6 Common Types of Conventional Loan

A conventional loan is one of the most common mortgage options in the United States. Banks, credit unions, and mortgage lenders offer these loans. They are not insured by the federal government.

Many conventional mortgages follow guidelines set by Fannie Mae and Freddie Mac. These two government-sponsored enterprises help create stability in the mortgage market and set standards for loan limits, borrower qualifications, and underwriting rules.

Conventional loans are flexible. They can be used to finance primary homes, second homes, and some investment properties. Lenders may offer different loan structures depending on the borrower’s financial profile and the type of property being financed.

Understanding the available loan options is important before applying for a mortgage. This guide explains 6 Common Types of Conventional Loan, how they work, and where each loan type may apply.

What Is a Conventional Loan

A conventional loan is a mortgage issued by a private lender. The loan is not backed by a government program such as FHA, VA, or USDA loans.

Most lenders follow underwriting standards created by Fannie Mae and Freddie Mac. These guidelines help lenders evaluate risk and maintain consistency across the mortgage market.

When reviewing a conventional loan application, lenders typically examine several financial factors.

These include:

• Credit score
• Income and employment history
• Debt-to-income ratio
• Property value and appraisal

Conventional loans can finance different property types, including:

• Primary residences
• Second homes
• Investment properties

These loans often offer flexible loan terms and competitive interest rates. As they are widely available, they are a common option for borrowers exploring mortgage financing.

For a deeper explanation of eligibility and loan guidelines, read What is conventional loan.

Understanding this foundation helps explain the different types of conventional loans available.

Basic Requirements for Conventional Loan

Before reviewing the loan types, it is helpful to understand the typical requirements for conventional mortgage approval.

Although requirements vary by lender, most conventional loans follow similar guidelines.

Common requirements include:

Credit Score

Most lenders prefer a minimum credit score of around 620 for conventional loans. Higher credit scores may help borrowers qualify for better interest rates.

Debt-to-Income Ratio (DTI)

The debt-to-income ratio measures how much of a borrower’s income goes toward existing debt payments.

Many lenders prefer a DTI below 43%, although some programs may allow slightly higher ratios.

Down Payment

Conventional loans may require different down payment amounts depending on the program and borrower profile.

Some programs allow down payments as low as 3%, while other loans may require larger down payments.

Private Mortgage Insurance (PMI)

If the down payment is less than 20%, lenders usually require private mortgage insurance. This PMI protects the lender if the borrower defaults on the loan.

Once the loan balance reaches about 80% of the home’s value, PMI can often be removed.

These requirements help lenders evaluate risk when approving a mortgage.

What Are the Types of Conventional Loan?

The six common types of conventional loans include:

• Conforming loans
• Non-conforming loans
• Fixed-rate conventional loans
• Adjustable-rate mortgages (ARM)
• Low down payment conventional loans
• Conventional renovation loans

Each loan type follows different lending rules. Loan limits, interest structure, and property conditions tend to determine which loan option applies.

1. Conforming Loans

A conforming loan is a conventional mortgage that follows guidelines established by Fannie Mae and Freddie Mac.

The most important requirement is the loan limit.

The Federal Housing Finance Agency (FHFA) sets conforming loan limits each year that define the maximum loan amount which still qualifies as a conforming mortgage.

Loan limits vary based on location because home prices differ across regions. High-cost housing markets often have higher limits than standard markets.

You can review the latest numbers in Conforming loan limits in 2026 in California.

Key features of conforming loans include:

• Loan amounts must stay within FHFA limits
• Lenders follow standardized underwriting guidelines
• Competitive interest rates
• Broad availability among mortgage lenders

Because conforming loans follow national guidelines, lenders can sell them to Fannie Mae or Freddie Mac in the secondary mortgage market. This helps maintain liquidity in the mortgage industry.

Conforming loans are widely used when applying for a conventional loan in California, where loan limits can vary by county.

2. Non-Conforming Loans

A non-conforming loan is a conventional mortgage that does not meet the guidelines set by Fannie Mae or Freddie Mac.

The most common example is a jumbo loan, which exceeds the conforming loan limit established by the FHFA.

Since lenders cannot sell these loans to the secondary mortgage market, they often apply stricter qualification standards.

Typical requirements for non-conforming loans may include:

• Higher credit scores
• Larger down payments
• Strong income verification
• Higher cash reserves

These loans are often used when purchasing higher-priced properties.

More information about these loan categories is explained in What are Conforming and non-Conforming loans?

Understanding this difference helps borrowers evaluate mortgage options when considering a conventional loan in California, especially in high-value housing markets.

3. Fixed-Rate Conventional Loans

A fixed-rate conventional loan keeps the same interest rate throughout the life of the mortgage.

This means the principal and interest portion of the monthly payment remains stable over time.

Common fixed-rate loan terms include:

• 30-year mortgage
• 20-year mortgage
• 15-year mortgage

Key benefits of fixed-rate loans include:

• Stable monthly payments
• Predictable long-term repayment schedule
• Protection from rising interest rates

Because the rate remains constant, borrowers can plan long-term housing costs with greater certainty.

Fixed-rate mortgages are among the most widely used loan structures in the United States.

4. Adjustable-Rate Mortgages (ARM)

An adjustable-rate mortgage begins with a fixed interest rate for a specific period. Once it ends, the interest rate adjusts based on market conditions.

ARM loans are typically written using two numbers.

Examples include:

• 5/1 ARM
• 7/1 ARM
• 10/1 ARM

The first number represents the number of years the rate remains fixed. After the fixed period ends, the rate may adjust periodically, usually once per year.

Important components of an ARM include:

• Initial fixed-rate period
• Adjustment schedule
• Interest rate caps
• Market index used for rate adjustments

ARM loans generally start with lower initial interest rates than fixed-rate mortgages. However, the rate may increase or decrease after the adjustment period begins.

5. Low Down Payment Conventional Loans

Some conventional loan programs allow borrowers to purchase a home with smaller down payments.

In certain cases, the down payment can be as low as 3% of the home purchase price.

Several programs support lower down payment options, including:

• Fannie Mae HomeReady
• Freddie Mac Home Possible
• Conventional 97 loan program

These programs help expand access to conventional mortgage financing.

Typical program features include:

• Lower initial down payment requirements
• Private mortgage insurance when down payment is below 20%
• Standard credit and income verification

Lower down payment programs reduce the upfront funds required to purchase a home.

You can learn more about these requirements in conventional loan minimum down payment.

These programs help make a conventional loan in California more accessible for many borrowers.

6. Conventional Renovation Loans

A conventional renovation loan allows borrowers to finance both the home purchase and renovation costs within a single mortgage.

These loans are useful when purchasing properties that need repairs or upgrades.

Two major renovation programs include:

• Fannie Mae HomeStyle Renovation Loan
• Freddie Mac CHOICERenovation Loan

Eligible renovation projects may include:

• Kitchen remodeling
• Bathroom upgrades
• Roof replacement
• Structural repairs
• Energy-efficient improvements

The loan amount is usually based on the future value of the property after renovations are completed, not just the current property value.

This allows renovation costs to be included in the mortgage instead of requiring a separate loan.

More details about these programs are available in conventional renovation loan.

Benefits of Conventional Loans

Conventional loans offer several advantages compared with other mortgage options.

Some common benefits include:

• Flexible loan terms
• Competitive interest rates
• Multiple property financing options
• Availability across many lenders

Borrowers with strong credit profiles may find conventional loans especially attractive because they often provide favorable interest rates and flexible repayment options.

Final Thoughts

Conventional loans offer flexible financing options for different property types and borrower situations. These mortgages are widely used because they provide competitive interest rates, flexible loan terms, and availability across many lenders.

Understanding how conventional loans work helps borrowers evaluate mortgage options before applying for financing. Loan limits, interest structures, down payment requirements, and property conditions can all influence which loan structure is appropriate.

ALT Financial helps borrowers understand lending requirements and navigate mortgage options when exploring conventional loan solutions.

Frequently Asked Questions

What are the main types of conventional loans?

The six common types include conforming loans, non-conforming loans, fixed-rate loans, adjustable-rate mortgages, low down payment loans, and conventional renovation loans.

What credit score is needed for a conventional loan?

Most lenders prefer a credit score of 620 or higher. Higher credit scores may qualify for lower interest rates.

What is the minimum down payment for a conventional loan?

Some conventional loan programs allow down payments as low as 3%, depending on borrower qualifications and program guidelines.

Can conventional loans be used for second homes or investment properties?

Yes. Conventional loans can finance primary residences, second homes, and some investment properties depending on lender requirements.

Can renovation costs be included in a conventional mortgage?

Yes. Renovation programs such as HomeStyle Renovation and CHOICERenovation allow renovation costs to be included within the mortgage.