| Feature | Conventional | FHA | VA |
|---|---|---|---|
| Minimum down payment | As low as 3 percent | As low as 3.5 percent | Often 0 percent |
| Typical credit floor | Around 620 or higher | Lower than conventional | Lender-set, often flexible |
| Mortgage insurance | PMI, cancelable | MIP, often for loan life | None, funding fee instead |
| Backed by | Private, agency guidelines | Federal Housing Administration | Department of Veterans Affairs |
Glossary · Financing & mortgages
Conventional Loan
A conventional loan is a mortgage not insured or guaranteed by a government agency like the FHA, VA, or USDA. Most conform to guidelines set by Fannie Mae and Freddie Mac. Conventional loans typically require stronger credit and larger down payments than government loans, and they are the most common mortgage type in the United States.
How does a conventional loan work?
A private lender funds the loan and often sells it to Fannie Mae or Freddie Mac, which requires the file to meet their guidelines. Borrowers generally need decent credit, a manageable DTI, and a down payment. Under 20 percent down usually means paying PMI.
Because these loans are backed by private capital rather than government insurance, lenders set qualification bars around credit, income, and reserves that meet agency guidelines.
Some conventional programs allow as little as 3 percent down for qualified buyers, though a larger down payment lowers PMI and monthly costs.
Why choose a conventional loan?
Conventional loans suit borrowers with solid credit who want to avoid the lasting mortgage insurance of some government loans. PMI on a conventional loan can be canceled once you reach enough equity, and stronger borrowers often get competitive rates and flexible terms.
The cancelable PMI is a key advantage over FHA insurance, which frequently lasts the life of the loan unless you refinance.
Conventional financing also works for a wide range of property types and purposes, including primary homes, second homes, and investment properties, which some government loans do not allow.
What is the difference between conforming and jumbo conventional loans?
Conventional loans within the annual conforming loan limits are conforming loans that Fannie Mae and Freddie Mac can buy. Those above the limit are jumbo loans with stricter requirements. The FHFA sets the conforming limit each year, and it is higher in high-cost areas.
Conforming loans follow standardized agency rules, which keeps them widely available and competitively priced.
Jumbo loans exceed the limit, so they carry tougher credit, down payment, and reserve requirements because lenders cannot sell them to the agencies.
Worked example. For example, a buyer with a 740 credit score purchases a 400,000 dollar home with 5 percent down, borrowing 380,000 dollars on a conventional loan. Because the down payment is under 20 percent, they pay PMI. After the balance falls to 320,000 dollars, which is 80 percent of the original value, they request PMI cancellation and drop that monthly cost.
Common mistakes with Conventional Loan
- Do not assume a conventional loan requires 20 percent down, because some programs allow as little as 3 percent.
- Do not ignore PMI when comparing conventional and government loans, since conventional PMI can be canceled but FHA insurance often cannot.
- Do not confuse conforming with conventional, because a conventional loan above the conforming limit becomes a jumbo loan.
- Do not overlook credit requirements, since conventional loans usually want a score around 620 or higher for approval.
- Do not skip comparing conventional and FHA offers, because the better fit depends on your credit, down payment, and long-term plans.
Related terms
Term
FHA Loan
A government-insured mortgage with lower down payment and credit requirements, popular wit
Define TermVA Loan
A mortgage guaranteed by the Department of Veterans Affairs for eligible service members a
Define TermJumbo Loan
A mortgage that exceeds the conforming loan limits set for Fannie Mae and Freddie Mac.
Define TermPrivate Mortgage Insurance (PMI)
Insurance that protects the lender when a borrower puts down less than 20 percent on a con
DefineConventional Loan FAQ
What credit score do I need for a conventional loan?
Conventional loans usually want a credit score around 620 or higher, and stronger scores earn better rates and lower PMI. Requirements vary by lender and program, so a higher score meaningfully improves your terms and approval odds.
How much down payment does a conventional loan require?
Some conventional programs allow as little as 3 percent down for qualified buyers. Putting down less than 20 percent means paying private mortgage insurance until you reach enough equity, so a larger down payment lowers your monthly cost.
Is a conventional loan better than an FHA loan?
It depends on your profile. Conventional loans favor stronger credit and offer cancelable PMI. FHA loans allow lower credit and down payments but often carry mortgage insurance for the loan's life. Compare total costs for your situation.
What is a conforming loan limit?
The conforming loan limit is the maximum loan amount Fannie Mae and Freddie Mac will buy. The FHFA sets it annually, and it is higher in designated high-cost areas. Loans above the limit are jumbo loans with stricter rules.
Can I use a conventional loan for an investment property?
Yes. Conventional loans can finance primary homes, second homes, and investment properties, which some government loans cannot. Investment property loans typically require a larger down payment, stronger credit, and cash reserves compared with a primary residence.
Real estate glossary
Open glossary →