A conventional loan is a mortgage that’s not insured or guaranteed by a government agency like the FHA, VA, or USDA. Instead, it’s backed by private lenders and often follows guidelines set by Fannie Mae and Freddie Mac.
Key characteristics:
- Credit score requirements: Generally higher than government loans (often 620+).
- Down payment flexibility: Can be as low as 3% for first-time buyers, though 20% eliminates private mortgage insurance (PMI).
- Loan limits: Must be within conforming loan limits for Fannie Mae/Freddie Mac, unless it’s a jumbo loan.
- PMI removal: Unlike FHA loans, PMI can be removed once you reach 20% equity.
Why it’s beneficial:
- Lower long-term cost – If you put 20% down, you avoid PMI completely, which can save thousands over the life of the loan.
- More property flexibility – Can be used for primary residences, vacation homes, or investment properties.
- Easier PMI removal – Even if you start with PMI, you can request removal when you reach 20% equity instead of being stuck for the life of the loan (as with FHA).
- Potentially better interest rates – Borrowers with strong credit scores and larger down payments may get lower rates than government loans.
- No upfront funding fee – Unlike VA or USDA loans, there’s no mandatory upfront fee.