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For about 80% of homebuyers, purchasing a home means taking out a mortgage — and a conventional 30-year fixed-rate mortgage is the most popular kind of financing.

For the vast majority of people, acquiring a new home means taking out a mortgage. For 90% of homebuyers, that means opting for a conventional 30-year fixed-rate mortgage.

Conventional mortgages are those that are not insured or guaranteed by the government.

But the fact that conventional mortgages are so popular doesn’t mean that a conventional home loan is right for everyone. Here, learn more about conventional mortgages and how they compare to other options, including:

•   How do conventional mortgages work?

•   What are the different types of conventional loans?

•   How do conventional loans compare to other mortgages?

•   What are the pros and cons of conventional mortgages?

•   How do you qualify for a conventional loan?

How Conventional Mortgages Work

Conventional mortgages are home loans that are not backed by a government agency. Provided by private lenders, they are the most common type of home loan. A few points to note:

•   Conventional loans are offered by banks, credit unions, and mortgage companies, as well as by two government-sponsored enterprises, known as Fannie Mae and Freddie Mac. (Note: Government-sponsored and government-backed loans are two different things.)

•   Conventional mortgages tend to have a higher bar to entry than government-guaranteed home loans. You might need a better credit score and pay more in interest, for example. Government-backed FHA loans, VA loans, and USDA loans, on the other hand, are designed for certain kinds of homebuyers or homes and are often easier to qualify for. You’ll learn more about them below.

•   Among conventional loans, you’ll find substantial variety. You’ll have a choice of term length (how long you have to pay off the loan with installments), and you’ll probably have a choice between fixed-rate and adjustable-rate products. Keep reading for more detail on these options.

•   Because the government isn’t offering any assurances to the lender that you will pay back that loan, you’ll need to prove you are a good risk. That’s why lenders look at things like your credit score and down payment amount when deciding whether to offer you a conventional mortgage and at what rate.

Conventional vs Conforming Loans

As you pursue a home loan, you’ll likely hear the phrases “conventional loan” and “conforming loan.” Are they the same thing? Not exactly. Let’s spell out the difference:

•   A conforming loan is one in which the underlying terms and conditions adhere to the funding criteria of Freddie Mac and Fannie Mae. There’s a limit to how big the loan can be, and this figure is determined each year by the Federal Housing Finance Agency, or FHFA. For 2024, that ceiling was set at $766,550 for most of the United States. (It was a higher number for those purchasing in certain high-cost areas; you can see the limit for your specific location on the FHFA web site.)

So all conforming loans are conventional loans. But what is a conventional mortgage may not be conforming. If, for instance, you apply for a jumbo mortgage (meaning one that’s more than $766,550 in 2024), you’d be hoping to be approved for a conventional loan. It would not, however, be a conforming mortgage because the amount is over the limit that Freddie Mac or Fannie Mae would back.

Types of Conventional Loans

When answering, “What is a conventional loan?” you’ll learn that it’s not just one single product. There are many options, such as how long a term (you may look at 15- and 30-year, as well as other options). Perhaps one of the most important decisions is whether you want to opt for a fixed or adjustable rate.

Fixed Rate

A conventional loan with a fixed interest rate is one in which the rate won’t change over the life of the loan. If you have one of these “fully amortized conventional loans,” as they are sometimes called, your monthly principal and interest payment will stay the same each month.

Although fixed-rate loans can provide predictability when it comes to payments, they may initially have higher interest rates than adjustable-rate mortgages.

Fixed-rate conventional loans can be a great option for homebuyers during periods of low rates because they can lock in a rate and it won’t rise, even decades from now.

Adjustable Rate

Adjustable-rate mortgages (also sometimes called variable rate loans) have the same interest rate for a set period of time, and then the rate will adjust for the rest of the loan term.

The major upside to choosing an ARM is that the initial rate is usually set below prevailing interest rates and remains constant for a specific amount of time, from six months to 10 years.

There’s a bit of lingo to learn with these loans. A 7/6 ARM of 30 years will have a fixed rate for the first seven years, and then the rate will adjust once every six months over the remaining 23 years, keeping in sync with prevailing rates. A 5/1 ARM will have a fixed rate for five years, followed by a variable rate that adjusts every year.

An ARM may be a good option if you’re not planning on staying in the home that long. The downside, of course, is that if you do stay put, your interest rate could end up higher than you want it to be.

Most adjustable-rate conventional mortgages have limits on how much the interest rate can increase over time. These caps protect a borrower from facing an unexpectedly steep rate hike.

Also, read the fine print and see if your introductory rate will adjust downward if rates shift lower over the course of the loan. Don’t assume they will.

💡 Recommended: Fixed-Rate vs Adjustable-Rate Mortgages

How Are Conventional Home Loans Different From Other Loans?

Wondering what a conventional home loan is vs. government-backed loans? Learn more here.

Conventional Loans vs. FHA Loans

Not sure if a conventional or FHA loan is better for you? FHA loans are geared toward lower- and middle-income buyers; these mortgages can offer a more affordable way to join the ranks of homeowners. Unlike conventional loans, FHA loans are insured by the Federal Housing Administration, so lenders take on less risk. If a borrower defaults, the FHA will help the lender recoup some of the lost costs.

But are FHA loans right for you, the borrower? Here are some of the key differences between FHA loans and conventional ones:

•   FHA loans are usually easier to qualify for. Conventional loans usually need a credit score of at least 620 and at least 3% down. With an FHA loan, you may get approved with a credit score as low as 500 with 10% down or 580 if you put down 3.5%.

•   Unlike conventional loans, FHA loans are limited to a certain amount of money, depending on the geographic location of the house you’re buying. The lender administering the FHA loan can impose its own requirements as well.

•   An FHA loan can be a good option for a buyer with a lower credit score, but it also will require a more rigorous home appraisal and possibly a longer approval process than a conventional loan.

•   Conventional loans require private mortgage insurance (PMI) if the down payment is less than 20%, but PMI will terminate once you reach 20% equity. FHA loans, however, require mortgage insurance for the life of the loan if you put less than 10% down.

💡 Recommended: Private Mortgage Insurance (PMI) vs Mortgage Insurance Premium (MIP)

Conventional Loans vs VA Loans

Not everyone has the choice between conventional and VA loans, which are backed by the U.S. Department of Veterans Affairs. Conventional loans are available to all who qualify, but VA loans are only accessible to those who are veterans, active-duty military, National Guard or Reserve members, or surviving spouses of those who served.

VA loans offer a number of perks that conventional loans don’t:

•   No down payment is needed.

•   No PMI is required, which is a good thing, because it’s typically anywhere from 0.58% to 1.86% of the original loan amount per year.

There are a couple of potential drawbacks to be aware of:

•   Most VA loans demand that you pay what’s known as a funding fee. This is typically 1.25% to 3.3% of the loan amount.

•   A VA loan must be used for a primary residence; no second homes are eligible.

Conventional Loans vs USDA Loans

Curious if you should apply for a USDA loan vs. a conventional loan? Consider this: No matter where in America your dream house is, you can likely apply for a conventional loan. Loans backed by the U.S. Department of Agriculture, however, are only available for use when buying a property in a qualifying rural area. The goal is to encourage people to move into certain areas and help them along with accessible loans.

Beyond this stipulation, consider these upsides of USDA loans vs. conventional loans:

•   USDA loans can offer a very affordable interest rate versus other loans.

•   USDA loans are available without a down payment.

•   These loans don’t require PMI.

But, to provide full disclosure, there are some downsides, beyond limited geographic availability:

•   USDA loans have income-based eligibility requirements. The loans are designed for lower- and middle-income potential home buyers, but the exact cap on income will depend on your geographic area and how many household members you have.

•   This program requires that the loan holder pay a guarantee fee, which is typically 1% of the loan’s total amount.

Benefits and Drawbacks of Conventional Mortgages

Now that you’ve learned what is a conventional loan and how it compares to some other options, let’s do a quick recap of the pros and cons of conventional loans.

Benefits of Conventional Loans

The upsides are:

•   Competitive rates. Rates may seem high, but they are still far from their high point of 16.63% in 1981. Plus, lenders want your business and you may be able to find attractive offers. You can use a mortgage calculator to see how even a small adjustment in interest rates can impact your monthly payments and interest payments over the life of the loan.

•   The ability to buy with little money down. Some conventional mortgages can be had with just 3% down for first-time homebuyers.

•   PMI isn’t forever. Once you have achieved 20% equity in your property, your PMI can be canceled.

•   Flexibility. There are different conventional mortgages to suit your needs, such as fixed- and variable-rate home loans. Also, these mortgages can be used for primary residences (whether single- or multi-family), second homes, and other variations.

Drawbacks of Conventional Loans

Now, the downsides of conventional loans:

•   PMI. If your mortgage involves a small down payment, you do have to pay that PMI until you reach a target number, such as 20% equity.

•   Tougher qualifications vs. government programs. You’ll usually need a credit score of 620 and, with that number, your rate will likely be higher than it would be if you had a higher score.

•   Stricter debt-to-income (DTI) ratio requirements. It’s likely that lenders will want to see a 45% DTI ratio. (DTI is your total monthly recurring payments divided by your monthly gross income.) Government programs have less rigorous qualifications.

How Do You Qualify for a Conventional Loan?

Conventional mortgage requirements vary by lender, but almost all private lenders will require you to have a cash down payment, a good credit score, and sufficient income to make the monthly payments. Here are more specifics:

•   Down Payment: Many lenders that offer conventional loans require that you have enough cash to make a decent down payment. Even if you can manage it, is 20% down always best? It might be more beneficial to put down less than 20% on your dream house.

•   Credit score and history: You’ll also need to demonstrate a good credit history to buy a house, which means at least 620, as mentioned above. You’ll want to show that you make loan payments on time every month.

Each conventional loan lender sets its own requirements when it comes to credit scores, but generally, the higher your credit score, the easier it will be to secure a conventional mortgage at a competitive interest rate.

•   Income: Most lenders will require you to show that you have a sufficient monthly income to meet the mortgage payments. They will also require information about your employment and bank accounts.

The Takeaway

A conventional home loan — meaning a loan not guaranteed by the government — is a very popular option for homebuyers. These mortgages have their pros and cons, as well as variations. It’s also important to know how they differ from government-backed loans, so you can choose the right product to suit your needs. Buying a home is a major step and a big investment, so you want to get the mortgage that suits you best.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

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FAQ

What is the minimum down payment for a conventional loan?

In most cases, 3% of the purchase price is the lowest amount possible and that minimum is usually reserved for first-time homebuyers — a group that can include people who have not purchased a primary residence in the last three years.

How many conventional loans can you have?

A lot! The Federal National Mortgage Association (FNMA, aka Fannie Mae) allows a person to have up to 10 properties with conventional financing. Just remember, you’ll have to convince a lender that you are a good risk for each and every loan.

Do all conventional loans require PMI?

Most lenders require PMI (private mortgage insurance) if you are putting less than 20% down when purchasing a property. However, you may find some PMI-free loans available. They typically have a higher interest rate, though, so make sure they are worthwhile given your particular situation.

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Setting up your first credit card is a major money milestone: When you get one, you join the more than three out of four Americans with plastic in their pocket. A credit card can allow you to buy goods and services pretty much whenever, wherever you like. You’re starting on an important credit-building journey as well.

As you comparison-shop and fill out an application or two, it’s valuable to understand the ins and outs of setting up a credit card. This can help you select the right card for your needs and use it responsibly. So read on to learn the full story on:

•   The basics on credit cards

•   What you need to get one

•   How to apply

•   The smart way to purchase with plastic once you’ve been approved.

What is a Credit Card?

A credit card is a physical card (typically a plastic one, rectangular in shape) that allows you to use your credit card account. By physically presenting the card to a vendor or keying in its details online, you can use your credit card to make purchases, donate funds, and withdraw cash up to your credit card limits. Some details:

•   The average credit limit in the U.S. now is almost $30,000, but the amount you’ll be given will vary based on such factors as payment and account histories, how much debt you are carrying, and your income.

•   A higher credit limit isn’t necessarily better (you’ll learn more about why below) as it can allow you to rack up more debt than might be financially healthy for you. Also, note that if you are new to credit, your limit may start low and rise as you show you can responsibly pay it back on time.

•   A credit card is a revolving form of a short-term loan. You then make payments to the credit card issuer. There are various types of credit cards (including all kinds of points to be earned and other rewards) to consider.

•   Depending on your particular situation and what kind of purchase you are trying to fund, there’s also the personal loan vs. credit card difference to ponder.

As you mull over your options, let’s be clear: Credit cards aren’t giving you this purchase power for free.

•   You may pay an annual fee and other credit card fees, and you are charged a typically high rate of interest on the balance you carry on your card.

•   The latest figures say that offers of new credit card accounts have an average interest rate of more than 20% at the start of 2024. In addition, if you miss a payment’s due date, you will probably be assessed late fees as well.

•   The latest Fed intel shows that Americans carry more than $1 trillion in credit card debt. That means a lot of people may have considerable debt. Paying careful attention to keeping your credit card account and your personal debt in good shape is an important responsibility.

Why You Might Need a Credit Card

Let’s look on the bright side of why so many of us have and reply upon credit cards.

•   They definitely make our lives easier. If you’d like to make purchases or pay bills online, then a credit card can be ideal.

•   It’s a convenient way to make in-person transactions without needing to carry around cash.

•   If cash is lost or stolen, it may be gone forever. With a credit card, though, you can report yours as lost or stolen and the issuer can cancel your old account and provide you with a new number and card.

•   When you’re short of cash, a credit card can help you to make necessary purchases. Say your washer/dryer breaks and you’d need about six months to save up for a new one. A credit card lets you get the appliance right now (and clean your laundry) while paying over time. Or maybe you get hit with a major car repair or dental bill. A credit card gives you the power to pay upfront and then gradually whittle that balance down.

•   Another reason you probably need a credit card: Many lodging facilities and car rental companies, as just two examples, may ask for a credit card number to hold your reservation.

Basic Requirements to Get a Credit Card

Credit card issuers may differ somewhat in the specifics of their requirements to get a card. In general, though, the financial institutions look for good credit scores and the financial ability to make credit card payments. Here are some pointers as you get set to apply:

•   Before you apply for a credit card, you can get copies of your credit reports from the three major credit bureaus for free at AnnualCreditReport.com. If there are any errors, dispute the data, and provide correct information, sending it to each of the credit bureaus that list incorrect details. The better your credit reports look, the higher your scores should be. This makes you a better candidate for loans and lines of credit.

•   A credit card issuer will also use financial criteria to help ensure that you’re able to make the payments. This can include your income and employment stability. In fact, the CARD Act of 2009 requires credit card issuers to consider a consumer’s ability to make required payments — at least the monthly minimum based on the outstanding balance.

•   Other requirements include being at least age 18 and having a Social Security number.

Recommended: How Many Credit Cards Should I Have?

How to Apply For a Credit Card

Next up: how to open a credit card. It basically requires filling out an application and then submitting the application for approval.

You can apply for your credit card in multiple ways:

•   in person at a financial institution

•   by mail

•   by phone

•   online.

After checking your credit scores, you may want to compare offers (including interest rates and APRs). As we’ve noted, interest rates can be high, so do research; there are plenty of online tools and sites that allow you to scan various offers.

Some cards may be no-interest credit cards during a promotional period. Benefits can be obvious (not paying interest) but also check the length of the promotional period, what happens when it ends, and what fees may be involved.

Then apply for the card of choice that you believe you can qualify to receive. Many people opt to apply for a credit card online. You fill in basic information about yourself, and agree to a “hard inquiry” credit check (which may briefly lower your score when it shows up that you are applying for credit). Typically, there is no application fee involved to seek out a credit card.

How to Use a Credit Card Once You Have It

Once you’re approved and receive your card, it’s important to use a credit card responsibly. Strategies for doing that include the following:

•   Don’t make too many impulse buys. ”Too many,” of course, will depend upon your budget and how much your impulse purchases cost. But the truth is, when you are not pulling out cash to pay for an item, it may feel almost like it didn’t happen. Using a debit card in some situations can counteract this.

•   Use the appropriate credit card. If you have more than one card, consider which one is best to use; for example, will you earn rewards on a certain card?

•   Take advantage of perks. If your card comes with a reward or cash-back program, take advantage of the benefits.

•   Sign up for automatic payments or for payment due-date reminders. That way, you can make payments on time, which helps with credit scores. If you fall behind, this can lower your credit scores and make it more challenging to get good interest rates going forward.

•   Check your monthly statements for errors. This is how you can catch identity theft and other credit card fraud. Let the issuer know ASAP when you spot something that’s not right — and report a lost or stolen card as soon as possible.

After you make purchases on your card, you’ll receive monthly statements, typically with a minimum payment (perhaps 1% to 4% of the balance or a fixed amount) and the outstanding balance. Credit card companies usually give you a grace period in which you can pay off the balance in full to avoid owing interest.

Consider these two caveats:

•   A common mistake new credit card holders make is thinking that the minimum payment due is the “right” amount to pay and somehow improves their credit. Wrong! The minimum payment is just what it says: the minimum to avoid certain fees. It is actually preferable to keep your balance low or non-existent (meaning pay the entire amount owed each month). What’s best for your credit score and financial health is often using only 10% or less of the credit limit on your card.

•   If your credit card allows you to take cash advances, know that interest rates are often higher than what you’d pay on purchases, plus there may be cash advance fees. If you take the money from an ATM or a bank, there will likely be additional fees. Also, it’s standard that interest accrues from the date of withdrawal with no grace period. In other words, this can be a very costly way to get your hands on some cash.

Recommended: Understanding Purchase Interest Charges on Credit Cards

The Takeaway

Getting a credit card is a major rite of passage as well as a big responsibility. As you’ve learned, it can be simple to apply and get approved for a card, but staying on top of your debt can take some attention and effort. Given how many Americans have at times unwieldy credit card debt and how high the rates are, use credit carefully, and you’ll enjoy its convenience and credit-building powers for years to come.

Whether you’re looking to build credit, apply for a new credit card, or save money with the cards you have, it’s important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

What are the benefits of having a credit card?

You can use credit cards to make purchases in person and online, and then make payments over time (although interest will accrue if you don’t pay the balance in full each month). Also, many offer rewards, among other benefits.

What are the requirements for opening up a credit card?

Requirements vary, but typically issuers want to see a good credit score and the financial ability to make payments on the card. Additional requirements:The applicant must be 18 years old with a valid Social Security number.

How should you use your credit card?

There are a wide range of ways to responsibly use your credit card. In fact, one of its key benefits is its flexibility. So, as long as you follow the credit card rules and manage the balance responsibility, how you use it is really up to you.

Photo credit: iStock/Alesmunt

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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