Definition
Conventional loans aren't insured by any government agency—they're purely private sector products. They require stronger credit and down payments than government-backed loans. Borrowers below 20% down must pay private mortgage insurance (PMI).
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Conventional loans follow standards set by Fannie Mae and Freddie Mac, the government-sponsored enterprises that purchase mortgages in the secondary market. They offer more flexibility in terms and pricing than government-backed loans but require better credit scores and higher down payments. Borrowers with down payments below 20% must pay private mortgage insurance (PMI).
Pro Tip
If your credit and down payment are strong enough, conventional loans often offer better long-term rates than government-backed options without the extra insurance costs.
Example
A borrower with a 750 credit score and $80,000 saved for a $400,000 home (20% down) qualifies for a conventional loan at favorable rates without needing PMI.