Conventional Loans Explained: Requirements, Types, and When They Win
Conventional loans are not backed by a government agency — they follow guidelines set by Fannie Mae and Freddie Mac. They are the most common loan type and often the best option for buyers with good credit.
Basic Requirements
Minimum credit score: 620 (though 680+ gets significantly better rates). Down payment: as low as 3% for first-time buyers (Conventional 97), 5% standard. DTI (debt-to-income ratio): typically under 43%, though some exceptions allow up to 50%. The home must be your primary residence for the lowest rates and smallest down payment (investment properties have different rules).
PMI and the 20% Threshold
If you put less than 20% down, you pay PMI (private mortgage insurance). But unlike FHA, conventional PMI automatically drops off when your equity reaches 22% (or you can request removal at 20%). PMI rates depend on your credit score and down payment — for strong-credit buyers, conventional PMI is often cheaper than FHA mortgage insurance.
Conforming vs. Non-Conforming
Conforming loans meet Fannie Mae/Freddie Mac guidelines and fall within loan limits (limits change annually — check the FHFA website for current limits in your county). Non-conforming (jumbo) loans exceed these limits and typically require higher credit scores, larger down payments, and more documentation.
Key Takeaways
- ✓Conventional loans allow as little as 3% down for first-time buyers
- ✓PMI is cancelable — it drops off when you reach 20-22% equity
- ✓Buyers with 680+ credit often pay less with conventional than FHA
- ✓Conforming loan limits vary by location — check your county's limit
Want a personalized plan?
HomeIQ Academy builds a learning path based on your situation — credit, income, savings — so you know what to focus on first.
Start Free