Conventional Loans: Meaning, Pros & How They Compare

The majority of homebuyers in the U.S. use a conventional mortgage when financing a home. Recent data shows that 52% of first-time buyers chose a conventional loan in 2024, compared to 29% who used an FHA loan and 9% who used a VA loan. That’s a big shift from 2009, when 55% of first-time buyers relied on FHA loans.^[1]

As buyer preferences and lending qualifications have evolved, conventional loans have become the go-to option, especially for borrowers with strong credit and the ability to make a larger down payment.

Unlike government-backed loans, conventional mortgages are funded by private lenders and follow standards set by Fannie Mae and Freddie Mac. Because there’s no government guarantee to protect lenders if a borrower defaults, the requirements are typically stricter, but the payoff can be worth it.

Conventional loans often come with lower long-term costs, making them a smart financial choice for many buyers.

There are two main types of conventional mortgages: Fixed-rate, where your interest rate stays the same over time, and adjustable-rate (ARM), where your rate may change after an initial period.

Fixed-rate mortgages have an interest rate that stays the same for the entire life of the loan. That means your monthly principal and interest payments stay consistent and predictable — no surprises. This type of mortgage is a good fit for buyers planning to stay in their home long term. With a fixed rate, borrowers can choose between 15-year, 20-year and 30-year mortgages.

The shorter the loan period, the lower the interest rate but the higher the monthly payments will be.

Adjustable-rate mortgages, also known as a variable-rate or tracker mortgage, have a convertible interest rate. This allows a buyer to start with a lower monthly payment. However, after an initial fixed period of 3 to 10 years, that rate can be adjusted yearly based on the performance of an index. Rate caps prevent the interest rate from going up or down past a certain point.

An adjustable-rate mortgage is a good option if you need a lower monthly payment to get started and you don’t mind the unpredictability of a fluctuating interest rate in the future.

Non-conventional mortgages are designed to help individuals with low-to-moderate incomes or individuals who require a low or no down payment.

This type of loan caters to borrowers who may have been rejected for a conventional loan for any number of reasons, including: being self-employed, having an unsteady employment history or insufficient cash revenues.

One potential downside to non-conventional loans is that they often come with additional costs, such as mortgage insurance premiums (MIP), funding fees, or guarantee fees, depending on the loan type.

For example, FHA loans require both upfront and annual MIP^[2], VA loans charge a one-time funding fee^[3] and USDA loans include both upfront and annual guarantee fees.^[4]

There are two main types of conventional loans: conforming loans and non-conforming loans.

Conforming loans are a specific type of conventional mortgage that comply with the financing limits and underwriting standards defined by the Federal Housing Finance Agency (FHFA). These loans are eligible to be bought by Fannie Mae and Freddie Mac, which generally helps borrowers access more competitive rates.

A key requirement is staying within the conforming loan limit, which varies by geography. For single-family properties in most U.S. counties, the 2025 baseline limit is $806,500, up from $766,550 in 2024. In designated high‑cost areas, the limit increases to $1,209,750 — or 150% of the baseline.^[5]

Non-conforming loans are mortgages that don’t meet the standards set by the Federal Housing Finance Agency (FHFA) — typically because they exceed the conforming loan limits. The most common type of non-conforming loan is a jumbo loan.

Because they’re not eligible for purchase by Fannie Mae or Freddie Mac, jumbo loans often come with stricter qualifying requirements. Borrowers usually need a higher credit score, larger down payment, lower debt-to-income ratio and more cash reserves. They may also carry higher interest rates compared to conforming loans, though this can vary depending on market conditions.

In addition to conforming and non-conforming loans, there are existing programs such as HomeReady and HomePossible by Fannie Mae and Freddie Mac. Many conventional loan options are specific to each state, so be sure to ask your realtor or mortgage broker about any additional options that exist where you are looking to buy.

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When it comes to non-conventional loans, there is a much wider variety of options available to home buyers.

FHA Loans
A type of low down payment government loan insured by the Federal Housing Administration, a program office of the U.S. Department of Housing and Urban Develoment. FHA loans are ideal for borrowers who do not have a lot of cash for a down payment or who have a low credit score.

VA Loans
A loan provided by a private lender and guaranteed by the U.S. Department of Veterans Affairs to make homeownership more affordable for veterans. VA loans can be used to buy or refinance a home.

USDA Loans
A type of government loan insured by the U.S. Department of Agriculture’s Rural Housing Program that enables low- and moderate-income households to purchase property in eligible rural areas. Benefits include zero down payment required and easy qualifications.

HUD Section 184
A loan option with low down payment and no minimum credit score that is guaranteed by HUD’s Office of Native American Programs to make homeownership more affordable for Native Americans. The guarantee of the loan assures the lender that in the event of foreclosure, its investment will be repaid in full.

Qualifying for either a conventional or non-conventional loan comes with a significant amount of verification. In general, the qualifications for each loan type will be as follows:

Conventional Mortgage Loan Requirements
The following factors must be taken into consideration when applying for a conventional mortgage loan:

• Credit score: The minimum credit score to qualify for a conventional mortgage is generally 620, depending on the lender.

• Documentation: Lenders will require you to provide documentation that verifies your income, your ability to pay debts as well as your spending habits.
• Income and assets: Lenders will use your bank and investment account statements to verify that you have sufficient means to cover the down payment and closing costs.

• Minimum Down Payments: Most lenders will require 5% down, but it could be up to 20%. Some states, such as Maine, New Hampshire and Massachusetts, offer options that allow for 3% down.

• Property Eligibility Type: Almost any type of property can qualify to use a conventional mortgage, including warrantable condos, modular homes and multifamily residences.

• Sufficient DTI Ratio: Most lenders will permit a maximum debt-to-income ratio of 43%.

• Private Mortgage Insurance (PMI): Yes, if you qualify for a conventional mortgage and put down less than 20%, lenders almost always require Private Mortgage Insurance (PMI). The typical annual cost of PMI ranges from 0.3% to 1.5% of the loan amount; however, market factors, your credit score and the loan-to-value ratio can influence the rate.

Non-Conventional Loan Requirements
When it comes to non-conventional mortgages, the requirements will vary by loan type. Below is a breakdown of the differing requirements.

• VA Loans are reserved for veterans, active-duty service members and certain surviving spouses. Unlike other loan types, the VA doesn’t set a hard cap on your debt-to-income (DTI) ratio. Instead, it offers guidance that if your DTI is over 41%, lenders are encouraged to take a closer look at your overall financial picture.

Some lenders will still approve loans with a DTI above 50%, especially if you have strong credit, steady income or extra savings. In those cases, they’ll pay close attention to something called residual income — that’s the money you have left over each month after covering major expenses. If your DTI is higher, you may need to meet stricter residual income requirements to move forward.^[6]

• FHA loans are designed to be more accessible, especially for buyers with lower credit or smaller savings. You’ll need a credit score of at least 580 to qualify with the minimum 3.5% down payment. These loans do come with mortgage insurance — both an upfront fee (typically 1.75% of the loan amount) and an annual premium that ranges from 0.15% to 0.75%, depending on your loan details.

If you put less than 10% down, you’ll pay MIP for the life of the loan. Put down 10% or more, and the annual MIP drops off after 11 years. Most lenders also prefer to see a debt-to-income ratio of 43% or lower to move forward with approval.

• USDA loans come with income limits that vary based on where you live and how many people reside in your household. To qualify, your total household income — not just the borrower’s — needs to fall within those limits. That means lenders will look at everyone’s income in the home, even if they’re not on the loan. USDA loans also include a guarantee fee, which helps support the program. It’s paid both upfront and as a small annual cost added to monthly mortgage payments.

Wondering how to decide which option is right for you? Start by reviewing the list below and checking off which boxes sound the most fitting to your financial and borrowing situation.

When to Choose a Conventional vs. Non-Conventional Mortgage

Benefits of a Conventional Loan:

• No upfront mortgage insurance
• Potential for lower mortgage insurance rates or no mortgage insurance at all
• Stable interest rates
• More appealing to sellers
• Viewed as less risky for lenders
• Shorter underwriter approval process
• No extra fees

Benefits of a Non-Conventional Loan:

• Require little to no down payment
• Can still qualify with poor credit
• Wide array of options

With so many loan options out there, it’s smart to talk to an experienced mortgage broker before you apply. We’re here to help you head in the right direction from the start. Contact us today to see how Blue Water can help you find the mortgage that fits your needs.

Blue Water Mortgage is licensed in New Hampshire, Maine, Massachusetts, Connecticut, Vermont, Rhode Island, Florida, North Carolina, Colorado, Texas, Georgia and South Carolina.