How It Works
A conventional loan is a mortgage that is not insured or guaranteed by any government agency. It is the most common type of mortgage and is offered by private lenders including banks, credit unions, and mortgage companies. These loans conform to guidelines set by Fannie Mae and Freddie Mac, the two government-sponsored enterprises that purchase mortgages on the secondary market.
Conventional loans come in two main varieties: conforming and non-conforming. Conforming loans meet the loan limits and guidelines set by Fannie Mae and Freddie Mac. If your loan amount exceeds the conforming limit for your area, you would need a jumbo loan instead. Most conventional loans offer both fixed-rate and adjustable-rate options with terms ranging from 10 to 30 years.
Down payments on conventional loans can be as low as 3% for first-time buyers through programs like Fannie Mae HomeReady and Freddie Mac Home Possible. However, putting down less than 20% means you will need to pay private mortgage insurance (PMI) until you reach 20% equity in the home. Once you hit that threshold, PMI can be removed, which is a major advantage over FHA loans where mortgage insurance often lasts the life of the loan.
Who Is This For?
- Borrowers with good to excellent credit (620+ score)
- Buyers who can afford at least 3% down payment
- Homeowners looking to refinance at competitive rates
- Buyers who want the ability to cancel mortgage insurance once they reach 20% equity
- Purchasers of primary residences, second homes, or investment properties
Pros & Cons
Frequently Asked Questions
What credit score do I need for a conventional loan?+
Most conventional lenders require a minimum credit score of 620. To qualify for the best interest rates, aim for 740 or higher. Borrowers with scores between 620 and 680 can still get approved but may face higher rates or stricter overlays.
Can I get a conventional loan with 3% down?+
Yes. Conventional loans through Fannie Mae's HomeReady or Freddie Mac's Home Possible programs allow down payments as low as 3% for first-time homebuyers who meet income limits. Most other buyers will need at least 5% down for a conventional loan.
When does PMI come off a conventional loan?+
Private mortgage insurance is canceled automatically by federal law when your loan balance reaches 78% of the original purchase price. You can request cancellation at 80% LTV. Home appreciation also lets you request early PMI removal with a new appraisal.
Conventional or FHA — which is better for me?+
Conventional is usually better if you have a credit score of 680+ and at least 5% down, because you can drop PMI later. FHA is often better with credit between 580 and 680 or with smaller down payments, but FHA mortgage insurance typically stays for the life of the loan.