When purchasing a home, choosing the right mortgage type is one of the most important decisions you’ll make. While government-backed loans like FHA, VA, and USDA loans offer benefits for specific buyers, conventional loans remain the most common mortgage type in the U.S.
But is a conventional loan the best choice for you? Understanding the pros and cons of this mortgage type will help you make an informed decision and determine if it aligns with your financial goals and homeownership needs.
What Is a Conventional Loan?
A conventional loan is a mortgage that is not insured or guaranteed by the federal government. These loans are offered by private lenders, including banks, credit unions, and mortgage companies, and they follow guidelines set by Fannie Mae and Freddie Mac.
Conventional loans are available in two primary categories:
- Conforming Loans: Loans that meet the loan limits set by the Federal Housing Finance Agency (FHFA). For 2024, the conforming loan limit in most areas is $766,550, but this can be higher in high-cost regions.
- Non-Conforming (Jumbo) Loans: Loans that exceed the conforming loan limit and have stricter qualification requirements.
Unlike FHA or VA loans, conventional loans do not require government mortgage insurance, but they may require private mortgage insurance (PMI) if you put down less than 20%.
The Pros of Conventional Loans
1. Lower Overall Loan Costs
One of the biggest advantages of a conventional loan is that it can be cheaper in the long run than government-backed loans.
- No upfront mortgage insurance premium (Unlike FHA loans, which require a 1.75% upfront fee).
- Lower monthly mortgage insurance costs (PMI can be removed, unlike FHA mortgage insurance).
- Competitive interest rates (Especially for borrowers with good credit).
If you have a strong credit score and a sizable down payment, a conventional loan can significantly reduce your borrowing costs.
2. Flexible Loan Options
Conventional loans offer a wide range of term lengths and structures, including:
- Fixed-rate mortgages (15, 20, or 30 years) – Stable monthly payments and long-term affordability.
- Adjustable-rate mortgages (ARMs) – Lower initial rates with periodic adjustments.
- Jumbo loans – Financing options for high-value properties.
This flexibility allows borrowers to customize their mortgage based on their financial goals and homeownership plans.
3. No Mortgage Insurance With a 20% Down Payment
With a conventional loan, you can avoid private mortgage insurance (PMI) if you put down at least 20%. This is a major advantage over FHA loans, which require mortgage insurance for the life of the loan (unless refinanced).
PMI typically costs 0.5%–1.5% of the loan amount per year, so eliminating it can save thousands over time.
4. Higher Loan Limits Than FHA Loans
For buyers considering homes in higher price ranges, a conventional loan provides more borrowing power.
- The FHA loan limit for most areas in 2024 is $498,257.
- The conventional loan limit is $766,550—and higher in some markets.
If you’re purchasing in expensive areas, a conventional loan may be the better option without needing a jumbo loan.
5. Can Be Used for Various Property Types
Unlike government-backed loans, conventional loans can be used to purchase:
- Primary residences
- Second homes & vacation properties
- Investment properties
This makes them a great choice for real estate investors and buyers looking to purchase multiple properties.
The Cons of Conventional Loans
1. Higher Credit Score Requirements
Conventional loans typically require higher credit scores compared to FHA or VA loans.
- Minimum credit score for conventional loans: 620 (higher scores preferred).
- To secure the best rates, lenders prefer scores of 740+.
- FHA loans allow scores as low as 580 with 3.5% down.
If your credit score is below 620, you may have a harder time qualifying for a conventional loan or may receive higher interest rates.
2. Stricter Debt-to-Income (DTI) Requirements
Lenders evaluate your debt-to-income (DTI) ratio to determine if you can afford a loan.
- DTI Limit for Conventional Loans: Usually 43% or lower.
- Some lenders may allow up to 50% for strong borrowers.
If you have significant student loans, car payments, or credit card debt, qualifying for a conventional loan might be more challenging.
3. Private Mortgage Insurance (PMI) Required for Low Down Payments
If you put less than 20% down, you’ll need private mortgage insurance (PMI) until you reach 20% home equity.
- PMI Costs: 0.5%–1.5% of the loan amount per year.
- How to Remove PMI: Once your loan balance reaches 80% of the home’s value, you can request removal.
While PMI can be removed, it’s still an additional monthly cost that FHA and VA loan borrowers don’t have.
4. Higher Down Payment Requirements Than FHA Loans
While some conventional loans allow as little as 3% down, most require at least 5%–10% down for borrowers with lower credit scores.
By comparison:
- FHA Loans: Only 3.5% down (with a credit score of 580+).
- VA Loans: 0% down for eligible military borrowers.
If you’re a first-time buyer with limited savings, an FHA loan may be a more accessible option.
Should You Choose a Conventional Loan?
Who Benefits Most from a Conventional Loan?
- Buyers with strong credit (680+) who qualify for lower interest rates.
- Those with at least 5%–10% down (or 20% to avoid PMI).
- Borrowers with stable income and a low DTI ratio.
- People buying second homes or investment properties (which FHA loans don’t allow).
- Buyers purchasing in higher price ranges who need higher loan limits.
Who Might Consider Other Loan Options?
- Buyers with lower credit scores (below 620).
- First-time buyers with limited savings who need low down payment options.
- Those with high debt-to-income ratios (above 43%).
- Borrowers who want minimal upfront costs and don’t mind mortgage insurance.
Final Thoughts: Is a Conventional Loan Right for You?
Conventional loans offer many benefits, including lower overall costs, flexible terms, and no PMI with a 20% down payment. However, they also have stricter credit and income requirements, making them best suited for buyers with strong financial profiles.
Before choosing a conventional loan, compare it with FHA, VA, and USDA loans to see which option aligns best with your financial situation and homeownership goals.
💡 Thinking about a conventional loan? Get pre-approved with the Orlicki Group today to explore your best mortgage options!
