Conventional Loan

A conventional loan is a mortgage not backed or insured by any government agency. It is funded and serviced by private lenders, and may be sold to Fannie Mae or Freddie Mac if it meets their guidelines.

Key Characteristics

  • Not government-insured
  • Issued by private lenders (banks, credit unions, mortgage companies)
  • May be conforming or non-conforming
  • Credit score, debt-to-income, and down payment requirements vary

Loan Types

Conforming Loans

Meet the loan limits and criteria set by Fannie Mae and Freddie Mac

Non-Conforming Loans

Don’t meet conforming standards (e.g., Jumbo Loans exceed loan limits)

May have stricter approval criteria

Credit Score Requirements

  • Minimum Score: 620
  • Recommended: 740+ for best rates
  • PMI Impact: PMI premiums decrease with higher scores

Down Payment Options

  • Minimum: 3% for qualified first-time homebuyers
  • Typical Range: 5%–20%
  • No PMI Threshold: 20% or more down removes PMI

Private Mortgage Insurance (PMI)

  • Required If: Down payment is less than 20%
  • Cancellation Point: Loan-to-value (LTV) reaches 80%
  • Cost Factors: Credit score and down payment size

Debt-to-Income Ratio

  • Typical Maximum: 43%–45%
  • Stricter than FHA or VA

Documentation Requirements

  • Proof of income (pay stubs, W-2s, tax returns)
  • Credit report and history
  • Employment verification
  • Asset statements (bank accounts, retirement accounts)

Loan Terms

Common Terms: 15 years, 20 years, 30 years

Rate Types: Fixed-rate , Adjustable-rate (ARM)

Best For

  • Borrowers with good to excellent credit
  • Those with stable income and steady employment
  • Buyers with savings for a 10–20% down payment
  • People looking to avoid long-term mortgage insurance payments

Pros

  • Lower overall cost for qualified borrowers
  • Wide availability and flexible terms
  • PMI can be canceled
  • Competitive interest rates (especially with strong credit)

Cons

  • Stricter credit and income requirements
  • PMI required if under 20% down
  • Higher rates for lower credit scores
  • Less flexible than government-backed options for first-time buyers

Summary

A conventional loan is a strong option for financially stable buyers with good credit. It offers competitive rates, term flexibility, and PMI removal, but isn't ideal for those with limited credit or savings.