Conventional Loan Guide
Conventional Loan Overview
Educational information about conventional mortgages, the most common type of home loan in the United States. Learn how conventional loans differ from government-backed options and what to consider when exploring this loan type.
Disclaimer: This website provides general mortgage and financial information for educational purposes only. It does not constitute financial, legal, or mortgage advice. Housentia is not a licensed mortgage broker, lender, or loan originator.
What is a Conventional Loan?
Conventional Mortgages:
A conventional loan is a mortgage that is not insured or guaranteed by a government agency such as the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA), or the U.S. Department of Agriculture (USDA). Instead, conventional loans are backed by private lenders and typically sold to government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac.
Conventional loans are the most common type of mortgage in the United States. They offer flexibility in terms of loan amounts, property types, and can be used for primary residences, second homes, and investment properties.
Why Conventional Loans Are So Common
Conventional loans have become the default choice for many U.S. borrowers for several practical reasons:
Long-Term Cost Efficiency
Unlike FHA loans where mortgage insurance may last for the life of the loan, conventional loans allow PMI removal at 80% loan-to-value. This means your monthly payment can decrease over time as you build equity, potentially saving thousands of dollars over the life of the loan.
Flexibility and Options
Conventional loans offer flexibility in property types (primary residence, second home, investment property), loan amounts (including jumbo loans), and terms (15-year, 30-year, ARMs). This versatility makes them suitable for a wide range of borrowers and situations.
Competitive Pricing with Strong Credit
Borrowers with strong credit scores (typically 740+) often receive competitive interest rates on conventional loans. The absence of government insurance premiums can also result in lower overall costs compared to government-backed loans for qualified borrowers.
Wide Availability
Conventional loans are offered by virtually all mortgage lenders, from large banks to credit unions to online lenders. This widespread availability gives borrowers more options to compare rates and terms.
Note: While conventional loans are common, they're not the right fit for everyone. Government-backed loans like FHA and VA may offer advantages for certain borrowers, such as lower down payment requirements or more flexible credit standards.
Key Characteristics of Conventional Loans
Down Payment Requirements
Conventional loans typically require a down payment of at least 3% to 5% for qualified borrowers. However, putting down 20% or more allows you to avoid private mortgage insurance (PMI), which can reduce your monthly payment.
Note: Down payment requirements vary by lender, credit score, and loan program. Some conventional loan programs may allow down payments as low as 3% for first-time home buyers.
Credit Score Considerations
Conventional loans generally require higher credit scores compared to government-backed loans like FHA. Most lenders look for credit scores of 620 or higher, though better rates may be available for scores of 740 or above.
Note: Credit score requirements are set by individual lenders and may vary. Your credit score is one of many factors lenders consider when evaluating your application.
Private Mortgage Insurance (PMI)
If you put down less than 20%, conventional loans typically require private mortgage insurance (PMI). PMI protects the lender in case of default. The good news is that PMI can be removed once you reach 80% loan-to-value (LTV) ratio, either through payments or property appreciation.
Note: PMI removal typically requires a request to your lender and may involve a new appraisal. Some loans may have automatic PMI removal at 78% LTV.
Loan Limits
Conventional loans have conforming loan limits set by Fannie Mae and Freddie Mac. For 2024, the conforming loan limit is $766,550 for most areas, with higher limits in high-cost areas. Loans above these limits are considered "jumbo loans" and may have different requirements.
Note: Loan limits are adjusted annually and vary by location. Check current limits for your area when considering a conventional loan.
Understanding Private Mortgage Insurance (PMI)
Key Advantage: PMI Can Be Removed at 80% LTV
One of the significant advantages of conventional loans is that PMI can be removed once you reach 80% loan-to-value ratio. This means your monthly payment can decrease over time, potentially saving you money as you build equity in your home.
How this differs from FHA loans:
FHA loans typically require Mortgage Insurance Premium (MIP) for the life of the loan if you put down less than 10%. With conventional loans, PMI removal at 80% LTV can result in lower long-term costs for borrowers who plan to stay in their home.
What is PMI?
Private Mortgage Insurance (PMI) is insurance that protects the lender if you default on your loan. It's typically required when your down payment is less than 20% of the home's purchase price.
PMI Removal at 80% Loan-to-Value (LTV)
Once you've paid down your loan to 80% of the home's original value (or the current appraised value, whichever is lower), you can request to have PMI removed. This can happen through:
- Regular payments: As you make monthly payments, your loan balance decreases and your LTV ratio improves.
- Property appreciation: If your home's value increases, your LTV ratio may drop below 80% even if you haven't paid down the loan significantly.
- Additional payments: Making extra principal payments can help you reach 80% LTV faster.
Important: PMI removal typically requires contacting your lender and may involve a new appraisal. Some loans automatically remove PMI at 78% LTV. Check your loan documents for specific PMI removal terms.
Conventional vs. FHA: Educational Comparison
Understanding the differences between conventional and FHA loans can help you make informed decisions. Here's an educational comparison:
Conventional Loans
- Not government-backed
- Typically requires 3-20% down payment
- PMI required if down payment < 20% (can be removed at 80% LTV)
- Generally requires credit score of 620+
- Can be used for primary residence, second home, or investment property
- Higher loan limits available (jumbo loans)
- No upfront mortgage insurance premium
FHA Loans
- Government-backed (FHA insured)
- Down payment as low as 3.5%
- Mortgage Insurance Premium (MIP) required (may be for life of loan)
- More flexible credit score requirements
- Primary residence only
- Lower loan limits than conventional
- Upfront MIP premium required
Educational Note: This comparison is for informational purposes only. The right loan type depends on your individual financial situation, credit profile, and goals. Consider speaking with licensed mortgage professionals to understand which option may be appropriate for your circumstances.
Is a Conventional Loan Right for You?
Consider these factors to help you understand if a conventional loan may align with your situation. This is a self-assessment tool, not financial advice:
Credit Score Range
Do you have a credit score of 620 or higher? Scores of 740+ may qualify for better rates. If your score is below 620, FHA loans may offer more flexibility.
Down Payment Considerations
Can you make a down payment of 3-5% or more? Putting down 20% avoids PMI entirely. If you can only afford 3.5% down, FHA may be an option to consider.
Property Type Flexibility
Are you buying a primary residence, second home, or investment property? Conventional loans offer flexibility for all three, while FHA and VA loans are typically limited to primary residences.
Long-Term Ownership Plans
Do you plan to stay in the home long enough to benefit from PMI removal at 80% LTV? If you plan to move or refinance within a few years, the PMI removal benefit may be less relevant.
Loan Amount Needs
Do you need a loan amount above conforming limits? Conventional jumbo loans are available, though they may have different requirements than conforming loans.
Educational Note: This self-assessment is for informational purposes only. Every borrower's situation is unique. Consider speaking with licensed mortgage professionals to understand which loan type may be appropriate for your specific circumstances.
Common Conventional Loan Terms
30-Year Fixed
The most common conventional loan term. Offers lower monthly payments spread over 30 years, making it easier to qualify and manage monthly expenses. You'll pay more interest over the life of the loan compared to shorter terms.
15-Year Fixed
Shorter term with higher monthly payments but significantly less interest paid over time. May be suitable if you can afford the higher payment and want to build equity faster.
Adjustable-Rate (ARM)
Conventional ARMs offer an initial fixed rate period (e.g., 5/1 ARM, 7/6 ARM) followed by adjustable rates. May start with lower rates but can increase over time.
Jumbo Loans
Conventional loans that exceed conforming loan limits. Typically require larger down payments, higher credit scores, and may have different interest rates than conforming loans.
Important Considerations
Potential Advantages
- PMI can be removed at 80% LTV
- Flexible property types (primary, second home, investment)
- Higher loan limits available (jumbo loans)
- No upfront mortgage insurance premium
- Competitive interest rates for qualified borrowers
- Widely available from many lenders
Things to Consider
- Higher credit score requirements than FHA
- PMI required if down payment < 20%
- Larger down payment typically needed for best rates
- Stricter debt-to-income ratio requirements
- May require more documentation than government loans
- Loan limits may restrict borrowing in high-cost areas
Explore Conventional Loan Scenarios
Use these educational tools to understand how conventional loans work:
Additional Resources
For more information about conventional loans and related topics:
Continue Your Learning
Use these educational resources to deepen your understanding of conventional loans and explore how they compare to other mortgage options.