A conventional loan is any mortgage that isn't backed by a government agency. It's the most common loan type in the United States by a wide margin, and it's what most borrowers end up with unless they specifically qualify for FHA, VA, or USDA financing. Understanding how conventional loans work — and what they require — is the baseline for shopping any mortgage.
What Makes a Loan "Conventional"
A conventional mortgage is funded by a private lender (a bank, credit union, or independent mortgage company) without insurance or guaranty from the federal government. Most are sold after closing to Fannie Mae or Freddie Mac — the two government-sponsored enterprises that buy loans, package them into securities, and resell them to investors. That secondary-market pipeline is what allows lenders to offer 30-year fixed rates and still recover their capital quickly.
Because Fannie and Freddie set the standards loans must meet to be sold to them, "conventional" effectively means "conforms to Fannie/Freddie rules." That's where the term *conforming loan* comes from. A loan that exceeds the Fannie/Freddie size limit is technically also conventional, but it's called a *jumbo* loan and follows different (stricter) rules.
Down Payment Options
You don't need 20% down. The minimum on a conventional loan is 3% for first-time buyers (5% for repeat buyers), but the down payment you choose has direct rate and insurance consequences.
Putting 20% down isn't about getting a lower rate — most of the rate benefit kicks in at 25% or higher. The real reason for 20% is to avoid PMI, which can add $80–$300+/month to your payment until you reach 20% equity.
| Down Payment | PMI Required? | Typical Rate Impact | Best For |
|---|---|---|---|
| 3% – 5% | Yes | Slightly higher | First-time buyers, limited cash |
| 10% | Yes (smaller premium) | Slightly higher | Builders of equity who want to keep cash |
| 15% | Yes (smallest premium) | Near best | Buyers a year or two from 20% |
| 20%+ | No | Best available | Borrowers with savings, lowest total cost |
PMI: When You Need It and When It Goes Away
Private Mortgage Insurance protects the lender — not you — if you default. You pay for it monthly, and it's required on conventional loans whenever your loan-to-value (LTV) exceeds 80%, meaning you put down less than 20%.
PMI premiums typically run 0.3% to 1.5% of the loan amount annually, with the rate depending heavily on your credit score. A 760+ credit score gets the lowest premium; a 620 score gets the highest. By law (the Homeowners Protection Act), PMI automatically terminates when your LTV reaches 78% based on the original amortization schedule. You can also request cancellation as soon as you reach 80% LTV, either by paying down principal or thanks to home appreciation (with an appraisal).
Credit and Income Requirements
- Minimum credit score: 620, though lenders rarely give favorable rates below 660. The best pricing starts at 740+.
- Debt-to-income ratio: typically capped at 45% for automated underwriting; manual underwriting can stretch to 50% with strong compensating factors.
- Cash reserves: 0–2 months of mortgage payments for most loans; more for jumbo or investment properties.
- Employment: two years of stable employment history; self-employed borrowers need two years of tax returns.
Conventional vs Government-Backed Loans
Conventional loans aren't always the best choice — they're just the default. Here's the short version of when each alternative beats them:
| If you have… | Consider… | Why |
|---|---|---|
| Credit below 680 + limited cash | FHA | Easier qualification, 3.5% down with 580 credit |
| Military service | VA | 0% down, no PMI, lower rate |
| Rural property + modest income | USDA | 0% down, no PMI, subsidized rate |
| Loan above ~$806k | Jumbo | Only option above the conforming limit |
| Strong credit + 10%+ down | Conventional | Lowest total cost, most flexibility |
If you have a 680+ credit score, a stable income, and can put down at least 5%, a conventional loan is almost always your starting point. Shop at least three lenders, watch the rate-vs-fee tradeoff carefully, and run the numbers on PMI elimination if you're under 20%. The Mortgage Calculator below will model monthly payment, full amortization, and total interest for any conventional scenario you want to evaluate.
