Conventional loans: What they are and how they work
Quick insights
- Conventional loans are mortgages that aren’t backed by the U.S. federal government.
- Conventional loans are the most popular way to finance a home. According to the 2025 National Association of REALTORS® (NAR) report, 64% of all homebuyers used one.
- To qualify for a conventional loan, you’ll need to meet lender requirements for factors like credit score, debt-to-income (DTI) ratio and down payment.
Most people in the United States don’t purchase property with cash. Instead, they finance the purchase with a mortgage. Conventional loans are the most popular method for financing home purchases. We’ll explain how conventional loans work, what the requirements are and more.
What is a conventional loan?
There are different types of conventional loans. But the simplest definition of a conventional loan is a mortgage that isn’t guaranteed or insured by the U.S. government. As they’re the most popular financing option for home purchases, most lenders offer them. They can be used either to purchase a home or to refinance an existing mortgage.
Although conventional loans aren’t part of specific government programs, that doesn’t mean lenders are left to set their own unique standards and assume all the risk.
Conforming vs. non-conforming loans
Conforming loans are conventional loans that are not insured or guaranteed by a government agency. For 2025, the baseline conforming loan limit (CLL) is $806,500 for a one-unit property. All conforming loans are also conventional loans. However, the inverse is not true.
Conventional loans can also be non-conforming loans. These are loans that don’t follow the GSE guidelines—for example, loans that exceed the CLL, also known as jumbo loans. Non-conforming loans aren’t guaranteed by Fannie Mae or Freddie Mac. This gives lenders the freedom to set their own guidelines, but they also assume more risk.
Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) established by Congress to provide liquidity and stability to the housing market and to help make homeownership more accessible. They purchase mortgages from lenders, which gives lenders the necessary liquidity to issue more mortgages.
Conventional loan requirements
The exact requirements for a conventional loan will depend on whether it’s a conforming or non-conforming loan, along with the lender you choose. That said, here are the areas they’ll review as part of your loan application.
Credit score
Although the minimum credit score for a conforming loan is 620, some lenders may impose more stringent requirements. If you’re applying for a non-conforming loan, the minimum credit score may be higher.
Debt-to-income ratio
The debt-to-income (DTI) ratio is one of the most important factors lenders consider in a mortgage application. For conforming loans, the preferred DTI is 36% or lower, but in some cases, lenders can approve DTIs as high as 45%. If you’re interested in a non-conforming loan, speak to your lender to find out what their DTI requirements are.
Down payment
For conforming loans, the minimum down payment requirement is 3%. If you’re applying for a non-conforming loan, the required down payment may be higher.
If you put down less than 20% for a conventional loan, you may be required to pay private mortgage insurance (PMI). This will be an additional cost each month.
Closing costs
To qualify for a conventional loan, your lender will also review your application to make sure you can afford closing costs on the loan. These typically range from 2–5% of the mortgage value. Closing costs can be higher for non-conforming loans.
Is a conventional loan right for you?
Here are some potential advantages and disadvantages of conventional loans for you to consider.
Pros
- Competitive rates: If you can meet the requirements for a conventional loan, you may qualify for a more competitive mortgage rate than you might with non-conventional loan options.
- Higher loan limits: If you apply for a non-conforming loan, you aren’t bound by CLLs.
Cons
- Harder to qualify: It can be harder to meet the requirements for conventional loans than other loans, like VA or FHA loans.
- Down payment requirements: Some loans, like VA loans or U.S. Department of Agriculture (USDA) loans, have options to qualify with no down payment. That isn’t an option for conventional loans. (Chase does not offer USDA loans at this time.)
- Private mortgage insurance: If you put less than 20% down on a conventional loan, you’ll typically have to pay PMI.
Alternatives to conventional loans
If you don’t think a conventional loan is the right choice for your homebuying goals, there are other types of mortgages worth considering.
FHA loans
These are loans insured by the Federal Housing Administration. They’re specifically designed to help first-time homebuyers and those who struggle to meet conventional loan requirements. They offer more relaxed credit score requirements than most conventional loans. However, they do require a down payment of at least 3.5%.
VA loans
These loans are guaranteed by the U.S. Department of Veterans Affairs and are specifically designed to help qualifying veterans, servicemembers, National Guard and Reserve members and their spouses afford homeownership.
USDA loans
These loans are guaranteed by the U.S. Department of Agriculture. They’re specifically designed for low- and moderate-income borrowers in rural areas. There are location and income requirements, but it’s possible to qualify without a down payment. Chase does not offer USDA loans at this time.
FAQs about conventional loans
Is a conventional loan a good option for first-time homebuyers?
Conventional loans can be a good option for first-time homebuyers. If you can qualify, they may offer competitive interest rates.
Is it better to have a conventional loan or an FHA loan?
That depends on your circumstances. Each option has strengths and weaknesses. Conventional loans have a lower down payment requirement, 3% versus 3.5% down for FHA loans., However, FHA loans may be easier to qualify for in terms of credit score and DTI ratio requirements.
Do you have to put 20% down with a conventional loan?
No, you can get a conventional loan for as little as 3% down. However, if you put down less than 20%, you may owe PMI, which will increase your monthly mortgage payment.
In summary
Conventional loans are the most popular financing option in the U.S. However, they can be tricky to qualify for and require a down payment. Speak to your lender to see if they’re the right fit for you or if pursuing another option, like an FHA loan, might potentially be more advantageous.
