Conventional Loan

· 3 min read
A conventional loan is any mortgage that isn’t backed by a government agency like the FHA, VA, or USDA — it’s the workhorse of American…

A conventional loan is any mortgage that isn’t backed by a government agency like the FHA, VA, or USDA — it’s the workhorse of American mortgage lending, accounting for roughly 75% of all home loans originated each year. If you have decent credit and some money for a down payment, conventional is probably your best option.

How Conventional Loans Work

Conventional loans are originated by private lenders and (if they’re conforming) sold to Fannie Mae or Freddie Mac on the secondary market. The guidelines come from these two government-sponsored enterprises, not from a federal agency. That means stricter underwriting than FHA but more flexibility than you might expect.

Minimum requirements: 620 credit score, 3% down for first-time buyers (5% for repeat buyers on some programs), and a DTI under 45-50%. But hitting minimums gets you minimum-quality pricing. The sweet spot is 740+ credit with 20% down — that unlocks the best rates with no PMI.

The Cost Impact

Conventional loan pricing is tiered. Fannie Mae and Freddie Mac use Loan-Level Pricing Adjustments (LLPAs) that add to your rate based on credit score, LTV, and loan type. Here’s what that looks like on a $350,000 loan:

  • 740 credit, 20% down: Base rate 6.75%, no adjustments, no PMI = $2,270/month
  • 700 credit, 10% down: Rate 7.00% (LLPA adds ~0.25%), PMI $130/month = $2,459/month
  • 660 credit, 5% down: Rate 7.375% (LLPA adds ~0.625%), PMI $250/month = $2,663/month

That’s a $393/month spread between the best and worst conventional scenarios on the same loan amount. Over 30 years, the 660-credit borrower pays roughly $141,000 more. Credit score is everything in conventional lending.

Conventional vs. FHA: The Crossover Point

Below ~680 credit with less than 10% down, FHA loans often beat conventional on rate and total cost. Above 700 credit with 5%+ down, conventional wins — especially since PMI cancels at 80% LTV while FHA’s MIP is permanent (on 3.5% down loans).

The crossover point shifts with market conditions, so always run both scenarios. A loan officer quoting only one option isn’t doing their job.

Conventional Loan Varieties

Conventional isn’t one-size-fits-all. Within the category, you’ve got:

  • Conforming: Under $832,750 (2025 limit), Fannie/Freddie guidelines
  • Jumbo: Above the conforming limit, stricter requirements
  • Portfolio: Held by the lender, custom guidelines
  • HomeReady/Home Possible: Low-down-payment programs for moderate-income borrowers

Real-World Example

A buyer with a 740 credit score and 15% down payment applies for a $350,000 conventional loan. Because the down payment is below 20%, PMI is required at $125/month. Their rate comes in at 6.50% with a monthly payment of $2,212 plus PMI. Once they reach 20% equity — through payments and appreciation — they can request PMI cancellation. An FHA borrower with the same profile would pay a lower rate but carry mortgage insurance for the entire loan term, making conventional the better long-term choice for this borrower.

Run the Numbers

Use our mortgage calculator to see how conventional loan applies to your specific situation. Plug in your numbers and compare scenarios before making any financial commitments.

Related Terms

Understanding conventional loan connects to several other concepts: FHA Loan, Conforming Loan, VA Loan, and PMI. Each of these terms interacts with conventional loan in ways that affect your buying power, monthly costs, or investment returns.

Frequently Asked Questions

Can I get a conventional loan with 3% down?

Yes. Fannie Mae’s HomeReady and Freddie Mac’s Home Possible programs allow 3% down for borrowers earning at or below 80% of area median income. Fannie’s standard 97% LTV program is available to all first-time buyers regardless of income. You’ll pay PMI, but it cancels once you reach 20% equity. Use our mortgage calculator to see payments with PMI included.

Is a conventional loan harder to qualify for than FHA?

Somewhat. Conventional requires a 620 minimum credit score (vs. 580 for FHA), and rate pricing penalizes lower scores more aggressively. But conventional allows higher loan amounts, has cancellable mortgage insurance, and doesn’t cap seller concessions as tightly. Check your DTI ratio and compare loan types to see which fits better.

What credit score do I need for a conventional loan?

Most lenders require a minimum 620 FICO score, but you will get the best rates with 740 or above. Scores between 620-680 often result in rate adjustments (called loan-level price adjustments) that can add 0.50-1.50% to your effective rate compared to a top-tier borrower.

How much down payment does a conventional loan require?

The minimum is 3% for first-time buyers through programs like HomeReady and Home Possible. Standard conventional loans require 5% minimum. Putting 20% down eliminates PMI entirely. Investment properties require 15-25% down depending on the number of units.