A conventional loan is a mortgage that follows Fannie Mae and Freddie Mac guidelines rather than a government program like VA or FHA. For borrowers with steady, documentable income and reasonable credit, it is usually the most flexible option and often the cheapest. This guide covers what conventional loans require, how the down payment and PMI work, what a conventional refinance can do, and when another loan type beats it.
What they require
The core requirements are credit, income, and a down payment:
- A credit score that meets guideline minimums, commonly around 620 or higher.
- A debt-to-income ratio within guideline limits.
- A down payment that can range from 3% to 20% or more.
The down payment, and the 3% programs
You do not need 20% down. Several conventional programs allow as little as 3%:
| Program | Down payment | Notable feature |
|---|---|---|
| Conventional 97 | 3% | The basic low-down option |
| HomeReady | 3% | Income limits, lower PMI cost |
| Home Possible | 3% | Income limits, flexible sources |
| HomeOne | 3% | No income limit, first-time buyers |
How PMI works
When you put down less than 20%, you pay private mortgage insurance, or PMI. Here is the part that matters: unlike FHA mortgage insurance, conventional PMI is not permanent. It can be removed once you build enough equity. Lenders are required to drop it automatically when your loan reaches 78% of the original value, and you can usually request removal earlier at 80%. That difference can make conventional cheaper than FHA over time.
What a conventional refinance can do
A conventional refinance is a flexible tool. It can:
- Lower your rate or shorten your term.
- Remove PMI once your equity crosses the threshold.
- Remove a co-borrower, for example after a divorce.
- Pull cash out of your equity, up to the program's loan-to-value limit.
Conforming, high balance, and jumbo
Conventional loans follow a conforming loan limit that is set each year. Loans up to that limit are conforming. Some high-cost areas allow a higher "high balance" limit. Above those limits, a loan becomes a jumbo loan with its own stricter requirements.
When conventional is the right call, and when it is not
Conventional is usually the cheapest path for a borrower with strong W-2 income, good credit, and a primary home. But it is not always the best fit:
- If you are a veteran with entitlement, a VA loan often beats conventional on rate and down payment.
- If you are an investor whose tax returns understate your income, a DSCR loan may qualify where conventional will not.
If you are not sure which bucket you are in, start with Which Refinance Is Right for You.
Frequently asked questions
What credit score do I need? Guidelines commonly start around 620, but a higher score earns a better rate and lower PMI.
Can I use a conventional loan for a rental? Yes, though investment properties require a larger down payment and price in a higher rate.
Does PMI last the whole loan? No. Conventional PMI comes off as you build equity, automatically at 78% of the original value.
See what you qualify for
A soft credit check and a few details show your conventional options, and whether a government or investor loan would serve you better, with no hit to your score.
