Conventional loans
A conventional loan is a mortgage not backed by a government agency, following Fannie Mae or Freddie Mac guidelines. It is the most common loan for buyers with reasonable credit and steady income, and it is the only type where mortgage insurance falls away automatically once you have enough equity.
Best for: Buyers with decent credit who want mortgage insurance that eventually goes away.
What makes this loan different
Mortgage insurance ends
Private mortgage insurance can be removed once you reach sufficient equity, and terminates automatically by law at a set point. On an FHA loan, mortgage insurance usually lasts the life of the loan.
Low down payment is available
Conventional does not require 20% down. Fannie Mae HomeReady and Freddie Mac Home Possible allow as little as 3% down for qualifying buyers, with reduced mortgage-insurance cost at lower incomes.
No upfront insurance premium
Unlike FHA, there is no upfront mortgage-insurance premium financed into the loan balance.
What you'll need
- Credit score generally in the low-to-mid 600s or above; better pricing at higher scores.
- Down payment from 3% for qualifying first-time buyers, otherwise typically 5%.
- Debt-to-income ratio within agency limits, with some flexibility from automated underwriting.
- Loan amount at or below the conforming limit, which is set annually and varies by county.
- Documented income and assets, plus an appraisal.
Honest trade-offs
- Credit score affects your price more than it does on FHA — a weaker score costs more here.
- Above the conforming limit you move into jumbo territory, with tighter requirements.
Common questions
Do I need 20% down for a conventional loan?
No. That is the most persistent myth in mortgage lending. Conventional loans allow as little as 3% down for qualifying first-time buyers and typically 5% otherwise. Below 20% you pay private mortgage insurance, which can be removed later once you have enough equity.
When does PMI come off a conventional loan?
You can request removal once your loan balance reaches 80% of the original value, and it terminates automatically at 78% under federal law, provided payments are current. This is the main advantage over FHA, where mortgage insurance generally lasts the life of the loan.
Is a conventional loan better than FHA?
Not always. Conventional usually wins if your credit is solid, because mortgage insurance is cheaper and eventually goes away. FHA usually wins if your credit is weaker or your debt ratio is high, because it prices less harshly on credit. Running both is the only way to know for your numbers.
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