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6 Common Types of Conventional Loans: How They Work

Conventional loans are popular among home buyers, but they come in more than one flavor. Each type has its own costs and qualification requirements.

Abby Badach Doyle
Chris Jennings
Updated
Conventional mortgages are the most common type of loan used to buy a house, but it may surprise you to learn there’s more than one type.
These loans are popular among first-time home buyers and repeat buyers alike. If you’re shopping for a mortgage, you might have researched some of the conventional loan types on this list. See what makes them different and decide what’s best for you.
» MORE: How much house can you afford?

What is a conventional home loan?

A conventional loan is any type of home loan that isn’t insured or guaranteed through a government agency. Some quick facts:
  • They often follow government-set rules: Many conventional loans conform to government-set loan limits as well as income and credit score minimums.
  • They tend to cost less: Conventional loans are often less expensive than government-backed mortgages such as FHA loans (insured by the Federal Housing Administration).
  • They’re tougher to qualify for: Conventional loan requirements, such as credit score and debt-to-income (DTI) ratio, are generally stricter than government-backed loan programs. Most lenders require at least a 620 minimum credit score to qualify, higher scores typically get better interest rates.
🤓 Nerdy Tip
If you have good credit and steady income, a conventional loan might be your best bet. But if you have credit challenges, weigh the pros and cons of FHA vs. conventional loans. An FHA loan might also be a good fit if you plan to use gift money for your down payment or have a higher debt-to-income ratio.
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Common types of conventional loans

1. Conforming conventional loans

If a conventional loan is less than the maximum loan amount set by the Federal Housing Finance Agency and meets additional loan standards set by Fannie Mae or Freddie Mac, it’s called a conforming loan. Because Fannie and Freddie are government-sponsored enterprises, you may also hear conforming loans referred to as “GSE loans.”
» MORE: See NerdWallet’s list of best conventional mortgage lenders

2. Nonconforming conventional loans

If a conventional loan exceeds FHFA loan limits or uses underwriting standards that are different from those set by Fannie Mae and Freddie Mac, it’s called a nonconforming loan. A jumbo loan is a common type of nonconforming conventional loan. You may need a jumbo loan to finance more than $832,750 in most U.S. counties.
» MORE: NerdWallet’s picks for best jumbo loan lenders

3. Fixed-rate conventional loans

Whether they’re conforming or nonconforming, all mortgages require you to pay interest. With a fixed-rate conventional loan, the interest rate stays the same for as long as you have the mortgage. Many buyers choose a 30-year fixed-rate conventional mortgage, but shorter terms are also available.
» MORE: Calculate your conventional loan payment

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4. Adjustable-rate conventional loans

The alternative to a fixed-rate mortgage is an adjustable-rate mortgage, or ARM. Conventional loans with adjustable rates, also known as hybrid ARMs, have rates that may go up or down over time. ARM rates usually adjust annually, after an initial fixed-rate period of three, five, seven or 10 years.
» MORE: See NerdWallet’s list of best adjustable-rate mortgage lenders

5. Low-down-payment conventional loans

Despite what you may have heard, you don’t need to put 20% down to buy a house. In fact, the average down payment on a house might be lower than you think: First-time buyers typically put 10% down, according to the National Association of Realtors.
HomeReady and Home Possible are conventional mortgage options that allow down payments as low as 3%, sometimes referred to as "3 down conventional loans." If you qualify for a 3% down payment through one of these programs, you’ll need to finance the other 97%. That’s why you may also hear them called “conventional 97 loans.”
Your down payment will also affect your loan-to-value (LTV) ratio, which measures what percentage of the home's value you’re financing with a mortgage. A higher LTV typically means higher risk to the lender and may require private mortgage insurance.
» MORE: Best no- and low-down-payment mortgage lenders
Did you know...
You can get 100% conventional loan financing. Some lenders — often credit unions — offer in-house, nonconforming conventional mortgage programs that feature 100% financing, but special qualification requirements often apply. Be aware that zero-down-payment conventional loans are inherently riskier: It takes longer to build equity, you’ll pay more in interest, and there’s the increased likelihood of going underwater if market values dip.

6. Conventional renovation loans

It can be hard to find the perfect house for your budget. Buying a fixer-upper is one way to achieve home ownership when prices are high or move-in-ready inventory is low.
The CHOICERenovation loan and HomeStyle loan are two types of conventional mortgages that allow you to finance a home purchase, as well as the necessary renovations, at the same time.
Not sure what type of loan is right for you? Use the tool below to help you find out.
NerdWallet writer Isabella Angelos contributed to this story.
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