Conventional loan
A mortgage not insured or guaranteed by a government agency such as the FHA, VA or USDA.
What it means
A conventional loan is made by a private lender without government backing. Most are conforming loans, meaning they meet size and underwriting standards set for purchase by Fannie Mae and Freddie Mac, the government-sponsored enterprises; loans above the conforming limit are jumbo loans.
Approval leans heavily on credit score, debt-to-income ratio and down payment. With less than 20% down, borrowers usually must pay private mortgage insurance, which can typically be removed once enough equity builds. These loans tend to suit borrowers with solid credit and some savings for a down payment.
Example
Suppose a buyer puts 10% down on a $400,000 home, borrowing $360,000 on a conventional loan. Because the down payment is under 20%, the lender requires PMI until the balance falls to a set share of the home’s original value.
How it’s used
- Buyers with good credit and stable income
- Second homes and investment properties
- Avoiding lifelong mortgage insurance
Strengths and weaknesses
Strengths
- PMI can usually be dropped as equity grows
- Flexible for primary, second and investment homes
- Often the lowest overall cost for strong-credit borrowers
Weaknesses
- Stricter credit and debt requirements than some government loans
- PMI adds cost with less than 20% down
- Pricing is more sensitive to credit score
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.