What Is a Conventional Loan and Is It the Best Option for Your Situation?

If you've started researching mortgages, you've probably seen the term "conventional loan" used a lot. It's the most common loan type in the country, but that doesn't automatically make it the right fit for every buyer. Here's what a conventional loan actually is, how it works, and how to tell whether it makes sense for your situation.

What Makes a Loan "Conventional"

A conventional loan is any mortgage that isn't backed by a government agency. FHA loans are backed by the Federal Housing Administration. VA loans are backed by the Department of Veterans Affairs. USDA loans are backed by the Department of Agriculture. Conventional loans have none of that government backing.

Instead, conventional loans are typically sold to Fannie Mae or Freddie Mac after they're originated. Those two entities set the guidelines that lenders have to follow in order to sell loans to them. That's why you'll hear conventional loans referred to as "conforming" loans when they fall within those guidelines and loan limits.

Because there's no government guarantee, lenders rely more heavily on your creditworthiness. That means stricter qualifying standards in some areas, but also more flexibility in others.

How Conventional Loans Work

Credit score requirements

Most lenders require a minimum credit score of 620 for a conventional loan. But the score you need to qualify and the score you need to get a good rate are two different things. Rates improve meaningfully as your score climbs, particularly once you get above 700 and again above 740. If your score is in the lower qualifying range, it's worth understanding what the rate difference looks like before you decide between conventional and other options.

Down payment

Conventional loans are available with as little as 3% down through programs like Fannie Mae HomeReady and Freddie Mac Home Possible. Standard conventional loans typically start at 5% down. The more you put down, the better your rate and the lower your monthly mortgage insurance cost.

Private mortgage insurance (PMI)

If you put less than 20% down on a conventional loan, you'll pay PMI. Unlike FHA mortgage insurance, PMI on a conventional loan is not permanent. Once your loan balance reaches 80% of the home's original value, you can request removal. It drops off automatically at 78%. This is one of the most significant advantages conventional has over FHA for the right borrower.

Loan limits

Conventional conforming loans have limits set by the Federal Housing Finance Agency each year. For 2025, the conforming loan limit for a single-family home in most of the country is $806,500. Loans above that threshold are considered jumbo loans and come with different guidelines and typically higher rates.

Property types

Unlike FHA and VA loans, which are restricted to primary residences, conventional loans can be used for primary homes, second homes, and investment properties. If you're buying something other than your main residence, conventional is almost certainly what you're working with.

Where Conventional Loans Have an Advantage

PMI goes away. As mentioned above, this is the big one. FHA mortgage insurance sticks around for the life of the loan in most cases. PMI on a conventional loan has an exit.

No upfront mortgage insurance premium. FHA loans charge 1.75% of the loan amount upfront as a mortgage insurance premium, rolled into the loan. Conventional loans don't have that.

More property flexibility. You can use a conventional loan to buy a second home, a vacation property, or a rental. Government-backed loans don't allow that.

Higher loan amounts. The conforming loan limit is well above the FHA limit in most markets, including Las Vegas. If you're buying in a higher price range, conventional gives you more room before you hit jumbo territory.

Less scrutiny on the property. FHA loans require the home to meet specific condition standards. Conventional appraisals focus on value, not condition checklists. This gives you more flexibility on the types of homes you can buy.

Where Conventional Loans Have a Disadvantage

Stricter credit requirements. If your score is below 680, FHA may offer better terms. The rate improvement curve on conventional loans means borrowers with lower scores often pay more than they would on FHA.

Less flexible on DTI. FHA allows higher debt-to-income ratios in more situations than conventional loans do. If your monthly debt load is on the higher side, this can matter.

PMI cost varies. PMI on a conventional loan is priced based on your credit score and loan-to-value ratio. For borrowers with lower scores and smaller down payments, PMI can be expensive enough that FHA becomes more competitive on a monthly payment basis.

Is Conventional the Right Loan for You?

Conventional tends to be the strongest option when:

• Your credit score is 700 or higher
• You have at least 5% to put down
• You want the ability to remove mortgage insurance over time
• You're buying a second home or investment property
• You want to avoid the FHA upfront mortgage insurance premium

It may not be the best fit when:

• Your credit score is below 680
• Your debt-to-income ratio is on the higher end
• You're a veteran who qualifies for VA financing
• You need maximum flexibility on qualifying guidelines

The honest answer for a lot of buyers is that you won't know which loan is actually better until someone runs both scenarios with your real numbers. A lower rate on a conventional loan doesn't always mean a lower payment once PMI is factored in. And a higher FHA rate doesn't always mean a worse deal once you account for the qualifying flexibility and the overall structure.

This is exactly the kind of comparison a good mortgage broker does before making a recommendation.

Bottom Line

Conventional loans are the most widely used mortgage product for a reason. For the right borrower they offer competitive rates, removable mortgage insurance, and broad flexibility on property types. But they're not automatically the best choice for everyone.

If you want to see how conventional stacks up against your other options given your specific credit, income, and goals, let's look at it together.

Chris Casiello is a licensed mortgage broker and loan officer at The Casiello Team | Powered by Five Star Mortgage, based in Henderson, NV. He specializes in purchase loans, first-time homebuyers, VA lending, and creative loan problem-solving in the Las Vegas metro area.