What is a traditional loan?
Traditional loans are simply mortgages that are not supported by the US government. If you are eligible, you can obtain this loan from a variety of mortgage lenders, including banks, credit unions, and online originators. It is the most common type of mortgage.
Traditional loans have more stringent eligibility criteria compared to government-supported mortgages such as FHA, VA, and USDA loans. However, other methods are flexible, such as allowing for a 3% lower down payment or a larger loan size.
There are two main types of traditional loans: fixed rates or adjustable rates. For fixed-rate mortgages, interest rates remain the same. You have the same monthly principal and interest payments on the length of your loan. With an adjustable rate mortgage, you have a fixed adoption rate, and then the rate changes at the preset interval based on the index rate and margin determined by the lender.
Compare current traditional mortgage rates
When comparing traditional mortgage rates, it’s good to know what you’re looking for. First, make sure you are comparing similar loans. Traditional loans are offered for different durations (such as 15 or 30 years) and have different rate behaviors (such as fixed fees or adjustable fees). The differences between each of these contribute to different rates.
It is also important to understand the difference between interest rates and annual rates (APR). The interest rate only reflects the interest charged on a mortgage, while the APR is a more complete picture of the interest rate with the fee charged. Comparing APRs will allow you to see more accurately how much a loan will cost.
Also, know that factors like your credit score, income, total debt, and loan amount will affect your fees. A higher credit score, higher income, lower debt and lower loan amounts generally provide the best possible fee.
Traditional loan requirements
To be approved for any type of mortgage, you must meet the lender’s credit and financial requirements. The requirements for traditional loans are as follows:
- Credit score: 620
- Debt Income (DTI) Ratio: 45% (excluding 50% exceptions)
- down payment: 3% of fixed-rate loans. 5% of adjustable loans
- Loan restrictions: $806,500 for a traditional loan that fits most of the US one-unit property. Up to $1,209,750 for the same type of loans and property in high cost areas
A traditional loan will only reduce by 3%, but you will pay private mortgage insurance (PMI) at less than 20%. According to the Urban Institute, the average monthly cost for PMI is between 0.46% and 1.5% of the loan amount. You can request that these premiums be cancelled when the loan to value (LTV) ratio reaches 80%.
learn more: How to get rid of PMI
Traditional loan types
Applicable loan
A conforming mortgage will adhere to certain guidelines regarding credit, loan size and other factors. For traditional loans, these guidelines are set by the Federal Housing Finance Agency (FHFA), the regulatory authority overseeing Fannie Mae and Freddie Mac. The FHFA standard includes a minimum credit score of 620 and a maximum (most locations) of a loan of $806,500.
If your traditional loan meets the conformance criteria, Fannie or Freddie is eligible to purchase. This buying, packaging and selling process will help drive capital flows in the mortgage market, allowing lenders to continue to fund borrowers.
Non-compliant loan
Traditional loans that do not meet one or more of the FHFA conforming loan criteria are known as non-conforming loans. One example of a non-conforming loan is a jumbo loan, a mortgage with an amount exceeding the maximum value of a conforming loan.
Non-qualified mortgage
Whether a traditional loan is conforming or non-conforming, it is covered by the “repayment ability” of the guidelines that determine whether a borrower can reasonably afford the loan. However, some lenders will expand their financing even if the borrower’s credit or financial profile does not meet these rules. This is known as an unqualified mortgage, QM loan or subprime loan.
learn more: 3% Mortgage Guide
Pros and cons of traditional loans
Strong Points
- Low down payment requirements: For a fixed-rate conforming traditional loan, you will need to lower it by 3%. This down payment could come from savings, gifts, down payment grants, or other sources.
- Cancellable mortgage insurance: If you cut below 20%, you will pay for your mortgage insurance, but you will not pay these premiums forever.
- Funding for a variety of needs: Traditional loans can be used to pay for a major residence, investment property, or a second home. It can also fit relatively large loan amounts at fixed or adjustable rates.
Cons
- Higher Credit Score Requirements: To get a traditional loan, you need a credit score of at least 620.
- Possibility of higher interest rates: Your particular rate depends on many factors, but sometimes traditional loans have slightly higher rates compared to government-supported options.
- A vetting of past difficulties: If bankruptcy or foreclosure occurs, you will need to wait a longer period of 2-4 years after bankruptcy and 3-7 years after foreclosure before applying for a traditional loan, compared to other types of mortgages.
Traditional loans vs government loans
Traditional loans are the most popular type of mortgage, but they are not the only type of fundraising. Here’s how you can compare it with government-supported options:
- Traditional vs FHA loans: FHA loans insured by the Federal Housing Administration (FHA) have dropped at least 3.5%, but require a minimum credit score of 580 (or 500 if placed 10% below). They also carry mortgage insurance requirements if you lower below 20%, but unlike traditional loan PMIs, FHA mortgage insurance is usually not possible to cancel or remove unless you refinance with a different type of loan.
- Traditional vs VA loan: VA loans guaranteed by the U.S. Veterans Affairs Administration (VA) are available to military service members, veterans and eligible spouses. VA loans most often do not require a down payment or mortgage insurance. However, unlike traditional loans, they cannot be used for investment properties or second or villas. This is only major residence. They also charge a funding fee.
- Traditional vs. USDA loans: USDA loans guaranteed by the USDA (USDA) are for moderate borrowers with low incomes in certain rural areas. No down payment is required, but you will be charged a guarantee fee and an annual fee.
What borrowers should know about today’s traditional loans
Traditional loan rates remained rising in the 6% to 7% range, most of 2023 and 2024. As home prices continue to rise, affordability remains a major problem for home buyers in 2025.
Experts surveyed by Bankrate in March 2025 predicted that mortgage rates will be stuck in a narrow range. They projected an average 30-year mortgage rate of 6.66% for 2025.
Mortgage rates are determined primarily by two things: bond markets and federal reserve policies. According to some experts surveyed, many lenders are priced for economic uncertainty. This leads at a higher rate.
“soUnless the economy is in a recession, there is limited room for decline,” says Mike Englund, chief economist at Action Economics.
This uncertainty complicates decisions Buy a house now or wait. Home buyers need to feel confident in their income safety to take this big step.
