Conventional Loan Guide 2025: Requirements, Rates & Down Payment Process
Quick Answer: What is a Conventional Loan?
A conventional loan is a mortgage that is not insured or guaranteed by the federal government. Offered by private lenders, conventional loans typically require a 620+ credit score and 3-20% down payment. They conform to Fannie Mae and Freddie Mac guidelines and are the most common type of home loan in America. For 2025, conforming loan limits are $766,550 in standard areas and up to $1,149,825 in high-cost markets. Unlike FHA loans, conventional loans allow you to remove private mortgage insurance (PMI) once you reach 20% equity.
Understanding conventional loans is essential for most homebuyers, as they represent over 70% of all mortgage originations in the United States. Unlike government-backed loans (FHA, VA, USDA), conventional mortgages are issued by private lenders following standards set by Fannie Mae and Freddie Mac. This comprehensive guide covers everything you need to know about conventional loan requirements for 2025, including credit score minimums, down payment options, current rates, the complete approval process, and how conventional loans compare to FHA and other mortgage types.
Whether you're wondering what credit score you need for a conventional loan, how much down payment is required, or whether a conventional loan is right for your financial situation, this guide provides expert insights to help you make an informed decision. We'll also explore current conventional loan rates for 2025, break down costs including private mortgage insurance (PMI), and walk you through the application process from pre-approval to closing.
What is a Conventional Loan?
A conventional loan is a mortgage that is not insured or guaranteed by a government agency. Instead, these loans are backed by private lenders (banks, credit unions, mortgage companies) and must conform to guidelines established by Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), two government-sponsored enterprises (GSEs) that purchase mortgages from lenders.
How Conventional Loans Work
Private Lending: Issued directly by banks, credit unions, and mortgage lenders without government insurance
GSE Guidelines: Must meet Fannie Mae and Freddie Mac underwriting standards to be sold on the secondary market
Risk-Based Pricing: Interest rates and terms vary based on credit score, down payment, and debt-to-income ratio
Flexible Use: Can be used for primary residences, second homes, and investment properties
Removable PMI: Private mortgage insurance can be eliminated once you reach 20% equity (unlike FHA's lifetime MIP)
Types of Conventional Loans
Conventional loans fall into two main categories:
1. Conforming Conventional Loans
Definition: Loans that meet Fannie Mae/Freddie Mac loan limits and underwriting standards
2025 Loan Limits: $766,550 standard; $1,149,825 high-cost areas
Advantages: Lower interest rates, easier to qualify, sold to GSEs for liquidity
Most Common: Represents the vast majority of conventional mortgages
Interest Rates: Often higher due to increased lender risk
Use Case: High-value properties in expensive markets
Conventional Loan Requirements 2025
Understanding conventional loan requirements for 2025 is critical for determining your eligibility and preparing a successful application. While requirements vary by lender, these are the standard criteria established by Fannie Mae and Freddie Mac.
Core Conventional Loan Requirements
Credit Score Minimum: 620 minimum (640-680 preferred for best rates)
Down Payment: 3% minimum for first-time buyers; 5% for repeat buyers; 20% to avoid PMI
Debt-to-Income Ratio: Maximum 43% DTI (50% with compensating factors like high credit score)
Employment History: Stable employment for at least 2 years (same field, not necessarily same employer)
Cash Reserves: 2-6 months of mortgage payments recommended (required for some loan types)
Property Type: Primary residence, second home, or investment property (different requirements)
Occupancy: Must state intended use (owner-occupied, second home, or rental)
Citizenship: U.S. citizen, permanent resident, or qualifying non-permanent resident
Credit History: Clean payment history; typically 2-4 years after bankruptcy/foreclosure
Conventional Loan Credit Score Requirements
Your credit score is one of the most important factors in conventional loan approval and rate determination:
Credit Score Range
Qualification Status
Rate Impact
740+
Excellent - Best rates available
Lowest rates, minimal PMI costs
700-739
Good - Competitive rates
Slightly higher than best rates
680-699
Fair - Standard approval
Moderate rate increase
640-679
Below Average - Higher costs
Significantly higher rates and PMI
620-639
Minimum - Difficult to qualify
Highest rates, consider FHA instead
Below 620
Not eligible for conventional
Consider FHA, VA, or credit repair
Credit Score Impact Example: On a $400,000 loan, the difference between a 640 and 760 credit score can mean 0.75-1.5% higher interest rate, costing $100,000+ over 30 years.
Conventional Debt-to-Income (DTI) Requirements
Your debt-to-income ratio measures your ability to manage monthly debt payments:
Front-End DTI (Housing Ratio): Maximum 28% of gross income for housing costs (PITI - principal, interest, taxes, insurance)
Back-End DTI (Total Ratio): Maximum 43% of gross income for all monthly debt obligations
High DTI Exception: Up to 50% DTI possible with compensating factors (740+ credit score, significant reserves, low LTV)
One of the most flexible aspects of conventional loans is the range of down payment options available. Understanding these options helps you plan your home purchase strategy.
Conventional Down Payment Options
3% Down: Available for first-time buyers through Conventional 97, HomeReady, or Home Possible programs
5% Down: Standard minimum for repeat buyers or non-primary residences
10% Down: Reduced PMI costs and better rate pricing
20% Down: No PMI required, best rates, full equity from day one
25%+ Down: Best possible rates, strongest negotiating position, lower monthly payments
Conventional Down Payment Calculations
Home Price
3% Down
5% Down
10% Down
20% Down (No PMI)
$250,000
$7,500
$12,500
$25,000
$50,000
$350,000
$10,500
$17,500
$35,000
$70,000
$500,000
$15,000
$25,000
$50,000
$100,000
$750,000
$22,500
$37,500
$75,000
$150,000
Low Down Payment Conventional Programs
Several programs offer 3% down payment options for qualified borrowers:
3% Down Payment Programs
1. Conventional 97 (Fannie Mae)
3% down payment for first-time homebuyers
620 minimum credit score
Income limits may apply
Must complete homeownership education
2. HomeReady (Fannie Mae)
3% down for low-to-moderate income borrowers
Income limit: 80% of area median income
Lower PMI costs than standard conventional
Allows non-borrower household income
3. Home Possible (Freddie Mac)
3% down for income-qualified buyers
Similar income limits to HomeReady
Reduced PMI pricing
Flexible income sources accepted
Down Payment Sources
Conventional loans accept down payments from various sources:
Personal Savings: Most common source from checking/savings accounts
Gift Funds: Gifts from family members (requires gift letter and documentation)
Retirement Accounts: 401(k) or IRA withdrawals (consider tax implications and penalties)
Investment Accounts: Stocks, bonds, mutual funds (must be liquidated and seasoned)
Sale of Property: Proceeds from selling current home or other real estate
Down Payment Assistance: State and local DPA programs (varies by location)
Employer Assistance: Some employers offer homebuyer assistance programs
Not Allowed: Unsecured loans, cash advances, or borrowed funds that increase DTI are generally not permitted.
Conventional Loan Limits 2025
Conventional loan limits for 2025 determine the maximum loan amount for conforming mortgages. These limits are set annually by the Federal Housing Finance Agency (FHFA) based on median home prices.
2025 Conforming Loan Limits
Standard Limit: $766,550 for single-family homes in most areas
High-Cost Ceiling: $1,149,825 for expensive markets (150% of baseline)
Calculation: Based on October-to-October median home price changes
County Variation: Limits set by county based on local housing costs
Conforming Loan Limits by Property Type
Property Type
Standard Area Limit
High-Cost Area Ceiling
Single-Family
$766,550
$1,149,825
Duplex (2-unit)
$981,500
$1,472,250
Triplex (3-unit)
$1,186,350
$1,779,525
Fourplex (4-unit)
$1,474,400
$2,211,600
High-Cost Conventional Loan Areas
Counties with maximum conforming loan limits include:
California: San Francisco Bay Area, Los Angeles, Orange County, San Diego, Santa Barbara
New York: New York City (Manhattan, Brooklyn, Queens), Westchester County, Long Island
Washington: King County (Seattle), San Juan Islands
Colorado: Summit County, Pitkin County (Aspen), Eagle County (Vail)
Hawaii: All counties (Honolulu, Maui, Kauai, Hawaii)
Exceeding Loan Limits: Loans above conforming limits are considered "jumbo loans" with different requirements (higher credit scores, larger down payments, stricter DTI limits).
Conventional vs FHA Loan: Detailed Comparison
The choice between conventional vs FHA loans is one of the most important decisions in your home buying journey. Each has distinct advantages depending on your financial profile.
Conventional vs FHA Loan Comparison Table
Factor
Conventional Loan
FHA Loan
Minimum Credit Score
620 (640-680 preferred)
580 (500 with 10% down)
Down Payment
3-20% (20% to avoid PMI)
3.5% (10% with 500-579 score)
Mortgage Insurance
PMI removable at 20% equity
MIP for life (3.5% down loans)
DTI Maximum
43% (50% with compensating factors)
43% (50% with compensating factors)
Loan Limits
$766,550 - $1,149,825
$498,257 - $1,209,750
Property Standards
Standard appraisal
Strict FHA minimum standards
Interest Rates
Lower with good credit (680+)
Competitive, less credit-sensitive
Upfront Costs
Lower (no upfront insurance)
1.75% upfront MIP required
Property Types
Primary, second home, investment
Primary residence only
Best For
Good credit, larger down payment, long-term ownership
Lower credit, minimal down payment, first-time buyers
When to Choose Conventional Loan
Conventional loans are better if you:
Have a credit score of 680 or higher
Can afford 5-20% down payment
Want to eliminate mortgage insurance eventually (20% equity)
Are buying a higher-priced home (above FHA limits)
Need financing for second home or investment property
Want more flexibility in property condition
Plan to stay in the home long-term (lower overall costs)
FHA loans are better if you:
Have a credit score between 580-679
Can only afford 3.5% down payment
Have higher debt-to-income ratio
Are a first-time homebuyer with limited savings
Have recent credit issues but meet waiting periods
Plan to refinance once you build equity
Private Mortgage Insurance (PMI) Explained
Unlike FHA's mandatory mortgage insurance, conventional loan Private Mortgage Insurance (PMI) is only required when you put down less than 20%, and it can be removed once you reach 20% equity.
How PMI Works on Conventional Loans
Requirement Trigger: Required when loan-to-value (LTV) ratio exceeds 80% (down payment less than 20%)
Cost Range: 0.3% to 1.5% of loan amount annually (varies by credit score, LTV, loan type)
Payment Method: Typically added to monthly mortgage payment
Removable: Automatically terminates at 78% LTV; can request removal at 80% LTV
PMI Cost Examples by Credit Score and Down Payment
Credit Score
5% Down (95% LTV)
10% Down (90% LTV)
15% Down (85% LTV)
760+
0.40% annually
0.30% annually
0.25% annually
700-759
0.60% annually
0.45% annually
0.35% annually
680-699
0.85% annually
0.65% annually
0.50% annually
620-679
1.25% annually
1.00% annually
0.75% annually
PMI Calculation Example
Calculating Monthly PMI Payment
Scenario: $400,000 home, 10% down ($40,000), 700 credit score
Loan Amount: $360,000
LTV: 90%
PMI Rate: 0.45% annually (based on credit/LTV)
Annual PMI Cost: $360,000 × 0.45% = $1,620
Monthly PMI: $1,620 ÷ 12 = $135/month
PMI Removal Timeline: When balance reaches $320,000 (80% LTV), PMI can be removed. On a 30-year loan at 6.5%, this occurs around year 8, saving $135/month for remaining 22 years (~$35,600 total savings).
How to Remove PMI
Three ways to eliminate PMI on conventional loans:
Automatic Termination: PMI automatically ends when LTV reaches 78% based on original amortization schedule
Borrower-Requested Cancellation: Request removal when LTV reaches 80% through payments (requires current on payments, good payment history, no subordinate liens)
Appraisal-Based Removal: Order new appraisal to prove home value increase has reduced LTV to 80% (typically requires 2+ years of ownership, appraisal costs $400-600)
Conventional Loan Rates 2025
Conventional mortgage rates for 2025 vary based on multiple factors including credit score, down payment, loan term, property type, and overall market conditions.
Factors Affecting Conventional Loan Rates
Credit Score: Higher scores (740+) qualify for lowest rates; 620-680 pay 0.5-1.5% more
Down Payment/LTV: 20%+ down gets better pricing; less than 10% down increases rates
Loan Amount: Loans near conforming limits may have higher rates; very small loans also penalized
Loan Term: 15-year loans have lower rates than 30-year; ARMs start lower than fixed
Property Type: Primary residences get best rates; second homes and investment properties higher
Debt-to-Income Ratio: DTI above 43% may trigger rate adjustments
Cash Reserves: More reserves (6-12 months) can improve pricing
Lock Period: Longer rate locks (60-90 days) cost more than 30-day locks
Rate Comparison by Credit Score (Example Rates)
Credit Score
Rate Impact vs Best Rate
Monthly Payment on $400K
Total Interest (30 years)
760+
6.50% (baseline)
$2,528
$510,080
700-759
6.75% (+0.25%)
$2,594
$533,760
680-699
7.00% (+0.50%)
$2,661
$557,960
660-679
7.25% (+0.75%)
$2,729
$582,440
620-659
7.75% (+1.25%)
$2,865
$631,400
Key Insight: A 620 credit score vs 760 on a $400,000 loan costs an additional $121,320 in interest over 30 years. Improving credit before buying can save six figures.
Conventional Loan Application Process
Understanding the conventional loan approval process helps you prepare documentation and navigate each stage efficiently.
Step-by-Step Conventional Loan Process
Preparation Phase (2-4 weeks before)
Check credit reports from all three bureaus (Experian, Equifax, TransUnion)
Dispute any errors and pay down credit card balances
Gather financial documents (tax returns, pay stubs, bank statements)
Determine budget and target down payment amount
Research neighborhoods and home prices
Pre-Qualification (1-3 days)
Contact multiple lenders for rate quotes
Provide basic financial information (income, assets, debts)
Receive preliminary loan estimates
Compare lender rates, fees, and terms
Pre-Approval (5-10 days)
Submit formal loan application with chosen lender
Authorize credit check (hard inquiry)
Provide complete documentation package
Receive pre-approval letter with specific loan amount
Pre-approval valid typically 60-90 days
Home Search and Offer (2-8 weeks)
Work with real estate agent to find suitable properties
Make offer with financing contingency
Negotiate purchase contract terms
Execute purchase agreement
Loan Processing (1-2 weeks)
Lender orders property appraisal ($400-800)
Submit updated financial documents if needed
Lender verifies employment and income
Title company begins title search
Underwriting (1-3 weeks)
Underwriter reviews complete loan file
Verifies credit, income, assets, appraisal
Issues conditional approval with required conditions
Borrower provides additional documentation as requested
Final clear to close issued
Closing (3-7 days after clear to close)
Review Closing Disclosure (CD) received 3 days before closing
Conduct final walkthrough of property
Wire down payment and closing costs to title company
Sign loan documents and transfer documents
Receive keys and take ownership
Required Documentation for Conventional Loans
Document Category
Required Items
Purpose
Identification
Driver's license or passport, Social Security card
Identity verification
Income (W-2 Employees)
2 years W-2s, 30 days pay stubs, 2 years tax returns (if self-employed income shown)
Income verification
Income (Self-Employed)
2 years personal and business tax returns, YTD profit/loss, balance sheet
Self-employment income calculation
Assets
2-3 months bank statements (all pages), investment account statements
Down payment and reserves verification
Employment
Verification of Employment (VOE) form, 2-year employment history
Employment stability verification
Current Housing
12-24 months cancelled rent checks or mortgage statements
Payment history verification
Gift Funds (if applicable)
Gift letter from donor, proof of donor's funds, transfer documentation
Gift fund source verification
Additional (if applicable)
Divorce decree, bankruptcy discharge, foreclosure explanation letter
Credit event documentation
Conventional Loan Pros and Cons
Advantages of Conventional Loans
Removable Mortgage Insurance: PMI can be eliminated at 20% equity (unlike FHA's lifetime MIP)
Lower Long-Term Costs: No upfront insurance premium; overall cheaper with good credit
Higher Loan Limits: Up to $1,149,825 vs FHA's $1,209,750 ceiling
Property Flexibility: Can finance primary, second homes, and investment properties
Less Strict Property Standards: No special property requirements like FHA minimum standards
Best Rates for Good Credit: 680+ credit scores get significantly better rates than government loans
Faster Closing: Less paperwork and fewer requirements than government loans
No Upfront Insurance: No 1.75% upfront fee like FHA (unless choosing lender-paid PMI)
Jumbo Loan Option: Can exceed conforming limits with jumbo loans (same lender, familiar process)
Competitive 3% Down Programs: HomeReady, Home Possible offer low down payment with better long-term costs than FHA
Disadvantages of Conventional Loans
Higher Credit Requirements: 620 minimum vs FHA's 580; best rates require 740+
Stricter Qualification: More rigid income and asset verification than FHA
Larger Down Payment Preferred: While 3% programs exist, 5-20% more common
Credit-Sensitive Pricing: Significant rate increases for credit scores below 680
Higher DTI Impact: DTI above 43% more difficult to qualify than FHA
PMI Costs with Low Down Payment: PMI expensive with credit scores below 700
Recent Credit Events: Longer waiting periods after bankruptcy/foreclosure than FHA
Conventional Loan Strategies and Tips
Maximize Your Conventional Loan Benefits
Improve Credit to 740+: Every 20-point credit increase saves money; aim for 740+ for best rates and PMI pricing
Put Down 20% if Possible: Eliminate PMI, get best rates, start with immediate equity
Consider 15-Year Term: If you can afford higher payments, 15-year rates are 0.5-0.75% lower, saving six figures in interest
Shop Multiple Lenders: Rates and fees vary significantly; compare at least 3-5 lenders
Use 3% Down Programs Wisely: HomeReady/Home Possible offer lower PMI than standard conventional with 3% down
Pay Down Debt Before Applying: Lower DTI improves approval odds and may reduce rate
Request PMI Removal Early: Monitor home value; if it appreciates, order appraisal to remove PMI sooner
Time Your Rate Lock: Lock when rates are favorable but ensure you can close within lock period
Maintain Reserves: 6-12 months reserves strengthen application and may improve pricing
Avoid Large Purchases Before Closing: New debt can disqualify you even after approval
Common Conventional Loan Mistakes to Avoid
Not Shopping Lenders: Assuming all conventional loans are the same; rates vary 0.25-0.75% between lenders
Ignoring Credit Score Impact: Not realizing a 40-point credit boost could save $50,000+ over loan life
Choosing Wrong Down Payment: Putting 19% down vs 20% still requires PMI; better to do 15% or save for 20%
Forgetting About PMI Removal: Not tracking equity to remove PMI as soon as eligible
Maxing Out Budget: Getting approved for maximum amount but unable to comfortably afford payments
Changing Jobs During Process: Job changes require re-verification and can delay or derail closing
Withdrawing Large Sums: Large deposits or withdrawals during underwriting trigger investigations
Skipping Pre-Approval: Making offers without pre-approval weakens negotiating position
Conventional Loan Alternatives
While conventional loans are ideal for many buyers, other programs may better suit specific situations:
Alternative Low Down Payment Options
FHA Loans: 3.5% down with 580+ credit; easier qualification for lower credit scores (see our FHA loan guide)
VA Loans: 0% down for eligible veterans, active military, and surviving spouses with no PMI (explore our VA loan guide)
USDA Loans: 0% down for rural/suburban properties with income limits (read our USDA loan guide)
Jumbo Loans: For amounts exceeding conforming limits; stricter requirements but available from same lenders
Portfolio Loans: Non-conforming loans held by lenders; more flexible but higher rates
State/Local Programs: Down payment assistance and special programs for first-time buyers
Conclusion: Is a Conventional Loan Right for You?
Conventional loans remain the gold standard for homebuyers with good credit and stable income, offering the most flexibility, lowest long-term costs, and best overall value for those who qualify. With credit scores of 680+, 5-20% down payment, and stable employment, conventional loans provide removable PMI, competitive rates, and the ability to finance primary residences, second homes, and investment properties.
Conventional Loan Quick Reference 2025
Minimum Credit Score: 620 (640-680 preferred; 740+ for best rates)
Loan Limits: $766,550 standard; up to $1,149,825 high-cost areas
DTI Maximum: 43% (50% with strong compensating factors)
PMI: Required under 20% down; removable at 20% equity (0.3-1.5% annually)
Best For: Good credit, larger down payment, long-term ownership, desire to remove PMI
Consider FHA/VA If: Lower credit (under 680), 3.5% down, or veteran benefits available
The key to maximizing conventional loan benefits is optimizing your financial profile before applying. Focus on improving your credit score to 740+, saving for at least 20% down payment to avoid PMI, and maintaining low debt-to-income ratios. Even small improvements—a 40-point credit boost or an extra 5% down payment—can save tens of thousands of dollars over the life of your loan.
Before committing to a conventional loan, compare it to FHA, VA, and USDA options to ensure you're choosing the mortgage that best aligns with your financial situation and homeownership goals. While conventional loans offer superior long-term value for well-qualified borrowers, government-backed programs may provide better short-term affordability if your credit or savings are limited.
Ready to calculate your conventional loan payment? Use our mortgage calculator to estimate monthly payments including PMI, or try our loan comparison calculator to compare conventional vs FHA options side-by-side.