A conventional mortgage is a home loan issued by private lenders that is not insured or guaranteed by a government agency (like FHA, VA, or USDA).
First-time buyers comparing loan types, renters ready to buy, homeowners refinancing away from government loans, and investors exploring financing options.
Conventional mortgages are standard home loans from banks, credit unions, and mortgage companies that follow private-lender rules. They commonly come as fixed- or adjustable-rate loans with terms such as 15, 20, or 30 years. Down payments can range from about 3% to 20% (or more), credit score requirements are stricter than many government programs, and PMI protects the lender if the borrower puts down under 20%.
Unlike FHA, VA, or USDA loans, conventional loans are not backed by a government agency. That means lenders set underwriting standards and bear more of the credit risk. Borrowers who qualify for conventional loans often receive lower fees or interest rates than some government programs, but they must meet higher credit and income thresholds and typically pay PMI when their down payment is small.
Conforming conventional loans meet Fannie Mae and Freddie Mac guidelines, including regional loan limits (the 2025 baseline conforming limit is $766,550 in most U.S. counties) and borrower standards; they usually have better rates. Non‑conforming conventional loans fall outside those requirements—most commonly jumbo loans—and typically come with higher rates and stricter underwriting.
| Feature | Conventional | FHA | VA | USDA |
|---|---|---|---|---|
| Backed by | Private lenders (may be sold to Fannie/Freddie) | Federal Housing Administration | Department of Veterans Affairs | U.S. Department of Agriculture |
| Minimum down payment | 3%–20% (depends on program & credit) | 3.5% | 0% (for eligible veterans) | 0% (rural-eligible buyers) |
| Typical credit score | ~620+ (740+ best rates) | ~580+ for 3.5% down | Flexible (varies by lender) | ~640+ typical |
| Mortgage insurance | PMI if <20% down | Upfront + annual MIP | No PMI; VA funding fee may apply | Upfront & annual guarantee fees |
| Property types | Primary, second homes, investment (limits differ) | Primary residence | Primary residence | Primary residence in eligible rural areas |
Most lenders expect a minimum credit score of about 620 for a conventional loan; scores >740 generally secure the best interest rates and terms.
Lenders typically prefer a DTI below ~36%–43% (total monthly debt divided by gross monthly income). Expect to provide pay stubs, W‑2s, tax returns, and bank statements to verify income and assets.
Stable employment—generally 2 years in the same field or with consistent income—helps approval. Lenders verify employment with recent pay stubs, employer contact, and tax records for self‑employment.
Primary residences and most single‑family homes are straightforward. Condos, multi‑unit properties, and fixer-uppers may need additional condo project approvals, higher down payments, or stricter condition inspections; investment properties usually require larger down payments and higher reserves.
Conventional programs can allow as little as 3% down (often for first‑time or low‑down programs) while 20% eliminates PMI. Larger down payments lower monthly payments and may reduce interest rates.
Conforming loans follow Fannie Mae/Freddie Mac limits; the 2025 baseline is $766,550 for most counties (higher in high‑cost areas). If your loan fits the limit and underwriting rules, you’ll likely get better pricing than a non‑conforming loan.
Buyers need jumbo or non‑conforming loans when the loan amount exceeds local conforming limits. These loans carry stricter credit requirements, larger down payments, higher rates, and more documentation because the lender retains more risk.
PMI protects the lender if a borrower with less than 20% down defaults. Most conventional loans require PMI when the loan‑to‑value (LTV) exceeds 80%.
PMI can be charged monthly, as an annual premium added to monthly payments, or paid upfront as a single fee. Rates depend on credit score, down payment, and loan term—better credit and larger down payments mean lower PMI.
Borrowers can request PMI cancellation when they reach 20% equity (80% LTV based on original value); federal rules generally require automatic termination at 78% LTV. Avoid PMI by making a 20% down payment, using a lender-paid mortgage insurance option (which may raise your rate), or employing a second "piggyback" mortgage.
Piggyback loans (an 80/10/10 structure) use a second loan to cover part of the purchase to avoid PMI but add complexity and possibly higher combined costs. Lender credits can offset upfront PMI or closing costs in exchange for a higher interest rate.
Qualified borrowers often receive conventional rates competitive with or lower than FHA/USDA rates; VA loans can be very competitive because of lower default risk for veterans. Rate differences depend on credit, down payment, and market conditions.
Higher credit scores, larger down payments, shorter loan terms, and lower DTI generally yield lower rates. Loan type (fixed vs adjustable) also affects initial rate and future payment risk.
Closing costs usually run about 2%–6% of the loan amount and include appraisal, title, lender fees, escrow, and prepaid items. Buyers typically pay most costs, but seller concessions or lender credits can shift some fees.
Example: $300,000 purchase, 30‑year fixed, 4.5% interest, 5% down ($15,000), mortgage = $285,000.
Primary residence financing typically has the most favorable rates and lower down payment options. Lenders verify occupancy intent and may require owner‑occupancy within a set time after closing.
Multi‑unit homes (2–4 units) can be financed with conventional loans if owner‑occupied and meet eligibility standards. Condos may need project approval, healthy reserves, and adherence to condo association rules.
Investment properties usually require larger down payments (often 15%–25% or more), higher credit standards, and sometimes cash reserves. Rates and fees for investment property loans are typically higher than for primary residences.
Prequalification is an initial estimate based on self‑reported info. Preapproval is a lender‑verified offer based on documentation and carries more weight when making offers.
Common documents: government ID, last 2 pay stubs, last 2 years’ W‑2s or tax returns (self‑employed need 2 years' returns), recent bank statements, asset statements, and explanation of large deposits.
Ask about interest rate, APR, loan estimate, PMI options, required reserves, and underwriting exceptions. Shop rates from multiple lenders and compare APR and total closing costs, not just the headline rate.
Underwriting often takes 2–4 weeks after application; delays can come from incomplete documentation, appraisal issues, title problems, or changes in employment or credit.
Refinance to conventional for lower rates, better terms, or to remove government mortgage insurance (e.g., refinance FHA with MIP into conventional and cancel PMI down the line). Cash‑out refinances let you borrow against equity but may need higher credit and reserves.
Refinances still require credit, income, and appraisal; cash‑out refinances usually have stricter limits and reserve requirements than rate‑and‑term refinances.
Refinancing an FHA or USDA loan into a conventional loan can eliminate ongoing government mortgage insurance. Refinancing a conventional loan after accumulating equity can remove PMI entirely once you meet cancellation rules.
Larger down payments improve approval odds and pricing. Gift funds are allowed by many lenders but must be documented with a gift letter and source verification.
Buyer A has a 700 credit score, stable job, and 5% down. Conventional gives competitive rate but requires PMI; FHA allows a slightly higher DTI but charges MIP that lasts longer—conventional is often better long term if Buyer A plans to build equity and refinance later.
Homeowner B bought with FHA and now has 22% equity. Refinancing to a conventional 30‑year loan can eliminate FHA MIP and, after reaching 20% LTV on the new loan, remove PMI obligations.
Before: FHA mortgage $250,000 at 4.5% → P&I ≈ $1,266; plus FHA MIP ≈ $150 → total ≈ $1,416. After refinance to conventional $240,000 at 4.0% → P&I ≈ $1,145; PMI (if <20%) varies but can be lower than FHA MIP. Net monthly savings can be meaningful depending on rate and insurance.
No — many conventional programs allow down payments as low as 3%, but putting 20% down avoids PMI.
Conventional lenders typically want a minimum score around 620; below that you may face higher rates or need alternative loan programs like FHA.
Not always. If your credit or down payment is weak, FHA or VA may be cheaper initially. For stronger borrowers, conventional often wins long term because of lower ongoing insurance costs and better pricing.
Typically 2–4 weeks after application, but timing depends on documentation, appraisal, and any issues found during underwriting.
Get prequalified online or with a lender by sharing income, assets, and credit range. Use a mortgage calculator to estimate payments at different down payments and rates.
Shop rates from multiple lenders, review APR and loan estimates, and contact local mortgage professionals to compare offers and program options.
