Conventional Loans Explained Topical Map: SEO Clusters

A conventional loan is a mortgage not insured by the federal government; it follows Fannie Mae/Freddie Mac or private lender guidelines. Unlike FHA or VA loans, conventional loans typically require higher credit scores and private mortgage insurance (PMI) when the down payment is under 20%, but they avoid FHA mortgage insurance premiums and VA funding fees.

Most lenders require at least a 620 credit score to qualify for a conventional loan, though borrowers typically need a 740+ score to access the best interest rates and pricing. Borrowers with scores from 620–739 may still qualify but will face higher interest rates and loan-level price adjustments.

Conventional loans can be originated with down payments as low as 3% for eligible first-time or low-down-payment programs, but many borrowers put down 5%–20%. A 20% down payment generally eliminates PMI, while smaller down payments require monthly or lender-paid PMI.

PMI is insurance that protects the lender when the borrower’s down payment is less than 20% equity; costs typically range from about 0.2% to 2% of the loan amount annually depending on credit and LTV. By law lenders must terminate PMI automatically when the loan balance reaches 78% of the original value, and borrowers can request cancellation at 80% LTV with documented value.

Under standard conforming guidelines, lenders generally prefer a front-end/back-end DTI around 28/36 but will commonly approve up to 43% DTI; with compensating factors (strong reserves, high credit score, low LTV) some borrowers can be approved with DTIs up to about 50%. Each lender interprets DTI flexibly, so underwriting overlays matter.

A typical conventional loan close time is 30–45 days from application to funding, assuming timely document submission and standard underwriting. Delays often stem from appraisal issues, incomplete income documentation (especially for self-employed borrowers), or title problems.

Yes — self-employed borrowers can qualify for conventional loans but must provide more detailed documentation such as two years of personal/business tax returns, profit-and-loss statements, and year-to-date bank statements; lenders may also use alternative income verification like bank-statement programs if offered. Underwriting will assess consistent net income and reserves to offset higher perceived risk.

If you have a small down payment but strong credit (620+), a conventional 3% down program can be cheaper over time because conventional PMI typically costs less than FHA mortgage insurance and can be removed at 80% LTV. However, borrowers with lower credit scores or larger cash constraints may still benefit from FHA’s more flexible credit and income thresholds despite higher lifetime mortgage insurance costs.

Conforming loan limits are maximum loan amounts Fannie Mae and Freddie Mac will purchase; for 2024 the baseline single-family limit is $766,550, with high-cost area limits up to 150% (e.g., $1,149,825). Loans above those limits are ‘jumbo’ and typically require stricter underwriting and higher rates, so conforming limits directly influence pricing and borrower eligibility.

Conventional rates are generally competitive with FHA and VA rates for borrowers with good credit; however, lower-credit borrowers may get better effective rates with government-backed loans due to more lenient underwriting. Pricing differences also depend on loan amount, down payment, and whether PMI or funding fees apply.