What Is a Conventional Loan?
A conventional loan is any mortgage not backed by a government agency. Unlike FHA, USDA, or VA loans, conventional loans are issued and guaranteed through private channels — either held by lenders directly or sold to Fannie Mae and Freddie Mac on the secondary market.
That distinction matters because it means no income limits, no geographic restrictions, and no primary-residence requirement. Conventional loans can finance primary homes, second homes, and investment properties. They're the most widely used mortgage type and often the best option for buyers with solid credit and stable income.
Conforming vs. non-conforming
Most conventional loans are "conforming" — they meet Fannie Mae and Freddie Mac size and credit standards. Loans above the conforming limit ($806,500 in 2025 for most areas) are "jumbo" loans — still conventional, but with stricter requirements and different pricing. Everything in this guide applies to conforming loans unless noted otherwise.
When Conventional Wins
When Government Loans May Win
Conventional Loan Requirements
Conventional loans have stricter baseline requirements than government-backed loans — but more flexibility in other areas. See the full requirements breakdown →
Longer waiting periods after derogatory events
Conventional loans have stricter waiting periods than FHA — 4 years after Chapter 7 bankruptcy vs. FHA's 2 years, and 7 years after foreclosure vs. FHA's 3 years. If you've had a recent bankruptcy or foreclosure, FHA may be the faster path to homeownership. See conventional after bankruptcy →
How Credit Score Affects Your Conventional Loan
Credit score matters more on a conventional loan than any other loan type — because it directly drives your interest rate and PMI cost. A 760 borrower and a 640 borrower can qualify for the same loan but pay dramatically different rates. See the full credit score guide →
Best rates + lowest PMI
Pricing is at its best. PMI rates are minimal. Competing with other loan types on every metric.
Strong rates, reasonable PMI
Solid qualification. Rates and PMI costs are competitive. Most buyers in this range do well with conventional.
Higher rate adjustments
Loan-level price adjustments (LLPAs) start to bite. Compare conventional vs FHA at this range — FHA may offer a lower effective rate.
At or near conventional floor
Qualifying is possible but pricing is significantly worse. FHA almost certainly has a better rate at this score range.
Conventional Down Payment Options
Conventional loans offer the widest range of down payment options — from 3% all the way to 100% cash. The tradeoff: lower down payments mean PMI, and PMI costs vary by credit score. See the full down payment guide →
Down Payment by Scenario
Down Payment by Purchase Price
Private Mortgage Insurance (PMI)
PMI is required when you put less than 20% down on a conventional loan. Unlike FHA's MIP, conventional PMI is cancellable — and it's often the better long-term choice even when FHA rates look lower upfront. See the full PMI guide →
How PMI Works
PMI protects the lender if you default. Typical cost: 0.2%–1.5% of the loan annually, divided into monthly payments. Your exact rate depends on credit score, loan-to-value ratio, and loan type.
On a $300,000 loan at 0.6% PMI: approximately $150/month.
When PMI Goes Away
PMI vs. FHA MIP — the long game
FHA MIP stays for the life of the loan if you put less than 10% down. Conventional PMI cancels at 20% equity. A borrower who puts 5% down conventional and cancels PMI at 20% equity often pays less total mortgage insurance than the same borrower on FHA — even though PMI is higher per month initially. Run the numbers with Bayou Mortgage before choosing.
Benefits of a Conventional Loan
For buyers with solid credit and stable income, conventional loans offer advantages no government-backed loan can match.
Any Property Type
Primary homes, second homes, and investment properties all qualify. No occupancy restrictions.
No Income Limits
High earners aren't penalized. No household income counting. No area median income caps.
PMI Cancellable
PMI drops off at 20% equity — unlike FHA MIP which can last for the life of the loan.
Higher Loan Amounts
Jumbo conventional loans go beyond the $806,500 conforming limit for higher-value purchases.
Flexible Refinance
No program-specific refinance restrictions. Cash-out, rate-and-term, or removing PMI — all available.
No Geographic Limits
Unlike USDA, conventional loans work in any location — urban, suburban, or rural.
Conventional vs. FHA Loan
The most common comparison in mortgage lending. Which is better depends entirely on your credit score, down payment, and how long you plan to stay. See the full comparison →
| Factor | Conventional | FHA |
|---|---|---|
| Min. Credit Score | 620 | 580 (3.5% down) |
| Min. Down Payment | 3–5% | 3.5% |
| Mortgage Insurance | PMI — cancels at 20% equity | MIP — life of loan (<10% down) |
| Max DTI | 43–50% | Up to 57% |
| Investment Properties | Allowed | Not allowed |
| Income Limit | None | None |
| Bankruptcy Wait | 4 years (Ch. 7) | 2 years (Ch. 7) |
| Best For | 620+ credit, investment, long-term | Under 620 credit, limited savings |
How to Apply for a Conventional Loan
The conventional loan process is the most straightforward of any mortgage type — no government agency involvement, no special appraisal requirements, and typically the fastest timelines.
Get Pre-Approved
We pull credit, verify income and assets, and run your file through automated underwriting (DU or LP). Pre-approvals typically issue within 24 hours with complete documentation.
Find Your Property
Shop with confidence. Conventional loans have no minimum property standards beyond a standard appraisal — no government MPS or MPR checklists to navigate.
Submit Your Documents
Two years of tax returns and W-2s, 30 days of pay stubs, two months of bank statements. Investment property purchases require additional asset documentation.
Appraisal & Underwriting
A conventional appraisal confirms market value. Underwriting reviews the full file — credit, income, assets, and property. Most files clear in 3–5 business days with a complete package.
Close on Your Home
Sign closing documents, wire your down payment and closing costs, get your keys. Average conventional close time: 21–28 days from completed application — faster than government-backed loans.
Ready to Get Pre-Approved?
Bayou Mortgage closes conventional loans every day. Tell us your situation and we'll tell you exactly where you stand.
Conventional Loan FAQ
Straight answers to the most common conventional loan questions.