A lower credit score means more risk for your lender. Because of that, they'll charge you more to cover that risk, especially since a conventional loan doesn't have a government agency as a safety net. Once your score dips below 680, you could find that government-backed options offer more competitive rates.
Conventional loans generally offer lower costs than other loan types, and if you meet credit score requirements and want a down payment of as low as 3%, a conventional mortgage might be the best solution for you. To find out what types of financing you qualify for, start the mortgage application process today.
FHA loans generally accept modest credit scores: Borrowers with lower credit scores or credit challenges are frequently approved. Conventional loans generally favor higher credit scores: Borrowers tend to need moderate to high credit scores to receive opportune loan terms and rates.
Benefits of a Conventional Loan
Conventional mortgages are often the best choice for borrowers who have excellent credit and a down payment of at least 20 percent. These loans can be used to buy a primary home, second home or investment property, unlike FHA or VA loans, which may only be used for a primary home.
FHA loans are mortgages insured by the U.S. government's Federal Housing Administration. The insurance allows lenders to offer qualifying terms that are less strict than conventional mortgages. That means that homebuyers (particularly first-time buyers) can more easily qualify for a mortgage.
Sellers often prefer conventional mortgages because they usually offer lower interest rates and the qualification requirements can be more lenient than those of an FHA loan. Additionally, with conventional loans, sellers may not have to pay private mortgage insurance or other upfront costs associated with an FHA loan.
Sellers often prefer conventional buyers because of their own financial views. Because a conventional loan typically requires higher credit and more money down, sellers often deem these reasons as a lower risk to default and traits of a trustworthy buyer.
The minimum down payment requirement for a conventional loan is 3% of the loan amount. However, lenders may require borrowers with high DTI ratios or low credit scores to make a larger down payment. Even if it's not required, if you're able to make a higher down payment, you may want to consider doing so.
Your monthly payment for a $300,000 mortgage and a 30-year loan term could range from $1,798 to $2,201, depending on your interest rate and other factors. Learn more about the upfront and long-term costs of a home loan. Aly J. Yale is a personal finance journalist with more than 12 years of experience.
Someone might want a conventional loan if they have a strong credit score and low debt-to-income ratio, because then they can get a relatively good rate. It's common to be able to put down 3% with a conventional loan these days, whereas even FHA loans require 3.5%.
Investors Who Buy Loans
Some are commercial banks, some are private companies, some are real estate investment trusts, and some are other mortgage banks.
Conventional loans typically require the borrower to have a debt-to-income ratio lower than 43%, although some lenders may allow it as high as 50%. Conventional loans of up to $424,100 typically do not require mortgage insurance.
Usually not. If you're applying for a conforming conventional loan, most lenders will require you to have a credit score above 620, which FICO considers fair. Other types of loans, such as FHA or VA loans, allow for lower credit scores, so check with your lender to see what you can qualify for.
Conventional loan closing costs: Typically, you'll pay between 2% and 5% of the price of the home at closing with a Conventional loan. FHA loan closing costs: According to the U.S. Department of Housing and Urban Development, FHA loan closing costs average between 3% and 4% of the purchase price of the home.
Low monthly payments: Assuming identical principle balances, a 30-year fixed-rate mortgage offers the lowest monthly payment among traditional fixed-rate loans. Flexibility with payments: The lower payment will allow you more flexibility if you run into financial trouble — a layoff or a prolonged illness, for instance.
Which loan is better: FHA or conventional? To a large extent, that depends on you and your financial profile. Generally, a conventional loan is best for those with strong credit and a bigger home buying budget. If your credit score is below 620, a loan backed by the FHA might be your only option.
Conventional loans typically require a 620 minimum credit score and at least 3 percent for a down payment. This type of mortgage comes with a fixed or adjustable interest rate, and can be either conforming or nonconforming.
The conforming mortgage loan limit for a single-family home in 2025 is $806,500, an increase from $766,550 in 2024. Conforming loan limits are based on home prices throughout the U.S.
These loans are perfect for borrowers with a strong credit history and the funds for a more substantial down payment. Conventional loans offer the ability to avoid the costs of mortgage insurance while also giving borrowers the option of fixed or adjustable rates.
Some reasons a seller might refuse an FHA loan include misconceptions about longer closing times, stricter property requirements, or the belief that FHA borrowers are riskier.
FHA Simple Refinances and FHA Streamline Refinances are only available to homeowners with an existing FHA loan. But both the FHA cash-out refinance and FHA 203(k) refinance options are available to homeowners with all loan types. This means borrowers can refinance a conventional mortgage into an FHA loan.
The benefits include low interest payments, no down payment options, and adjustable rate mortgages. Drawbacks include stricter requirements to qualify, large payments if market rates increase, lack of 5% equity requirement, and additional fees if borrower has a less than excellent credit score.
A lot of first-time homebuyers think they need a 20% down payment to qualify for a conventional loan. That's simply not true. Conventional loan down payment requirements are as low as 3%. That's only $9,000 down for a $300,000 home, or $6,000 down for a $200,000 home.
Reasons your mortgage application may be denied include a dip in your credit score, increased debt, paperwork errors, a low home appraisal and unverified cash deposits.