Conventional Loan
A conventional loan is a mortgage not insured or guaranteed by a government agency (unlike FHA, VA, or USDA loans), typically requiring a 20% down payment to avoid private mortgage insurance (PMI).
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Exam Tip
Conventional = NOT government-backed. PMI required if <20% down. PMI can be removed at 20% equity. FHA MIP stays for life of loan!
What is a Conventional Loan?
A conventional loan is a mortgage loan that is not backed by a government agency. These loans are originated and funded by private lenders such as banks, credit unions, and mortgage companies, and may be sold to Fannie Mae or Freddie Mac.
Conventional vs. Government Loans
| Loan Type | Backed By | Down Payment | Mortgage Insurance |
|---|---|---|---|
| Conventional | Private lenders | 3-20%+ | PMI if <20% down |
| FHA | Federal Housing Administration | 3.5% | MIP required for life (with <10% down) |
| VA | Veterans Administration | 0% | Funding fee, no monthly MI |
| USDA | US Dept. of Agriculture | 0% | Guarantee fee + annual fee |
Private Mortgage Insurance (PMI)
| PMI Facts | Details |
|---|---|
| When Required | Down payment less than 20% |
| Typical Cost | 0.3% - 1.5% of loan amount annually |
| Payment Method | Added to monthly payment |
| Cancellation | At 20% equity (request) or 22% equity (automatic) |
| Tax Deductible | May be deductible (check current tax laws) |
How to Avoid PMI
| Method | Description |
|---|---|
| 20% Down Payment | Pay 20% or more upfront |
| Piggyback Loan | 80-10-10: First mortgage (80%) + second mortgage (10%) + down payment (10%) |
| Lender-Paid PMI | Higher interest rate, no monthly PMI |
| Pay Down Principal | Reach 20% equity faster |
Conventional Loan Requirements
| Requirement | Typical Standard |
|---|---|
| Credit Score | 620 minimum (680+ for best rates) |
| Down Payment | 3% minimum (20% to avoid PMI) |
| Debt-to-Income Ratio | 43-50% maximum |
| Employment | 2 years stable employment |
| Documentation | Full income and asset verification |
Conforming vs. Non-Conforming Loans
| Type | Definition |
|---|---|
| Conforming | Meets Fannie Mae/Freddie Mac guidelines and loan limits |
| Non-Conforming (Jumbo) | Exceeds conforming loan limits |
2025 Conforming Loan Limits
| Area Type | Loan Limit |
|---|---|
| Most Areas | $806,500 |
| High-Cost Areas | Up to $1,209,750 |
Advantages of Conventional Loans
| Advantage | Description |
|---|---|
| PMI Cancellation | Can remove PMI at 20% equity |
| No Upfront MI Fee | FHA has 1.75% upfront MIP |
| Flexible Terms | 10, 15, 20, 30 year options |
| Second Homes/Investment | Allowed (FHA is primary residence only) |
| Lower Costs Long-Term | Often cheaper than FHA over time |
Exam Alert
- Conventional = NOT government-backed (no FHA, VA, USDA)
- PMI required if less than 20% down payment
- PMI can be removed at 20% equity (request) or 22% (automatic)
- FHA has MIP for life of loan (if <10% down), conventional PMI is removable
- Conforming loans meet Fannie Mae/Freddie Mac guidelines
Study This Term In
Related Terms
Mortgage
A mortgage is a loan used to purchase real estate, where the property serves as collateral, typically repaid over 15-30 years with interest.
PMI (Private Mortgage Insurance)
Private Mortgage Insurance (PMI) is insurance required on conventional loans when the down payment is less than 20%, protecting the LENDER (not the borrower) against default. PMI can be canceled once the borrower reaches 20% equity, unlike FHA mortgage insurance.
FHA Loan
An FHA loan is a mortgage insured by the Federal Housing Administration, designed for first-time and lower-income homebuyers with lower down payment requirements (3.5%) and more flexible credit standards, requiring mortgage insurance premium (MIP).
VA Loan
A VA loan is a government-backed mortgage guaranteed by the U.S. Department of Veterans Affairs for eligible veterans, active-duty service members, and surviving spouses, featuring 0% down payment, no private mortgage insurance (PMI), and competitive interest rates.
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