If you're looking for the most affordable mortgage available, you're likely in the market for a standard loan. Before committing to a lending institution, however, it's essential to understand the types of traditional loans available to you. Every loan choice will have different requirements, benefits and disadvantages.

What is a traditional loan?

Conventional loans are merely 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 need to highly consider this loan type, as it's most likely to provide less costly borrowing options.

Understanding standard loan requirements

Conventional lenders frequently set more stringent minimum requirements than government-backed loans. For instance, a borrower with a credit history listed below 620 will not be qualified for a standard loan, however would receive an FHA loan. It's important to look at the complete image - your credit rating, debt-to-income (DTI) ratio, down payment amount and whether your borrowing requires go beyond loan limitations - when selecting which loan will be the very best fit for you.

7 types of conventional loans

Conforming loans

Conforming loans are the subset of traditional loans that follow a list of guidelines released by Fannie Mae and Freddie Mac, two distinct mortgage entities produced by the federal government to help the mortgage market run more efficiently and effectively. The standards that conforming loans must follow consist of a maximum loan limit, which is $806,500 in 2025 for a single-family home in a lot of U.S. counties.

Borrowers who:
Meet the credit rating, DTI ratio and other requirements for adhering loans
Don't need a loan that surpasses current conforming loan limitations

Nonconforming or 'portfolio' loans

Portfolio loans are mortgages that are held by the lender, instead of being sold on the secondary market to another mortgage entity. Because a portfolio loan isn't handed down, it does not need to comply with all of the stringent rules and guidelines connected with Fannie Mae and Freddie Mac. This suggests that portfolio mortgage lenders have the flexibility to set more lenient credentials guidelines for debtors.

Borrowers trying to find:
Flexibility in their mortgage in the kind of lower deposits
Waived personal mortgage insurance coverage (PMI) requirements
Loan amounts that are higher than conforming loan limitations

Jumbo loans

A jumbo loan is one type of nonconforming loan that does not stick to the guidelines released by Fannie Mae and Freddie Mac, however in a very specific method: by exceeding optimum loan limitations. This makes them riskier to jumbo loan lending institutions, implying debtors frequently face an extremely high bar to qualification - remarkably, though, it doesn't always indicate higher rates for jumbo mortgage customers.

Take care not to confuse jumbo loans with high-balance loans. If you need a loan larger than $806,500 and reside in an area that the Federal Housing Finance Agency (FHFA) has deemed a high-cost county, you can qualify for a high-balance loan, which is still considered a standard, conforming loan.

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

Fixed-rate loans

A fixed-rate loan has a steady interest rate that stays the same for the life of the loan. This eliminates surprises for the debtor and indicates that your month-to-month payments never ever 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 generally start with a low interest rate (compared to a common fixed-rate mortgage) for an introductory duration, debtors must be prepared for a rate increase after this period ends. Precisely how and when an ARM's rate will adjust will be set out because loan's terms. A 5/1 ARM loan, for instance, has a fixed rate for five years before changing annually.

Who are they best for?
Borrowers who are able to re-finance or sell their house before the fixed-rate introductory period ends might conserve money with an ARM.

Low-down-payment and zero-down conventional loans

Homebuyers searching for a low-down-payment conventional loan or a 100% financing mortgage - also understood as a "zero-down" loan, considering that no money deposit is necessary - have a number of options.

Buyers with strong credit may be qualified for loan programs that need just a 3% down payment. These include the conventional 97% LTV loan, Fannie Mae's HomeReady ® loan and Freddie Mac's Home Possible ® and HomeOne ® loans. Each program has slightly different income limits and requirements, nevertheless.

Who are they best for?
Borrowers who do not wish to put down a large amount of money.

Nonqualified mortgages

What are they?

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

Borrowers who can't fulfill the requirements for a conventional loan might certify for a non-QM loan. While they frequently serve mortgage borrowers with bad credit, they can also supply a method into homeownership for a range of individuals in nontraditional circumstances. The self-employed or those who wish to acquire residential or commercial properties with uncommon features, for example, can be well-served by a nonqualified mortgage, as long as they understand that these loans can have high mortgage rates and other unusual features.

Who are they finest for?

Homebuyers who have:
Low credit report
High DTI ratios
Unique circumstances that make it hard to get approved for a standard mortgage, yet are confident they can safely handle a mortgage

Pros and cons of standard loans

ProsCons.
Lower deposit than an FHA loan. You can put down just 3% on a standard loan, which is lower than the 3.5% required by an FHA loan.

Competitive mortgage insurance coverage rates. The cost of PMI, which begins if you don't put down a minimum of 20%, may sound difficult. But it's cheaper than FHA mortgage insurance and, sometimes, the VA funding charge.

Higher maximum DTI ratio. You can stretch approximately a 45% DTI, which is higher than FHA, VA or USDA loans typically allow.

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

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

Higher deposit than VA and USDA loans. If you're a military borrower or live in a rural area, you can utilize these programs to get into a home with no down.

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

Higher expenses for particular residential or commercial property types. Conventional loans can get more pricey if you're financing a made home, second home, apartment or more- to four-unit residential or commercial property.

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