Conventional Loans Explained

Conventional Loans Explained

Conventional loans are the most common type of mortgage in the United States. Unlike FHA, VA, or USDA loans, they are not backed by the federal government — they're originated by private lenders and typically sold to Fannie Mae or Freddie Mac on the secondary market.

---

Key Features

Feature	Conventional
Down payment	3–20%+
PMI required?	Yes, if < 20% down
Credit score minimum	620 (680+ for best rates)
DTI limit	43–45% (some to 50%)
Loan limits (2026)	$806,500 (most counties)
MIP for life?	No — PMI cancels at 80% LTV

---

Conforming vs. Non-Conforming

A conforming loan meets Fannie Mae/Freddie Mac limits and guidelines. In 2026, the conforming limit is $806,500 in most U.S. counties and up to $1,209,750 in high-cost areas (like most of California).

A non-conforming loan — most commonly a jumbo loan — exceeds these limits and requires stricter qualification: typically 680+ credit score, 20%+ down, and 6–12 months of reserves.

---

PMI: The Down Payment Trade-Off

Private Mortgage Insurance (PMI) protects the lender if you default. It kicks in when your LTV exceeds 80% (i.e., down payment under 20%).

• Typical PMI cost: 0.5–1.5% of loan amount annually
• On a $400k loan: roughly $167–$500/mo
• PMI cancels once you reach 80% LTV — either through payments or appreciation
• You can request cancellation; lenders must auto-cancel at 78% LTV under the Homeowners Protection Act

This is a major advantage over FHA, where MIP lasts the life of the loan (in most cases).

---

Who Conventional Works Best For

• Buyers with 10–20%+ down and good credit (700+)
• Buyers purchasing above FHA limits
• Buyers who want PMI to eventually go away
• Investment property buyers (FHA is owner-occupied only)
• Buyers who plan to stay long enough to benefit from PMI cancellation

---

Conventional vs. FHA: When to Choose Which

Situation	Better Choice
3.5% down, 640 credit score	FHA
10% down, 740 credit score	Conventional
Buying above FHA loan limits	Conventional (or Jumbo)
Buying a second home or rental	Conventional
Want PMI to go away	Conventional
High DTI, tight credit	FHA

---

Bottom line: Conventional is the workhorse of the mortgage market. If your credit and down payment are solid, it's usually the right call — especially since PMI isn't permanent.