What is a Conventional Loan?

When most people start shopping for a mortgage, they hear the term conventional loan almost immediately—but few homeowners truly understand what it means. Many assume it’s just another name for a standard mortgage, while others confuse it with government-backed options.

That confusion matters because choosing the wrong loan type or accepting the first conventional loan offer you receive can cost you tens of thousands of dollars in unnecessary interest and fees.

Understanding how conventional loans work can help you choose the right loan, avoid unnecessary costs, and refinance with confidence.

Key Takeaways

• A conventional loan is not backed by the government

• Most conventional loans follow Fannie Mae and Freddie Mac guidelines

• Credit score, DTI, and equity play a major role in approval

• Conventional loans often offer lower long-term costs than FHA loans

• Private mortgage insurance (PMI) can usually be removed at 80% LTV or less

What a Conventional Loan Is

A conventional loan is a mortgage that is not insured or guaranteed by a government agency, such as the FHA, VA, or USDA. Instead, it’s backed by private lenders and typically conforms to standardized underwriting rules.

Most conventional loans are considered conforming loans, meaning they meet size and risk guidelines set by Fannie Mae and Freddie Mac. Some loans fall outside those limits and are called non-conforming.

💡Pro tip: Lender pricing for conventional loans varies more than borrowers realize. Accepting the first offer you receive can leave thousands of dollars on the table.

How Conventional Loans Work

Conventional loans rely heavily on your financial profile to assess risk. Lenders look at the full picture rather than relying on government insurance as a safety net.

They typically evaluate:

• Credit score and history

• Debt-to-income ratio (DTI)

• Down payment or home equity

• Income stability and employment

• Property type and occupancy

Because lenders assume more risk, stronger borrowers are often rewarded with better pricing.

💡 Pro Tip: A small improvement in credit or DTI may move you into a better conventional pricing tier. If your qualifying factors are “on the bubble,” consider fixing what you can before applying.

Conventional Loan Down Payments

One of the largest misconceptions is that conventional loans require large down payments. In reality, many options are more flexible than expected.

Common down payment ranges:

• As low as 3% for some first-time buyers

• 5–10% for many standard purchases

• 20% to avoid PMI entirely

For refinances, the down payment is replaced by equity, which plays a similar role in approval and pricing. Equity is the difference between your home’s value and your outstanding mortgage.

Clear takeaway: You don’t need 20% down to qualify—but it may reduce costs.

Credit Score Requirements

Conventional loans tend to be more credit-sensitive than government-backed loans.

Typical credit score ranges:

• Minimum approval often starts around the low 600s, depending on lender overlays

• Strong pricing usually improves above mid-to-high 600s

• Competitive rates are typically reserved for higher scores

Lower credit scores don’t automatically disqualify you, but they can increase interest rates or PMI costs.

💡 Pro Tip: Even a 20–40-point increase in credit score may improve conventional loan pricing, but exact pricing varies by lender and borrower profile. Not obtaining multiple quotes could mean missing out on a better deal.

Conventional Loans and PMI

Private Mortgage Insurance (PMI) is required when you have less than 20% equity in a conventional loan. Unlike FHA mortgage insurance, PMI is not permanent.

Key PMI features:

• Required below 20% equity

• Cost varies based on credit score and LTV

• Can be removed once equity increases, with lender approval

• Automatically drops off at certain equity thresholds

This flexibility is one reason conventional loans often cost less over time.

Conventional Loan Uses

Conventional loans are versatile and can be used for many scenarios.

Common uses include:

• Home purchases

• Rate-and-term refinances

• Cash-out refinances

• Primary residences

• Second homes (rules vary)

• Some investment properties

Because of this flexibility, conventional loans are often the default choice for well-qualified borrowers.

💡 Pro Tip: Not all lenders price conventional loans the same—shopping matters more than many borrowers realize.

Step-by-Step: How a Conventional Loan Works

1. Review your credit, income, and debts

2. Compare conventional loan offers

3. Apply with documentation

4. Complete underwriting and appraisal

5. Close and begin repayment

Common Mistakes to Avoid

• Assuming FHA is always cheaper

• Ignoring PMI removal potential

• Focusing only on the interest rate, not the total cost

• Applying with just one lender

• Overlooking how debt-to-income affects pricing

How Fincast Helps You Compare Conventional Loans

You can compare conventional loans yourself by applying with multiple lenders and comparing your Loan Estimates, but this can get time-consuming and overwhelming. Fincast solves this problem by using the first Loan Estimate you receive from any lender and anonymously collecting competitive offers from qualified lenders.

Here’s how it works:

1. Upload your Loan Estimate securely

2. Fincast benchmarks your deal across vetted lenders

3. Lenders anonymously compete to beat your offer

4. You choose the strongest offer — no spam, no extra credit pulls

Fincast only works with licensed lenders that meet strict performance standards. Using Fincast enables you to confidently choose the offer that best suits your financial situation. If you already have a Loan Estimate, you’re one step away from knowing it’s competitive.

FAQs

What is a conventional loan?

A conventional loan is a mortgage not backed by the government. It follows private lending guidelines and is often based on Fannie Mae or Freddie Mac standards.

Is a conventional loan better than an FHA loan?

A conventional loan may be better if you have stronger credit and equity. FHA loans may work better for lower-credit profiles, but compare the total loan costs to determine which makes the most sense.

What credit score do you need for a conventional loan?

Many lenders approve conventional loans starting in the low 600s, but better rates typically require higher scores. Exact requirements vary by lender.

Does a conventional loan require PMI?

Yes, if your equity is below 20%. However, PMI on a conventional loan can usually be removed once sufficient equity is reached and the lender approves it, or it automatically falls off at 78% LTV.

Can I refinance with a conventional loan?

Yes. Conventional loans are commonly used for both rate-and-term and cash-out refinances, depending on your equity and financial profile.

Bottom Line

A conventional loan isn’t just a “standard” mortgage; it’s a powerful option for borrowers with solid credit, manageable debt, and sufficient equity. When priced correctly, conventional loans often deliver lower long-term costs, flexible uses, and the ability to remove PMI over time. But, pricing varies widely by lender, and the difference can save (or cost) you tens of thousands of dollars over the life of the loan.

👉 Before you move forward with a conventional loan, know where your offer truly stands. Act quickly because rates change often — upload your Loan Estimate to Fincast within 48 hours of receiving a Loan Estimate and see how it compares across lenders, anonymously with no spam or extra credit pulls.

• This blog is for educational purposes only and not financial or legal advice. Consult with a licensed mortgage professional for personalized guidance.