A young family sits at a kitchen while they discuss if they use a conventional loan to purchase a home.

What Is A Conventional Loan

Conventional loans are a favorite for homebuyers with decent credit scores and who have a fair amount of funds for a down payment. Conventional mortgages should not be confused with “Conforming Mortgages.” Conventional mortgages are institutional mortgages that are not insured by the FHA (Federal Housing Administration) or guaranteed by the VA (Veterans Administration) or the U.S. Department of Agriculture. Conventional mortgages include conforming loans, but they also have jumbo and portfolio loans. The government does not endorse these loans. However, Private Mortgage Insurance (PMI) is unnecessary if a down payment is made that is less than 20%.

Conventional Loan Down Payment

Many buyers with limited down payment funds think FHA financing is their only option. But, homebuyers can put as little as 3% down using conventional financing.

Benefits of 3% Down Conventional Financing: 

  1. No upfront mortgage insurance is required.
  2. No minimum required time period for private mortgage insurance.
  3. Sellers look more favorably on conventional offers.

Drawbacks of 3% Down Conventional Financing:

  1. Conventional rates are higher than other low down payment financing options like FHA or VA loans.
  2. Underwriting guidelines can be tougher to meet for buyers putting 3% down for conventional financing.
  3. Homebuyers who put less than 20% down for a conventional loan need will need to pay Private Mortgage Insurance (PMI).

Private Mortgage Insurance

Private Mortgage Insurance (PMI) is an insurance policy for conventional loans that protects mortgage lenders from any losses they might incur from mortgage default. So, homebuyers with PMI will still be liable for their mortgage debt even after PMI steps in to make the lender whole.

Homebuyers with conventional financing are usually required to obtain PMI when they put down less than 20%. The word “Private” in PMI distinguishes it from just “Mortgage Insurance” (MI) that is required for FHA/”government” loans.

Contact Our Team

This blog covers the very basics of conventional loans that are available for homebuyers. If you would like to learn more about conventional loans or get pre-approved for a real estate purchase, contact our expert team! Our Client Advisors are available 7 days a week for any questions by phone at (855) 855-4491 or by email at [email protected]

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