If you're looking for the most affordable mortgage readily available, you're likely in the market for a standard loan. Before devoting to a lender, however, it's essential to understand the kinds of conventional loans readily available to you. Every loan option will have different requirements, advantages and downsides.

What is a conventional loan?

Conventional loans are simply mortgages that aren't backed by federal government entities like the Federal Housing Administration (FHA) or U.S. Department of Veterans Affairs (VA). Homebuyers who can receive traditional loans should strongly consider this loan type, as it's likely to supply less costly loaning choices.

Understanding conventional loan requirements

Conventional lending institutions often set more rigid minimum requirements than government-backed loans. For example, a customer with a credit history below 620 will not be qualified for a standard loan, however would qualify for an FHA loan. It is very important to look at the full photo - your credit score, debt-to-income (DTI) ratio, down payment amount and whether your borrowing needs exceed loan limits - when selecting which loan will be the finest suitable for you.

7 types of traditional loans

Conforming loans

Conforming loans are the subset of conventional loans that stick to a list of standards provided by Fannie Mae and Freddie Mac, two distinct mortgage entities produced by the government to assist the mortgage market run more efficiently and successfully. The standards that adhering loans must abide by consist of an optimum loan limitation, which is $806,500 in 2025 for a single-family home in most U.S. counties.

Borrowers who:
Meet the credit report, DTI ratio and other requirements for adhering loans
Don't require a loan that exceeds existing conforming loan limitations

Nonconforming or 'portfolio' loans

Portfolio loans are mortgages that are held by the loan provider, rather than being sold on the secondary market to another mortgage entity. Because a portfolio loan isn't handed down, it does not have to conform to all of the stringent rules and standards related to Fannie Mae and Freddie Mac. This suggests that portfolio mortgage lending institutions have the flexibility to set more lax credentials guidelines for borrowers.

Borrowers looking for:
Flexibility in their mortgage in the form of lower deposits
Waived personal mortgage insurance coverage (PMI) requirements
Loan amounts that are higher than adhering loan limitations

Jumbo loans

A jumbo loan is one kind of nonconforming loan that does not stay with the guidelines provided by Fannie Mae and Freddie Mac, but in a really particular way: by going beyond optimum loan limitations. This makes them riskier to jumbo loan lending institutions, meaning customers frequently face an exceptionally high bar to certification - remarkably, though, it does not always suggest higher rates for jumbo mortgage borrowers.

Beware not to confuse jumbo loans with high-balance loans. If you need a loan larger than $806,500 and live in a location that the Federal Housing Finance Agency (FHFA) has deemed a high-cost county, you can receive a high-balance loan, which is still considered a traditional, conforming loan.

Who are they finest for?
Borrowers who need access to a loan larger than the conforming limit amount for their county.

Fixed-rate loans

A fixed-rate loan has a steady rates of interest that stays the exact same for the life of the loan. This removes surprises for the customer and indicates that your month-to-month payments never differ.

Who are they finest for?
Borrowers who desire stability and predictability in their mortgage payments.

Adjustable-rate mortgages (ARMs)

In contrast to fixed-rate mortgages, adjustable-rate mortgages have a rate of interest that changes over the loan term. Although ARMs usually start with a low rates of interest (compared to a typical fixed-rate mortgage) for an initial period, customers must be prepared for a rate boost after this period ends. Precisely how and when an ARM's rate will adjust will be laid out in that loan's terms. A 5/1 ARM loan, for instance, has a fixed rate for five years before changing every year.

Who are they finest for?
Borrowers who have the ability to refinance or offer their home before the fixed-rate introductory period ends may save money with an ARM.

Low-down-payment and zero-down traditional loans

Homebuyers searching for a low-down-payment traditional loan or a 100% funding mortgage - also called a "zero-down" loan, considering that no cash down payment is required - have numerous options.

Buyers with strong credit might be qualified for loan programs that need just a 3% deposit. These include the standard 97% LTV loan, Fannie Mae's HomeReady ® loan and Freddie Mac's Home Possible ® and HomeOne ® loans. Each program has slightly different income limitations and requirements, however.

Who are they best for?
Borrowers who do not wish to put down a big quantity of cash.

Nonqualified mortgages

What are they?

Just as nonconforming loans are defined by the fact that they do not follow Fannie Mae and Freddie Mac's guidelines, nonqualified mortgage (non-QM) loans are defined by the fact that they do not follow a set of rules provided by the Consumer Financial Protection Bureau (CFPB).

Borrowers who can't fulfill the requirements for a conventional loan might qualify for a non-QM loan. While they often serve mortgage customers with bad credit, they can also provide a way into homeownership for a range of people in nontraditional scenarios. The self-employed or those who wish to purchase residential or commercial properties with uncommon functions, for instance, can be well-served by a nonqualified mortgage, as long as they understand that these loans can have high mortgage rates and other unusual functions.

Who are they finest for?

Homebuyers who have:
Low credit history
High DTI ratios
Unique circumstances that make it hard to receive a standard mortgage, yet are confident they can safely take on a mortgage

Pros and cons of traditional loans

ProsCons.
Lower down payment than an FHA loan. You can put down only 3% on a traditional loan, which is lower than the 3.5% required by an FHA loan.

Competitive mortgage insurance coverage rates. The cost of PMI, which kicks in if you do not put down a minimum of 20%, might sound difficult. But it's less costly than FHA mortgage insurance coverage and, in many cases, the VA financing cost.

Higher optimum DTI ratio. You can stretch as much as a 45% DTI, which is higher than FHA, VA or USDA loans usually permit.

Flexibility with residential or commercial property type and tenancy. This makes traditional loans a terrific alternative to government-backed loans, which are limited to customers who will utilize the residential or commercial property as a main home.

Generous loan limitations. The loan limitations for conventional loans are often greater than for FHA or USDA loans.

Higher down payment than VA and USDA loans. If you're a military borrower or reside in a rural area, you can use these programs to enter a home with no down.

Higher minimum credit history: Borrowers with a credit history listed below 620 will not be able to qualify. This is often a higher bar than government-backed loans.

Higher expenses for specific residential or commercial property types. Conventional loans can get more costly if you're funding a made home, 2nd home, apartment or 2- to four-unit residential or commercial property.

Increased expenses for non-occupant customers. If you're financing a home you don't plan to live in, like an Airbnb residential or commercial property, your loan will be a little bit more pricey.