Conventional loan

A conventional loan is any residential mortgage that isn't insured or guaranteed by a federal program (FHA, VA, or USDA). The vast majority of conventional loans are conforming loans, meaning they meet Fannie Mae and Freddie Mac's underwriting and size standards and can be sold to those agencies on the secondary mortgage market. Loans above the conforming size limit are jumbo loans, which are a separate product priced and underwritten differently.

How it works: conventional loans typically require down payments of 3% to 20%, with credit scores at 620 or above, and debt-to-income ratios under about 43%. When the down payment is less than 20%, conventional loans require private mortgage insurance (PMI) until the loan-to-value ratio drops to 78%, at which point federal law requires the lender to cancel it.

Why it matters: conventional is the default mortgage product for buyers with strong credit and at least a 5% down payment. The main advantage over FHA is that PMI cancels, once enough equity has built up, the monthly mortgage insurance disappears, often saving hundreds of dollars per month for the life of the loan. The disadvantage is somewhat stricter underwriting than FHA, which makes it harder to qualify for buyers with lower credit scores or thinner cash reserves.

Common gotcha: the conforming loan limit is set annually by the Federal Housing Finance Agency and varies by county, with higher limits in high-cost areas. A loan one dollar above the limit becomes a jumbo, which can shift the rate, qualifying standards, and reserve requirements meaningfully. Borrowers near the limit should confirm where the limit is in their county before locking a rate.