-ideal credit or unstable finances. 

Additionally, while some Conventional loans offer down payments as low as 3%, you'll need at least 20% down to avoid paying PMI, which adds extra costs to your monthly payments until you reach 20% home equity. 

Conventional vs. FHA 

You may be trying to decide between a Conventional loan and a government-backed loan, like one from the Federal Housing Administration (FHA). But the right choice totally depends on your financial situation. Consider the following differences before making your decision: 

• Credit Score: At Atlantic Bay, Conventional loans generally require a higher credit score (620 or above), whereas FHA loans are slightly more lenient at 600. 

• Down Payment: FHA loans allow for a lower down payment—3.5%—making them accessible to first-time homebuyers or those with limited savings.  

• Mortgage Insurance Premium (MIP): Contrasting Conventional loans’ PMI, FHA loans require an MIP regardless of your down payment size, and in some cases, it lasts for the life of the loan. 

• Loan Limits: FHA loans have lower loan limits, depending on your location. 

And of course, you’re not in this homebuying game alone!  

Next Steps 

So, what’ve we learned? Well, a Conventional loan offers flexibility, competitive terms, and lower long-term costs if you have a strong credit profile and can meet the down payment requirements. If you're ready to apply, do three things: review your credit score, gather income documents, and consult the Atlantic Bay team to explore your options and get pre-approved.