Conventional Loans

While government-backed options offer great perks, conventional loans are still the most popular choice among homebuyers. With flexible terms, competitive interest rates, and fewer restrictions, conventional loans might offer more long-term value—especially for borrowers with strong credit and savings.

In this guide, we'll break down everything you need to know about conventional loans, from requirements and benefits to types and tips for getting approved.

What exactly is a conventional loan?

A conventional loan is a type of home loan that the federal government doesn’t back. That means, unlike FHA, VA, or USDA loans, private lenders—like banks, credit unions, or mortgage companies—fund and insure conventional loans, which follow guidelines set by Fannie Mae and Freddie Mac. These two government-sponsored enterprises (GSEs) help keep the housing market stable by buying loans from lenders.

Conventional loans are one of the most common types of home financing and are often a great fit for borrowers with good credit, steady income, and some money saved for a down payment.

Conventional vs. Non-Conventional Loans

The difference between conventional and non-conventional loans is that non-conventional loans are insured or guaranteed by the federal government, while conventional loans follow the guidelines set by Fannie Mae and Freddie Mac.

Non-conventional loans are designed to expand the availability of affordable home ownership for those who may struggle to qualify for conventional loans. These programs have lower credit scores and down payment requirements but usually include upfront fees or ongoing mortgage insurance.

Common non-conventional loan types include:

• FHA loans - 3.5% down payment loan option backed by the Federal Housing Administration
• VA loans - 0% down payment option only available to eligible Veterans and active-duty service members
• USDA loans - 0% down payment option only for buyers in eligible rural areas who make less than the limit set by the USDA

Top Benefits of Conventional Loans

So, why are conventional loans so popular despite their typically high down payment requirements?

The short answer is that you're likelier to pay less in the long term. While government-backed loans are great for trying to save money upfront, they often include higher fees or mortgage insurance with limited availability to cancel, meaning you'll pay more in interest over the life of the loan.

Here are some other great conventional loan benefits:

1. Higher Loan Limits

   One of the biggest benefits of a conventional loan is its higher lending limits than other mortgage options. In 2025, the standard loan limit for conventional loans is $806,500.

   Here are the standard and high-income area conventional loan limits for 2025:

   2025 Conventional Loan Limits
   Number of Units in Property	Standard Limit in Most U.S. Areas	Alaska, Guam, Hawaii, and the U.S. Virgin Islands
   1	$806,500	$1,209,750
   2	$1,032,650	$1,548,975
   3	$1,248,150	$1,872,225
   4	$1,551,250	$2,326,875

   If you need a home above the conforming limit, you can also look into a conventional jumbo loan.

2. Cancellable Mortgage Insurance

   Unlike most FHA loans, one big benefit of conventional loan mortgage insurance is that it doesn't last forever.

   • Automatic cancellation: PMI is automatically canceled when your loan balance reaches 78% of the home's original value (meaning you've built 22% equity), as long as you're up to date on payments.
   • Early cancellation: You can request to remove PMI earlier—once you reach 20% equity in your home, either through paying down your loan or rising property values. You may need a new appraisal to confirm your home's value.

3. Flexibility for Second Homes and Investment Properties

   Unlike government-backed home loans, which are limited to primary residence purchases, conventional loans offer more flexibility—you can use them to buy investment properties or second homes.

   You can still buy a 1- to 4-unit property with an FHA or conventional loan, but FHA loans generally require you to live in one of the units for at least a year.

Conventional Loan Requirements

Conventional loan requirements vary greatly depending on the type of loan and whether it's for a family home, second home, or investment property.

Generally, you'll need the following to qualify for a conventional loan:

• 640+ credit score - You can qualify for Home Possible® and HomeReady® with a 620, but you must meet their income limit requirement.
• 3%+ down payment - While Home Possible® and HomeReady® loans only require 3% down, you must meet certain income requirements. A 5% down payment or more is standard on most conventional purchase loans.
• 45% debt-to-income ratio or lower - DTI requirements can be flexible, but you'll have to have other strong compensating factors.
• Monthly mortgage insurance - Mortgage insurance will automatically be canceled once you reach 22% equity in your home, or you can request cancellation at 20% equity.

Types of Conventional Mortgages

Here are the most common types of conventional loans and which might be best for you:

Interested in one of these conventional loan types? Check rates and your loan eligibility here.

Do you have to put 20% down with a conventional loan?

No, you don't have to put 20% down to get a conventional loan. However, the benefit of putting 20% down at closing is eliminating the need to pay private mortgage insurance, which is required until you own 20% equity in your home.

Several conventional loan programs allow as little as 3% down. Additionally, many conventional loan types are eligible for down payment assistance.

Conventional Loan Down Payment Assistance

Down payment assistance (DPA) programs can be used with conventional loans, not just government-backed options. These programs—offered by state and local housing agencies, nonprofits, and even some lenders—can help cover part or all of your down payment and, in some cases, closing costs.

Some DPA programs let you borrow your down payment through a second loan—often referred to as a second mortgage or silent second. This second loan typically comes with one of the following repayment structures:

• Deferred payment - This repayment structure has no monthly payments and is only due when you sell, refinance, or pay off your first mortgage.
• Forgivable loan - The balance is forgiven after a certain number of years, usually if you stay in the home.
• Amortizing loan - Monthly payments are required, typically with low or no interest.

Neighbors Bank offers Down Payment Assistance for all home loan types. Check your eligibility

4 Quick Tips About Conventional Loans

If you're considering a conventional loan for your upcoming home purchase, there are four things to keep in mind as you apply for your mortgage:

1. Down payments typically start at 5%

   Although 3% is allowed for Home Possible® and HomeReady®, these programs are only meant for medium- to low-income borrowers who make less than 80% of their area's median income. These programs are only eligible for primary residences and require a 3% down payment.

   Most other conventional loans require at least 5% down without down payment assistance.

2. You can cancel private mortgage insurance later on.

   If you put down less than 20%, your lender will most likely require private mortgage insurance (PMI) until you have at least 20% equity in the property. When this occurs, you may be able to cancel PMI with your lender. This is a key difference with conventional loans, as many FHA loans don't allow borrowers to cancel their mortgage insurance at any point.

3. There are no up-front mortgage insurance fees.

   Conventional loans do not require an up-front payment on your PMI.

   In the place of mortgage insurance, VA and USDA loans require upfront funding or guarantee fees. USDA loans also require a recurring fee that is not cancellable.

   FHA loans require paying an up-front mortgage insurance premium and an annual one, which is only cancellable (after 11 years) if you put 10% down at closing.

4. Your credit score matters more.

   Conventional loans typically require higher credit scores than government-backed options. Most lenders require a minimum 620+ score, but better scores (740+) unlock lower interest rates and better loan terms.

Applying for a Conventional Loan

Ready to make your next move? Whether you're buying a home, investing in property, or looking to refinance, a conventional loan from Neighbors Bank could be the smart, flexible option you need. Our home loan specialists are here to walk you through every step—so you can confidently move forward.