Mortgage Basics
What Is a Conventional Loan?
A conventional loan is a mortgage not insured or guaranteed by the federal government. It is the most common home loan type in the U.S., offered by banks, credit unions, and private lenders. For the real estate exam, knowing how conventional loans work — and how they differ from FHA, VA, and USDA loans — is essential.
Conventional Loan Key Facts
Not Government-Backed
Unlike FHA, VA, and USDA loans, conventional mortgages have no federal insurance or guarantee. Lenders bear the full default risk, which is why they set stricter qualification standards.
Credit Requirements
Minimum credit score is typically 620, though 740+ gets the best rates. Higher credit scores mean lower interest rates and lower PMI costs for conventional borrowers.
Down Payment
Conventional loans allow down payments as low as 3% (97% LTV programs for first-time buyers). Down payments below 20% require PMI, which is cancelable once you reach 20% equity — unlike FHA's lifetime MIP.
Conforming Limits
Conventional loans are either conforming (meeting Fannie Mae/Freddie Mac limits — $766,550 in most areas for 2024) or non-conforming/jumbo (exceeding those limits). Conforming loans can be sold on the secondary market.
Conventional vs. FHA Loans
FHA loans allow credit scores as low as 580 with 3.5% down and are more forgiving of past credit issues. However, FHA requires mortgage insurance premium (MIP) for the life of the loan on most borrowers — a significant long-term cost.
Conventional loans offer lower total cost for borrowers with good credit. PMI on a conventional loan is cancelable once LTV reaches 80%, whereas FHA MIP is largely permanent. For borrowers who qualify, conventional is usually cheaper over time.
Real Estate Exam Key Points
Conventional loans are NOT government-backed — private lenders bear the risk
PMI is required when LTV exceeds 80% — but it is cancelable at 20% equity
Conforming loans meet FHFA limits and can be sold to Fannie Mae / Freddie Mac
Jumbo loans are non-conforming conventional loans that exceed those limits
FHA MIP lasts the life of the loan on most loans; conventional PMI does not
Minimum credit score: typically 620 for conventional; 580 for FHA
Definition Page Pillars
Use this term page as a concept layer, then return to pillar pages for full workflow review.