Conventional loans follow guidelines set by Fannie Mae and Freddie Mac if they are conforming loans. They typically require higher credit scores (620+) and larger down payments (3-20%) than government-backed loans. If the down payment is less than 20%, private mortgage insurance (PMI) is required. Conventional loans offer both fixed-rate and adjustable-rate options. Non-conforming conventional loans (jumbo loans) exceed the conforming loan limits.
A buyer with a 740 credit score and 10% down payment obtains a conventional loan for $300,000. Because the down payment is less than 20%, the lender requires PMI. Once the buyer reaches 20% equity, the PMI can be removed.
Know the key differences between conventional and government-backed loans: conventional = no government guarantee, requires PMI below 20% down. FHA = government insured, lower credit requirements. VA = government guaranteed, no down payment. PMI can be removed from conventional loans at 20% equity but MIP on FHA loans cannot easily be removed.
Related Terms
Related Concepts
An FHA loan is a mortgage insured by the Federal Housing Administration that allows lower down payments and credit scores than conventional loans. It is designed to help first-time homebuyers and borrowers with limited resources.
A VA loan is a mortgage guaranteed by the Department of Veterans Affairs available to eligible veterans, active-duty service members, and surviving spouses. It offers no down payment and no private mortgage insurance requirements.
A fixed-rate mortgage has an interest rate that remains constant for the entire term of the loan, resulting in equal monthly principal and interest payments throughout the life of the mortgage.
An adjustable-rate mortgage (ARM) has an interest rate that changes periodically based on market conditions, typically after an initial fixed-rate period. The rate adjustment is tied to a financial index plus a margin.
The loan-to-value ratio (LTV) is the percentage of a property's appraised value or purchase price (whichever is lower) that is being financed through a mortgage. LTV = Loan Amount / Property Value.
Frequently Asked Questions
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