Conventional Loan
A mortgage not insured or guaranteed by a federal government agency such as the FHA or VA.
What is Conventional Loan?
A conventional loan is a residential mortgage that is not insured, guaranteed, or funded by any federal government program, distinguishing it from FHA loans (insured by the Federal Housing Administration), VA loans (guaranteed by the Department of Veterans Affairs), and USDA loans. Conventional loans can be conforming—meeting Fannie Mae and Freddie Mac guidelines—or non-conforming such as jumbo loans. Borrowers typically need a minimum credit score of 620–640, a down payment of at least 3–5%, and a debt-to-income ratio below 43–50% to qualify. Borrowers who put down less than 20% are required to pay private mortgage insurance (PMI) until their equity reaches 20%, at which point they can request cancellation. Conventional loans offer more flexibility in property types and loan structures than government-backed alternatives and are the most common form of home financing in the United States.
Example
A borrower with a 760 credit score and a 20% down payment takes out a conventional 30-year fixed mortgage at 6.75% to purchase a $400,000 home. Because the down payment exceeds 20%, no private mortgage insurance is required. An FHA loan on the same purchase would have required ongoing mortgage insurance premiums regardless of equity.