Conventional loans represent the most common path to homeownership in America, accounting for nearly 70% of all home purchases. Unlike government-backed loans, conventional mortgages offer flexibility, competitive rates, and diverse options to suit various financial situations. Understanding the different types of conventional loans can help you choose the best financing solution for your home purchase or refinance.
Understanding Conventional Loans
What Makes a Loan "Conventional"?
A conventional loan is any mortgage that isn't insured or guaranteed by a government agency. These loans are originated and serviced by private lenders such as banks, credit unions, and mortgage companies. While they follow guidelines set by Fannie Mae and Freddie Mac, conventional loans offer more flexibility than government-backed options.
Key Characteristics:
- Not insured by FHA, VA, or USDA
- Typically require higher credit scores
- More flexible property types and uses
- Variety of down payment options
- No upfront mortgage insurance premium
- Cancelable private mortgage insurance (PMI)
Major Categories of Conventional Loans
Conforming Loans
Conforming loans meet the standards set by Fannie Mae and Freddie Mac, allowing them to be sold on the secondary mortgage market. This makes them the most widely available and often most affordable conventional loan option.
2024 Conforming Loan Limits:
- Standard areas: $766,550
- High-cost areas: Up to $1,149,825
- Multi-unit properties: Higher limits based on units
Advantages:
- Competitive interest rates
- Wide lender availability
- Standardized requirements
- Multiple down payment options
- Streamlined approval process
Non-Conforming Loans
Non-conforming loans don't meet the standard guidelines for sale to Fannie Mae or Freddie Mac. The most common type is the jumbo loan, but this category includes various specialized products.
Types of Non-Conforming Loans:
- Jumbo mortgages (exceeding conforming limits)
- Portfolio loans (held by the lender)
- Non-QM loans (non-qualified mortgages)
- Bank statement loans
- Asset-based loans
Fixed-Rate Conventional Loans
30-Year Fixed-Rate Mortgage
The most popular mortgage choice in America, offering stability and predictability.
Benefits:
- Lowest monthly payment
- Payment never changes
- Protection against rate increases
- Easier to qualify with lower payments
- Maximum cash flow flexibility
Best For:
- Long-term homeowners
- Those prioritizing payment stability
- Buyers wanting lower monthly payments
- First-time homebuyers
15-Year Fixed-Rate Mortgage
A shorter term that saves significant interest over the life of the loan.
Benefits:
- Lower interest rate than 30-year
- Build equity twice as fast
- Save hundreds of thousands in interest
- Own your home free and clear sooner
- Forces disciplined savings
Best For:
- Higher income borrowers
- Those nearing retirement
- Refinancers with equity
- Investment-minded buyers
20-Year Fixed-Rate Mortgage
A middle ground between 15 and 30-year terms.
Benefits:
- Lower rate than 30-year
- More affordable than 15-year
- Significant interest savings
- Faster equity building
- Balanced approach
Best For:
- Move-up buyers
- Refinancers shortening their term
- Those with moderate income growth expected
- Buyers planning medium-term ownership
10-Year Fixed-Rate Mortgage
The shortest standard fixed-rate term, offering maximum savings.
Benefits:
- Lowest available rates
- Minimal interest paid
- Rapid equity accumulation
- Quick path to ownership
- Excellent for wealth building
Best For:
- High-income earners
- Aggressive savers
- Near-retirees
- Investment property buyers
Adjustable-Rate Conventional Loans
5/1 ARM
Fixed for five years, then adjusts annually.
Structure:
- 5 years at initial fixed rate
- Annual adjustments thereafter
- Rate caps protect against extreme changes
- Often 0.5-1% lower initial rate
Ideal Situations:
- Planning to move within 5-7 years
- Expecting income growth
- High-cost markets
- Maximum initial affordability
7/1 ARM
Seven years of fixed-rate stability before adjustments.
Structure:
- 7 years at initial fixed rate
- Annual adjustments after year 7
- Slightly higher than 5/1 ARM
- More stability than shorter ARMs
Best For:
- Medium-term homeowners
- Professional relocations
- Growing families
- Risk-conscious ARM buyers
10/1 ARM
Maximum fixed period for an ARM product.
Structure:
- 10 years at initial fixed rate
- Annual adjustments after year 10
- Rates closer to fixed mortgages
- Long-term predictability
Advantages:
- Decade of payment stability
- Lower than 30-year fixed
- Time to build equity
- Refinance opportunity window
Specialized Conventional Loan Programs
HomeReady Mortgage (Fannie Mae)
Designed for low-to-moderate income borrowers.
Features:
- 3% down payment minimum
- Below-median income not required
- Flexible funding sources
- Reduced mortgage insurance
- Income from all household members counts
Requirements:
- 620 minimum credit score
- Income limits apply (varies by area)
- Homebuyer education required
- Owner-occupied only
Home Possible Mortgage (Freddie Mac)
Freddie Mac's affordable loan solution.
Features:
- 3% down payment option
- No minimum borrower contribution required
- Flexible credit guidelines
- Reduced PMI rates
- Sweat equity eligible
Benefits:
- First-time buyer friendly
- Gift funds allowed
- BoarderIncome consideration
- Multiple unit properties allowed
Conventional 97 Loan
Maximum financing conventional loan option.
Key Points:
- 3% down payment only
- 97% loan-to-value ratio
- Fixed-rate only
- Single-family homes
- First-time buyer focus
Requirements:
- 620+ credit score
- At least one first-time buyer
- Owner-occupied only
- Standard PMI applies
- Full documentation required
Physician Loans
Specialized conventional loans for medical professionals.
Unique Features:
- No down payment options
- No PMI despite low/no down
- Student loans treated favorably
- Higher loan amounts
- Employment contract acceptance
Eligibility:
- Medical doctors (MD)
- Doctors of Osteopathy (DO)
- Dentists (DDS/DMD)
- Veterinarians (DVM)
- Sometimes residents/fellows
Bank Statement Loans
For self-employed borrowers using bank deposits as income.
How They Work:
- 12-24 months bank statements
- Deposits demonstrate income
- No tax returns required
- Higher rates than traditional
- Larger down payments typical
Best For:
- Business owners
- Freelancers
- Gig economy workers
- Commission-based sales
- Cash-heavy businesses
Down Payment Options
20% Down Conventional
The traditional gold standard.
Advantages:
- No PMI required
- Best interest rates
- Stronger offers in competitive markets
- More loan options
- Immediate equity cushion
10-15% Down Programs
Balanced down payment approach.
Benefits:
- Lower PMI rates
- Good rate pricing
- Reasonable cash requirement
- Equity buffer
- Competitive offers
Low Down Payment Options (3-5%)
Maximum financing with minimal cash.
3% Down Programs:
- HomeReady
- Home Possible
- Conventional 97
- First-time buyer focused
5% Down Standard:
- Available to all buyers
- No income limits
- More property types
- Repeat buyers eligible
Private Mortgage Insurance (PMI) Considerations
Understanding PMI
Required when putting less than 20% down on conventional loans.
PMI Rates Depend On:
- Credit score
- Down payment amount
- Loan term
- Property type
- Occupancy type
PMI Removal Strategies
Automatic Termination:
- 78% LTV based on original schedule
- No action required
- Must be current on payments
Requested Cancellation:
- 80% LTV reached
- Through payments or appreciation
- May require new appraisal
- Good payment history needed
Refinancing:
- Reach 20% equity
- Refinance to remove PMI
- Consider rate environment
- Factor in closing costs
Choosing the Right Conventional Loan
For First-Time Buyers
Recommended Options:
- 30-year fixed with 3-5% down
- HomeReady or Home Possible
- Conventional 97 if eligible
- Consider down payment assistance
For Move-Up Buyers
Consider:
- 20% down to avoid PMI
- 15 or 20-year terms
- Jumbo loans if needed
- Bridge loans for transitions
For Refinancers
Evaluate:
- Rate-and-term refinancing
- Cash-out options
- Term reduction opportunities
- PMI elimination potential
For Investors
Options Include:
- 25% down investment loans
- Portfolio products
- Multiple property financing
- DSCR loans
Current Market Considerations
Interest Rate Environment
Understanding how rates affect your options:
- Fixed rates protect against increases
- ARMs benefit if rates fall
- Shorter terms offer lower rates
- Points can reduce rates
Property Type Factors
Single-Family Homes:
- Most options available
- Best rates
- Lowest down payments
- Standard requirements
Condominiums:
- HOA review required
- Warrantable vs. non-warrantable
- Potentially higher rates
- Owner-occupancy ratios matter
Multi-Unit Properties:
- Higher down payments
- Increased rates
- Rental income consideration
- More stringent requirements
The Application Process
Documentation Requirements
Standard Documents:
- Two years tax returns
- Two months bank statements
- 30 days of pay stubs
- Photo ID
- Credit authorization
Qualification Factors
Key Metrics:
- Credit score (minimum 620, ideally 740+)
- Debt-to-income ratio (maximum 43-50%)
- Down payment funds
- Cash reserves
- Employment history
Timeline Expectations
Typical Process:
- Pre-approval: 1-3 days
- Full application: 1 day
- Processing: 2-3 weeks
- Underwriting: 3-5 days
- Closing: 3-5 days
Maximizing Your Conventional Loan Benefits
Rate Shopping
Best Practices:
- Get quotes from 3-5 lenders
- Compare on same day
- Look beyond rates
- Consider lender reputation
- Evaluate total costs
Credit Optimization
Before Applying:
- Check credit reports
- Pay down credit cards
- Avoid new credit
- Dispute errors
- Build payment history
Strategic Planning
Long-Term Thinking:
- Consider future needs
- Plan for life changes
- Build equity strategically
- Maintain financial flexibility
- Protect your investment
Common Misconceptions
Myth: You Need 20% Down
Reality: Many conventional loans require just 3-5% down, though 20% eliminates PMI.
Myth: Perfect Credit Required
Reality: Minimum scores start at 620, though better credit means better rates.
Myth: Conventional Loans Take Longer
Reality: Often close faster than government loans due to less red tape.
Myth: Only for Primary Residences
Reality: Conventional loans work for second homes and investment properties too.
Working with SRK CAPITAL
At SRK CAPITAL, we specialize in matching borrowers with the perfect conventional loan for their unique situation. Our experienced team understands the nuances of each loan type and can guide you toward the optimal solution.
Our Conventional Loan Expertise
- Access to multiple lenders
- Competitive rate pricing
- Specialized programs
- Fast processing times
- Expert guidance throughout
Our Process
- Consultation: Understand your goals and situation
- Analysis: Review your financial profile
- Recommendation: Present optimal loan options
- Application: Guide you through documentation
- Closing: Ensure smooth transaction completion
Making Your Decision
Choosing the right conventional loan requires balancing multiple factors:
- Current financial situation
- Future income expectations
- Homeownership timeline
- Risk tolerance
- Market conditions
The variety of conventional loan options means there's likely a perfect fit for your situation. Whether you're a first-time buyer exploring low down payment options, a move-up buyer seeking competitive rates, or an investor building a portfolio, conventional loans offer the flexibility and features to achieve your goals.
Ready to explore your conventional loan options? Contact SRK CAPITAL today for a personalized consultation. Our mortgage experts will analyze your situation, explain your options, and help you secure the ideal conventional loan for your home purchase or refinance. With our expertise and your goals, homeownership success is within reach.