A conventional loan is any mortgage that is not insured or guaranteed by a government agency — FHA, VA, or USDA. The majority of conventional loans conform to Fannie Mae and Freddie Mac standards, which is why they're also called conforming loans.
Conventional loans are the most common mortgage product in the U.S. They offer flexible terms, competitive pricing for borrowers with good credit, and the ability to drop mortgage insurance (PMI) once you build enough equity — something FHA's mortgage insurance doesn't offer as easily.
How it works
Lenders underwrite conventional loans against Fannie Mae or Freddie Mac guidelines, checking credit history, income, assets, and the loan-to-value ratio. Because the loan isn't government-insured, the lender leans more heavily on credit strength and down payment size to manage risk.
Down payment programs for first-time buyers can start well below the traditional 20% figure many people assume is required — some conventional programs allow as little as 3% down for qualified borrowers, with PMI covering the lender's added risk until enough equity builds up.
Terms are flexible: 15-year, 20-year, and 30-year fixed options are all common, along with adjustable-rate versions. The shorter the term, the faster you build equity and the less total interest you pay, at the cost of a higher required monthly payment.
When it matters to you
Conventional loans matter as the default comparison point for most homebuyers — they're worth quoting alongside FHA, VA, or USDA any time you qualify for more than one program, since the total cost can differ meaningfully.
They matter especially once you've built 20% equity, since that's typically when PMI can be dropped, permanently lowering the payment on an otherwise unchanged loan.
Common mistakes
- Assuming conventional always requires 20% down — several conventional programs allow much smaller down payments for qualified buyers.
- Not comparing conventional against FHA when credit is borderline — depending on your score, one program can be meaningfully cheaper than the other.
- Forgetting to request PMI cancellation once you reach 80% loan-to-value instead of waiting for it to drop off automatically at 78%.
- Choosing a 30-year term by default without pricing out a 15- or 20-year option, which can significantly reduce total interest paid.
FAQs
Do I need 20% down for a conventional loan?
No. Several conventional programs allow down payments as low as 3-5% for qualified buyers. PMI applies until you reach roughly 20% equity, but 20% down is not a requirement to get the loan.
What credit score do I need for a conventional loan?
Most lenders look for a minimum score in the low-to-mid 600s, with the best pricing reserved for stronger credit profiles. Exact minimums vary by lender and by how the rest of your application looks.
Is conventional better than FHA?
It depends on your credit and down payment. Conventional loans typically cost less over time for borrowers with strong credit, while FHA can be more accessible for borrowers with lower scores or past credit events. Compare both quotes side by side.