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GlossaryMortgageLoan types

Conventional loan

2 min read
Short answer
A conventional loan is any mortgage not insured or guaranteed by a government agency such as FHA, VA or USDA. Most conform to Fannie Mae and Freddie Mac guidelines, which is what makes them saleable on the secondary market. Pricing depends heavily on credit score and down payment, and mortgage insurance is required below twenty percent equity but cancels once that equity is reached.

A conventional loan is any mortgage that is not insured or guaranteed by a government agency. It is defined by what it is not — not FHA, not VA, not USDA — which makes it the default category rather than a specific product.

Most conventional lending in the United States follows Fannie Mae and Freddie Mac guidelines, because loans meeting those guidelines can be sold on the secondary market. That saleability is why the guidelines matter so much: a lender writing a loan it cannot sell is taking a very different kind of risk.

How they are priced#

Two variables dominate: credit score and down payment.

Conventional pricing is tiered. The same loan, same property, same income, costs materially more at a lower credit score — expressed in the rate, in the mortgage insurance premium, or in loan-level adjustments applied at closing.

This is the sharpest practical difference from FHA, which prices far less aggressively on score. A borrower at the lower end of acceptable credit often finds FHA cheaper; a borrower with strong credit almost always finds conventional cheaper.

Mortgage insurance that ends#

Below twenty percent equity, conventional loans require private mortgage insurance.

The crucial feature is that it stops. The borrower can request cancellation at eighty percent of original value and the servicer must terminate it at seventy-eight percent. It is a temporary cost attached to a temporary risk.

FHA's equivalent, for most loans written since 2013, runs for the life of the loan. Over a full term that difference is very large, and it is the main reason FHA borrowers refinance into conventional loans once equity allows.

Down payment reality#

The twenty percent figure is folklore. Conventional programmes exist with down payments as low as three percent for qualifying buyers.

What twenty percent buys is the avoidance of mortgage insurance, not access to the loan. Whether it is worth waiting to accumulate depends on what the property market does while you wait, which nobody knows.

Property types and occupancy#

Conventional lending is the flexible category. It finances second homes and investment properties, which government-backed lending largely does not, and it handles a wider range of property types.

Pricing reflects occupancy directly. The same borrower buying the same house pays one rate as a primary residence, a higher one as a second home, and higher again as a rental. Misrepresenting occupancy to get the better rate is occupancy fraud, and lenders check.

Where it sits for an investor#

For anyone buying rental property, conventional financing is the cheapest option available until the loan count limits bite. After that the market moves to portfolio and DSCR lending, which is more flexible, faster, and considerably more expensive.

Common questions

What credit score do I need for a conventional loan?
Higher than FHA requires, and the exact floor varies by lender and programme. More important than the floor is that conventional pricing is tiered by score — the same loan costs meaningfully more at a lower score, in rate or in mortgage insurance premium or both.
Is a conventional loan better than FHA?
It is usually cheaper for a borrower with strong credit and some equity, mainly because the mortgage insurance cancels. FHA is often the only option for a borrower with a lower score or a very small down payment. Neither is better in the abstract.
Do conventional loans require twenty percent down?
No. Programmes exist with down payments as low as three percent. Below twenty percent triggers private mortgage insurance, which is a cost rather than a barrier, and it ends once the loan reaches the cancellation threshold.
Keep reading
Conforming loan
A mortgage that meets Fannie Mae and Freddie Mac guidelines including the annual loan limit, making it saleable on the secondary market.
FHA loan
A mortgage insured by the Federal Housing Administration, allowing lower credit scores and small down payments in exchange for mandatory insurance premiums.
Private mortgage insurance
Insurance protecting the lender when a conventional borrower puts down less than twenty percent, paid by the borrower and cancellable at set thresholds.