What Is a Conventional Loan?
A conventional loan is a mortgage that is not insured or guaranteed by a federal government agency. Unlike FHA, VA, or USDA loans, conventional loans are originated by private lenders and typically sold to government-sponsored enterprises (GSEs) Fannie Mae or Freddie Mac. They are the most widely used loan type in the US, accounting for the majority of home purchase and refinance transactions each year.
Conventional vs. Government-Backed Loans
Government-backed loans offer more lenient qualifying standards in exchange for mortgage insurance premiums or guarantee fees paid to the government. Conventional loans demand stronger credit and larger down payments but give borrowers more flexibility once they build equity.
| Feature | Conventional | FHA | VA | USDA |
|---|---|---|---|---|
| Min. Down Payment | 3% | 3.5% | 0% | 0% |
| Min. Credit Score | 620 | 580 (500 w/ 10% down) | No minimum (lender sets) | 640 typical |
| Mortgage Insurance | PMI (cancellable at 80% LTV) | MIP for life of loan (if <10% down) | None | Annual guarantee fee |
| Upfront Insurance Fee | None | 1.75% of loan | 1.25–3.3% funding fee | 1% guarantee fee |
| Property Types | Flexible | Primary residence only | Primary residence only | Rural/suburban primary only |
| Income Limits | None | None | None (must be eligible veteran) | Yes (≤115% area median) |
Conforming vs. Non-Conforming (Jumbo) Loans
Conventional loans split into two categories based on loan size:
- Conforming loans fall at or below the conforming loan limit set annually by the Federal Housing Finance Agency (FHFA). For 2024, the baseline limit is $766,550 for a single-unit property in most US counties, with higher limits in high-cost areas (up to $1,149,825). Conforming loans can be purchased by Fannie Mae and Freddie Mac, which keeps rates competitive.
- Non-conforming (jumbo) loans exceed the conforming limit. Because Fannie Mae and Freddie Mac cannot purchase them, lenders hold them in their own portfolios. Jumbo loans typically require higher credit scores (720+), larger down payments (10–20%+), and substantial cash reserves.
Conventional Loan Requirements
To qualify for a conventional loan, lenders generally look for:
- Credit score: 620 minimum; scores of 740+ receive the best rates.
- Down payment: As low as 3% through programs like Fannie Mae's HomeReady or Freddie Mac's Home Possible, though 20% eliminates PMI entirely.
- Debt-to-income (DTI) ratio: Most lenders cap total DTI at 45–50%, with some flexibility to 57% for strong borrowers with compensating factors.
- Stable income and employment: Two years of documented income history preferred; self-employed borrowers typically need two years of tax returns.
- Appraisal: The property must appraise at or above the purchase price.
PMI on Conventional Loans
If your down payment is less than 20%, your lender will require private mortgage insurance (PMI). PMI protects the lender if you default. It typically costs 0.5%–1.5% of your loan amount per year, depending on your credit score, LTV ratio, and insurer.
A key advantage over FHA loans: PMI on conventional loans is cancellable. Under the Homeowners Protection Act, your lender must automatically cancel PMI when your loan balance reaches 78% of the original purchase price. You can also request cancellation when you reach 80% LTV — either through payments or home appreciation (with a new appraisal). Use our PMI calculator to estimate your monthly cost and cancellation timeline.
Advantages of Conventional Loans
- No upfront mortgage insurance fee. FHA charges 1.75% of the loan amount at closing; conventional loans have no equivalent charge.
- PMI is cancellable. FHA MIP typically lasts the life of the loan for borrowers who put less than 10% down. Conventional PMI ends at 80% LTV.
- Flexible property types. Second homes, investment properties, condos, and multi-unit properties (2–4 units) are all eligible — something most government-backed programs do not allow.
- Higher loan limits. Conforming limits exceed FHA limits in many markets, and jumbo loans have no cap.
- Potentially lower total cost for borrowers with strong credit and 20% down compared to FHA over the life of the loan.
When an FHA or Government Loan May Be Better
Conventional loans are not right for everyone. Consider a government-backed option if:
- Your credit score is below 620 — FHA loans accept scores as low as 500 with a 10% down payment.
- You have a higher DTI (above 50%) that exceeds conventional limits.
- You are an eligible veteran or active-duty service member — a VA loan offers 0% down with no mortgage insurance.
- You are buying in a qualifying rural or suburban area with limited savings — a USDA loan offers 0% down and low fees.
- You have a recent bankruptcy or foreclosure and cannot yet meet conventional waiting periods.
Run the numbers with our FHA loan calculator and compare total costs side by side before deciding.
Source: Fannie Mae — Conventional Loan Overview
This definition is for informational purposes only and does not constitute financial advice.