What is a Conventional Loan?

Conventional loans are the most common choice of mortgage loans for home financing.

Conventional loans exclude loans that are supported by governmental agencies such as the Federal Housing Administration (FHA), the US Department of Veterans Affairs (VA), or the US Department of Agriculture (USDA) and publish their own set of guidelines for financing qualification.

But how do conventional mortgage loans compare to other types of mortgages in California? Whether you’re a first-time homebuyer in Santa Clarita, or you're looking to refinance, we'll break down everything to know about conventional loans, so you make the right financial decision.

What is a Conventional Loan?

Conventional loans typically conform to guidelines set by Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs) that help regulate the mortgage market.

Because conventional loans aren’t government-backed, they often have stricter requirements when it comes to credit scores, income, and down payments. However, they also offer flexibility, competitive interest rates, and a variety of loan term options.

Types of Conventional Loans

There are two main types of conventional loans: conforming and non-conforming.

1. Conforming Loans

Conforming loans meet the guidelines established by Fannie Mae and Freddie Mac, including loan limits set by the Federal Housing Finance Agency (FHFA). In 2024, the conforming loan limit for a single-family home was $766,550 in most areas, though it can be higher in certain high-cost regions.

2. Non-Conforming Loans (Jumbo Loans)

Non-conforming loans, which are often referred to as jumbo loans, exceed the FHFA loan limits. These loans are typically used for higher-priced homes and require a larger down payment and an excellent credit score. Because they don’t conform to GSE guidelines, they may also have higher interest rates.

Conventional Loan Requirements

Since conventional loans are not government-backed, lenders take on more risk. That means they set higher standards for approval. Here are the typical requirements:

1. Higher Credit Score

   Most lenders require a credit score of at least 620 to qualify for a conventional loan. However, a score of 740 or higher can help you secure a lower interest rate and better terms.

2. Down Payment

   Conventional loans generally require a minimum down payment of 3% to 5% for first-time homebuyers. However, if you can put down 20% or more, you can avoid private mortgage insurance (PMI), which can save you money over time.

3. Debt-to-Income (DTI) Ratio

   Lenders prefer a debt-to-income ratio of 43% or lower. This means your monthly debt payments (including your mortgage) should not exceed 43% of your gross monthly income.

4. Loan Limits

   Conforming loans have maximum loan limits set by the FHFA. If your home loan exceeds the loan limit amount, you’ll need to apply for a jumbo loan.

5. Private Mortgage Insurance (PMI)

   If your down payment is less than 20%, lenders will require you to pay PMI. This insurance protects the lender in case you default on the loan. PMI typically costs 0.5% to 1% of your loan amount annually, but can be removed once you reach 20% equity in your home.

Conventional Loans vs. Government-Backed Loans

How does a conventional loan stack up against government-backed loans like FHA, VA Loans, and USDA loans?

Loan Type	Backed By	Minimum Down Payment	Credit Score Requirement	PMI Required?
Conventional	Private lenders	3%-5% (20% to avoid PMI)	620+	Yes, if <20% down
FHA	Federal Housing Administration	3.5%	580+ (500 with 10% down)	Yes
VA	Department of Veterans Affairs	0%	No minimum (typically 620+)	No
USDA	U.S. Department of Agriculture	0%	640+	Yes (guarantee fee)

Pros and Cons of Conventional Loans

Pros:

✔️ Lower interest rates for borrowers with good credit

✔️ No upfront mortgage insurance fees (unlike FHA loans)

✔️ More flexible loan terms (10, 15, 20, or 30 years)

✔️ No property restrictions (unlike USDA loans)

Cons:

❌ Stricter credit and income requirements

❌ Requires PMI if less than 20% down

❌ Higher down payment compared to some government loans

Is a Conventional Loan Right for You?

A conventional loan is a great option if:

✅ You have a solid credit score (620+ but ideally 740+ for the best rates)

✅ You can afford a 3%-20% down payment

✅ You want to avoid mortgage insurance by putting 20% down

✅ You need flexibility in loan terms and property types

However, if you have a lower credit score or can’t afford a large down payment, an FHA, VA, or USDA loan may be a better fit.

How to Apply for a Conventional Loan

Ready to buy a home in Santa Clarita? Here’s what you’ll need:

1. Check your credit score and debt-to-income ratio

2. Save for a down payment (aim for 20% if possible)

3. Get pre-approved by a lender to determine your budget

4. Shop for homes within your price range

5. Submit your mortgage application and provide necessary documents

6. Close on your home and get the keys!

   
   
   
   

Mortgage Lenders in Santa Clarita

A conventional loan is one of the most popular mortgage options for homebuyers due to its flexibility and competitive interest rates. Peregrine Financial is one of the top mortgage lenders in Santa Clarita because we assess your needs, financial situation, and can get creative to get you the home you want and need.

Still have questions about conventional loans? Call us today to set up an appointment to get started.