When people talk about "getting a mortgage," they're usually thinking of a conventional loan—the most common type of home financing in America. Roughly two-thirds of all mortgages are conventional loans, backed not by the government but by private lenders and investors. Understanding how they work, what they require, and when they make sense helps you choose the right financing for your situation.
What Is a Conventional Loan?
A conventional loan is any mortgage that isn't insured or guaranteed by a government agency. Unlike FHA loans (insured by the Federal Housing Administration), VA loans (guaranteed by the Department of Veterans Affairs), or USDA loans (backed by the Department of Agriculture), conventional loans rely on private mortgage insurance and the borrower's creditworthiness to protect lenders.
Most conventional loans are conforming loans, meaning they meet the standards set by Fannie Mae and Freddie Mac—government-sponsored enterprises that buy mortgages from lenders. These standards include loan limits ($832,750 in most areas for 2026, higher in expensive markets), credit requirements, and documentation standards. Loans that exceed conforming limits are called jumbo loans and have different requirements.
The conforming loan system creates a massive secondary market where lenders can sell loans and replenish their capital to make more loans. This liquidity keeps mortgage rates competitive and makes conventional loans widely available.
Qualification Requirements
Conventional loans have stricter requirements than government-backed options, but they're achievable for many buyers—especially those with solid credit and stable income.
Credit score: The minimum is typically 620, but your rate improves significantly with higher scores. Borrowers with 740+ get the best conventional rates. Each tier below that—720-739, 700-719, and so on—pays incrementally more. If your score is below 680, you might pay half a percentage point or more above the best rates.
Down payment: Despite the 20% myth, conventional loans allow as little as 3% down for first-time buyers with good credit. However, putting less than 20% down triggers private mortgage insurance requirements. Common down payment tiers are 3%, 5%, 10%, 15%, and 20%—each affecting your rate and PMI cost.
Debt-to-income ratio: Your total monthly debt payments (including the new mortgage) generally shouldn't exceed 43% of your gross monthly income, though some lenders allow up to 50% with strong compensating factors. Use our DTI calculator to check where you stand.
Income and employment: Lenders verify stable income, typically wanting two years of employment history in the same field. Self-employed borrowers need two years of tax returns showing consistent income. Large gaps or frequent job changes require explanation.
Reserves: Expect to show two to six months of mortgage payments in savings after closing, depending on loan amount and property type. Investment properties and multi-unit purchases require more reserves.
Private Mortgage Insurance (PMI)
When you put less than 20% down on a conventional loan, lenders require private mortgage insurance. PMI protects the lender (not you) if you default—but you pay the premiums. Costs typically range from 0.3% to 1.5% of the loan amount annually, depending on your credit score and down payment. On a $300,000 loan, that's $75-$375 monthly.
The good news: conventional PMI is cancelable. Once you reach 20% equity (through payments, appreciation, or home improvements), you can request PMI removal. At 22% equity, the lender must remove it automatically. This differs significantly from FHA loans, where mortgage insurance typically lasts the life of the loan.
PMI isn't all bad. It lets you buy sooner with less down, potentially getting into a home before prices rise further. Some buyers strategically put less down, invest the difference elsewhere, and cancel PMI once they've built equity.
PMI can be structured several ways: monthly premiums added to your payment, a single upfront premium at closing, or lender-paid PMI where the lender covers it in exchange for a slightly higher interest rate. Your lender can show you which option costs less over your expected ownership period.
Conventional vs. FHA: When to Choose Which
The choice between conventional and FHA often comes down to credit score and how long you'll keep the loan.
Choose conventional if: Your credit score is above 700, you can put at least 5-10% down, and you plan to stay long enough to cancel PMI. Conventional loans also work better for buying condos (FHA has stricter condo requirements) and are required for second homes or investment properties.
Choose FHA if: Your credit score is below 680, you've had past credit problems (bankruptcy, foreclosure) that are now resolved, or you have a higher debt-to-income ratio that conventional lenders won't accept. FHA's lifetime mortgage insurance makes it more expensive long-term, but it might be your only path to approval.
Run the numbers both ways. On a $300,000 loan with 5% down and a 680 credit score, FHA might offer a lower rate—but the permanent mortgage insurance could cost more over time than conventional's higher rate with cancelable PMI. Our loan comparison tool can help.
Who Should Choose Conventional?
Conventional loans make the most sense for buyers with good credit (680+), stable income, and the ability to put at least 5% down. If you can put 20% down, conventional becomes an even clearer choice—no PMI means lower monthly payments and more straightforward comparisons between lenders.
Conventional is also the only choice for investment properties and second homes. Government-backed loans are restricted to primary residences only (with limited exceptions for VA).
If you're on the borderline—say, a 660 credit score with 5% down—get quotes for both conventional and FHA. The right answer depends on the specific rates and costs you're offered, your break-even timeline on PMI, and your plans for the property.