What is a Conventional Loan?

A conventional loan1 is any home loan that is not guaranteed or insured by the federal government. (Some examples of government-backed loans include FHA loans, VA loans, and USDA loans.)

Most conventional loans, though, are backed by the government-sponsored entities Fannie Mae and Freddie Mac.2 This backing helps make mortgages more accessible and affordable to moderate-income people, as banks are more likely to lend money when there is some external agency backing the mortgage in the event of foreclosure.

Loans that are backed by Fannie Mae or Freddie Mac are called conforming loans. To qualify, the amount you borrow must not exceed $484,350,3 though the limit may be as high as $726,525 in higher-cost counties.

Unlike FHA, VA, and USDA loans, you can apply for a conventional loan with any bank or other lender.

Here are some common questions about conventional loans and information about how they compare to the other types, so you can determine if this is the right type of home loan for you.

Who is eligible for a conventional loan?

Eligibility for conventional loans varies from bank to bank, but typically you'll need to have at least a 10% down payment (some banks may require 20% for some borrowers) and a credit score of at least 640.

As with all loans, you'll need to prove that your income is sufficient to cover your monthly payments.

Can I use any financial assistance or gifts to some or all of the down payment and/or closing costs?

This will vary from bank to bank. With a conventional loan, the bank will often want to see that you have at least a 10% down payment from your own savings.

If you will need to rely on family gifts or other financial assistance to cover your down payment or closing costs and have trouble finding a conventional loan that will allow this, consider applying for an FHA loan.

With an FHA loan, you often only need a 3.5% to 5% down payment, and it's OK to use gifts or other financial assistance to cover the down payment and closing costs. There is no upper limit on income for getting an FHA loan, though you do need to find an FHA-approved lender.