Conventional Loans Explained

A conventional loan is a mortgage that isn't insured or guaranteed by a government agency like FHA or VA. Most conventional loans follow guidelines set by Fannie Mae and Freddie Mac, which buy loans from lenders. They're the most common type of mortgage in the country.

Conforming vs. non-conforming

• Conforming loans fall within the loan limits set each year by the Federal Housing Finance Agency and meet Fannie Mae or Freddie Mac guidelines. In many California counties, limits are higher than the national baseline because home prices are higher.
• Non-conforming loans fall outside those guidelines, most often because the loan amount is above the conforming limit. Those are usually called jumbo loans.

Limits change annually and differ by county, so ask me for the current figure for your area.

Down payment

Conventional loans can allow as little as 3% down for eligible buyers on certain programs, often first-time buyers or those within income limits. Many borrowers put down 5%, 10% or more. Twenty percent down generally avoids private mortgage insurance.

Private mortgage insurance (PMI)

With less than 20% down, conventional loans usually require PMI. A few things that make it different from FHA mortgage insurance:

• The cost is priced based on your credit score, down payment and other factors, so stronger profiles often pay less.
• It can generally be removed once you reach enough equity. Federal law requires automatic termination at a certain point based on the original value and payment schedule, and you can often request removal earlier.

More in understanding mortgage insurance.

Credit and debt guidelines

Conventional loans generally have stricter credit requirements than FHA. Pricing is also more sensitive to credit scores. Two borrowers with the same loan amount can see meaningfully different rates or PMI costs based on credit. Maximum debt-to-income ratios depend on the overall file and the automated underwriting findings.

Property types

Conventional financing can be used for primary homes, second homes and investment properties, and for single-family homes, condos and 2–4 unit properties. Condos may need the HOA to meet certain standards.

Advantages

• PMI can usually be removed, unlike FHA mortgage insurance on many loans.
• Flexible on property type and occupancy, including second homes and rentals.
• Often a strong choice for borrowers with good credit and some savings.
• Sellers in competitive markets sometimes view conventional offers favorably, though every seller is different.

Disadvantages

• Stricter credit guidelines than FHA.
• PMI can be expensive for lower credit scores with small down payments.
• Loan limits apply; larger amounts move into jumbo territory.

Conventional vs. FHA: an example

These numbers are for illustration only. Imagine two buyers, each putting 5% down on the same home. One has a credit score in the high 700s, the other in the low 600s. The first buyer may find conventional financing with a lower overall payment because PMI is priced favorably. For the second buyer, FHA may come out ahead because its pricing is less sensitive to credit. The only way to know is to compare both. Here's more on FHA loans.

Is a conventional loan right for you?

It often fits borrowers with solid credit, steady income and at least a modest down payment. But "often" isn't "always". As an independent broker, I can compare conventional options across lenders and against other programs. You can also read my overview on the conventional loans page.

Questions?

If you'd like to see how a conventional loan compares with your other options, contact me, or start your pre-approval to see what you may qualify for.