“Conventional loan” sounds like the boring, default option — the mortgage your parents got. And in a way it is the default: it’s the most common type of home loan in America. But for first-time buyers, the conventional loan has quietly become one of the most flexible and cost-effective paths to owning a home, thanks to a set of programs that let qualified buyers put down as little as 3%. If you have decent credit, this is very often the loan that costs you the least over time — and the reason comes down to one word most people don’t fully understand: PMI.
This guide explains what “conventional” actually means, walks through the three big 3%-down programs for first-time buyers, and demystifies PMI — including its single biggest advantage over FHA loans. We’ll be honest about where conventional loans win, where they lose, and how to tell which camp you’re in. If a friend asked me “should I do conventional or FHA?”, this is the conversation I’d have with them.
What “conventional” actually means
A conventional loan is simply a mortgage that is not backed by a government agency. That’s the whole definition. FHA loans are insured by the Federal Housing Administration, VA loans are guaranteed by the Department of Veterans Affairs, and USDA loans are backed by the Department of Agriculture. A conventional loan has none of that government backing behind it.
Instead, the vast majority of conventional loans follow the rules set by Fannie Mae and Freddie Mac — two government-sponsored enterprises that buy mortgages from lenders, which frees the lenders up to make more loans. When a loan meets Fannie and Freddie’s standards (loan size, credit, documentation), it’s called a conforming loan. Because these two enterprises effectively set the rulebook that most lenders follow, “conventional” and “conforming” are often used interchangeably, even though technically a conventional loan that’s too large to conform is called a “jumbo” loan.
The practical upshot: conventional loans are standardized, widely available from nearly every lender, and — contrary to old assumptions — do not require a 20% down payment. That 20% figure is a myth that keeps a lot of would-be buyers on the sidelines. Let’s clear it up.
The 3%-down programs for first-time buyers
There are three main conventional programs designed to get qualified first-time and lower-income buyers into homes with a small down payment. All three allow as little as 3% down. Here’s how they differ.
Conventional 97
The name tells you the deal: “97” refers to a 97% loan-to-value ratio, meaning the loan covers 97% of the price and you put down the other 3%. On a $300,000 home, that’s a $9,000 down payment instead of $60,000. Conventional 97 is offered through both Fannie Mae and Freddie Mac (Freddie’s version is branded HomeOne).
The key feature: there are no income limits on the standard Conventional 97 program. That makes it the go-to 3%-down option for buyers who earn too much to qualify for the income-restricted programs below. To use it, at least one borrower usually needs to be a first-time buyer, which Fannie Mae defines as someone who had no ownership interest in a residential property during the three years before the purchase. So if you sold a home four years ago, you can still count as a first-time buyer here.
HomeReady (Fannie Mae)
HomeReady is Fannie Mae’s affordable-lending program for low-to-moderate-income buyers. It also allows 3% down, but it adds an income cap: your total qualifying household income generally must be at or below 80% of the area median income (AMI) for the home’s location. Those AMI figures are set by county and updated every year (Fannie Mae refreshed the 2026 numbers in June 2026), so the exact dollar limit depends entirely on where you’re buying — you check it using Fannie Mae’s income eligibility lookup tool.
In exchange for meeting the income limit, HomeReady offers real perks: reduced private mortgage insurance costs compared to a standard conventional loan, more flexible sources for your down payment (gifts, grants, and down payment assistance are all allowed), and the ability to count income from household members who aren’t on the loan, or from a boarder, to help you qualify. It’s built for buyers who are stretching.
Home Possible (Freddie Mac)
Home Possible is Freddie Mac’s near-identical answer to HomeReady. It also allows 3% down, caps income at 80% of AMI, offers reduced mortgage insurance, and permits flexible down-payment sources. The two programs are so similar that which one you use often just comes down to which one your lender’s automated underwriting system approves you for. A good loan officer will run both and take whichever gives you the better terms.
Quick comparison
- Conventional 97: 3% down, no income limit, first-time buyer generally required, standard PMI.
- HomeReady: 3% down, income capped at 80% AMI, reduced PMI, flexible income and down-payment sources.
- Home Possible: 3% down, income capped at 80% AMI, reduced PMI, flexible income and down-payment sources.
If you’re under the 80% AMI limit for your area, HomeReady or Home Possible will almost always be cheaper than Conventional 97 because of the reduced mortgage insurance. If you earn more than the limit, Conventional 97 is your 3%-down path. And remember, these can often be combined with down payment assistance programs to shrink your out-of-pocket cost even further.
PMI: what it is and why it’s not as scary as you think
PMI stands for private mortgage insurance. Whenever you put down less than 20% on a conventional loan, the lender requires it. Here’s the honest framing: PMI protects the lender, not you. If you were to default, PMI reimburses the lender for part of its loss. You pay for it, but it’s not insurance on your behalf.
PMI is usually paid as a monthly add-on to your mortgage payment. The cost varies based on your credit score, your down payment, and the loan, but it commonly runs somewhere between about 0.4% and 1.9% of the loan amount per year. On a $300,000 loan, that might be anywhere from roughly $100 to $475 a month. Higher credit and a bigger down payment push it toward the low end; a small down payment and lower credit push it up.
Nobody loves paying it. But here’s the thing that changes the whole calculation:
The big advantage: conventional PMI cancels
This is the single most important thing to understand about conventional loans versus FHA, so I’ll say it plainly: conventional PMI goes away. It is not a permanent cost.
Under the federal Homeowners Protection Act, once your loan balance drops to 80% of the home’s original value (meaning you’ve built 20% equity), you can request that your lender cancel PMI. And once your balance reaches 78% of the original value, the lender is legally required to cancel it automatically, whether you ask or not. You get there through a combination of paying down your loan and, often, your home’s value rising. Some buyers reach 20% equity in just a few years.
Compare that to FHA. On an FHA loan with less than 10% down, the mortgage insurance premium (called MIP) lasts for the entire life of the loan — 30 years — and the only way to get rid of it is to refinance out of the FHA loan entirely. That’s a structural difference that can add up to tens of thousands of dollars over the life of a loan. With conventional PMI, you have a built-in exit. With FHA’s MIP, on a low down payment, you generally don’t. This is the core reason a strong-credit buyer often comes out ahead with conventional. For the full FHA picture, see our FHA loan guide.
One more note: if you’d rather not pay PMI monthly, some lenders offer “lender-paid PMI” (baked into a slightly higher interest rate) or a one-time upfront PMI payment. These have tradeoffs — lender-paid PMI can’t be cancelled since it’s built into the rate — so run the numbers before choosing. Our mortgage calculators can help you see how PMI affects your monthly payment and when it’s likely to drop off.
Credit score norms for conventional loans
Conventional loans are more credit-sensitive than government-backed loans. The typical minimum credit score is around 620. Below that, you’ll generally be pushed toward FHA, which is more forgiving of lower scores.
But here’s the nuance that matters for your wallet: with conventional loans, your credit score doesn’t just decide whether you qualify — it heavily influences your interest rate and your PMI cost. The higher your score, the lower both tend to be. A buyer with a 760 score will typically get a noticeably better rate and cheaper PMI than a buyer with a 640 score on the same house. That “risk-based pricing” is why improving your credit before you apply can pay off so much on a conventional loan.
So the general rule of thumb: the stronger your credit, the more a conventional loan tilts in your favor. If your score is in the 700s, conventional is very often your cheapest option. If it’s in the low 600s or below, FHA may serve you better. For a deeper look at how scores map to approvals and rates, see our credit score requirements guide.
2026 conforming loan limits
Because most conventional loans have to conform to Fannie Mae and Freddie Mac standards, there’s a cap on how much you can borrow and still get a “conforming” (and therefore standard-priced) loan. The Federal Housing Finance Agency, or FHFA, updates this limit every year to track average home-price changes.
For 2026, the baseline conforming loan limit for a one-unit home in most of the country is $832,750, up from $806,500 in 2025. In designated high-cost areas — parts of California, Hawaii, the Northeast, and other expensive markets — the ceiling rises to $1,249,125 (150% of the baseline). The new limits apply to loans starting January 1, 2026.
Why does this matter to a first-time buyer? For most people it’s a non-issue — a starter home is comfortably under the limit. But if you’re buying in a pricey market and need to borrow more than the conforming limit, you’d be looking at a jumbo loan, which typically has stricter credit and down-payment requirements. Knowing the limit helps you understand which lane your purchase falls into.
When conventional beats FHA — and when it doesn’t
This is the decision most first-time buyers actually face, so let’s be direct about it.
Conventional usually wins when you have good credit
If your credit score is in the higher ranges (think mid-700s and up), a conventional loan is typically the better deal for a few reasons:
- PMI cancels. You’ll stop paying mortgage insurance once you hit 20% equity, instead of carrying it for the life of the loan like FHA.
- PMI is cheaper for strong-credit borrowers. High scores earn low PMI rates, sometimes below what FHA charges.
- No upfront insurance premium. FHA charges 1.75% of the loan upfront; conventional loans don’t have an equivalent mandatory fee.
- More property flexibility. Conventional appraisals are generally less strict than FHA’s minimum property standards, which can matter on older homes.
FHA can win when your credit or budget is tighter
FHA exists precisely to serve buyers that conventional loans price out, and it does that job well:
- Lower credit thresholds. FHA allows scores as low as 580 (with 3.5% down) or even 500 (with 10% down). Conventional generally wants 620+.
- Cheaper for lower-credit borrowers. FHA’s mortgage insurance is priced the same regardless of credit score, so a buyer with a 620 score often pays less for FHA MIP than for conventional PMI at that score.
- More forgiving of debt. FHA can accept higher debt-to-income ratios, helpful if you carry student loans or other obligations.
The honest summary: run both. There’s no universal winner. A buyer with a 780 score and a 5% down payment will almost certainly save money with conventional; a buyer with a 630 score will often do better with FHA. The only way to know for sure is to have a lender quote you both loans side by side — same house, same down payment — and compare the total monthly payment plus the long-term insurance cost. To weigh every path, browse all our loan programs.
Fixed vs. adjustable rate, and loan terms
Conventional loans come in a few shapes, and it’s worth knowing your options because they affect your monthly payment and your risk. The two big variables are the rate type and the loan term.
A fixed-rate mortgage locks your interest rate for the entire life of the loan, so your principal-and-interest payment never changes. This is the safe, predictable choice most first-time buyers make — you’ll never be surprised by a payment jump. An adjustable-rate mortgage (ARM) starts with a lower fixed rate for an introductory period (say, five or seven years) and then adjusts up or down periodically based on market rates. An ARM can save money if you’re confident you’ll sell or refinance before the fixed period ends, but it carries the risk that your payment rises later. For most people buying their first long-term home, a fixed rate is the more comfortable fit.
On term length, the 30-year fixed is by far the most popular because it spreads payments over the longest period and keeps them affordable. A 15-year fixed has higher monthly payments but a lower interest rate and builds equity much faster — which, relevant to this article, also means you’ll hit the 20% equity mark and shed PMI sooner. If your budget can handle the higher payment, a 15-year loan saves an enormous amount of interest over time. Our mortgage calculators let you compare the two side by side for your numbers.
How to get rid of PMI faster
Since PMI is the main ongoing cost of a low-down-payment conventional loan, it’s worth knowing the levers that make it disappear sooner. Because conventional PMI is cancellable — unlike FHA’s lifetime insurance — these strategies actually pay off:
- Pay down principal faster. Making extra payments toward principal, even modest ones, pushes your balance below the 80% threshold sooner so you can request cancellation.
- Request cancellation at 80%. Don’t wait for the automatic 78% cutoff. Once you reach 20% equity based on the original value, contact your lender in writing to ask for removal — you’re entitled to request it.
- Use a new appraisal if your home appreciated. If your home’s value has risen significantly, an appraisal showing you now have 20% or more equity can let you cancel PMI even before you’ve paid the balance down that far. Lenders have specific rules on how long you must have held the loan, so ask first.
- Refinance out of it. If rates drop or your equity has grown a lot, refinancing into a new loan without PMI can be worthwhile — though weigh the closing costs against the savings.
The takeaway: PMI on a conventional loan is temporary and, with a little planning, you control how long you pay it. That’s a fundamentally different situation from carrying insurance for 30 years, and it’s why the conventional path rewards buyers who keep an eye on their equity.
The honest tradeoffs of a conventional loan
No loan is perfect. Here’s the straight talk on where conventional loans can fall short:
- Stricter credit and DTI. The 620 floor and risk-based pricing mean weaker credit costs you more, or shuts you out entirely.
- PMI still applies with under 20% down. Yes, it cancels — but you do pay it in the early years, which raises your monthly payment.
- Income limits on the cheapest programs. HomeReady and Home Possible’s best pricing is only available to buyers at or below 80% AMI.
- Reserves and documentation. Conventional underwriting can be more paperwork-intensive, and lenders may want to see cash reserves.
- Higher rates for lower-credit buyers. Because pricing is risk-based, a middling score can mean a meaningfully higher interest rate than a government-backed loan would offer.
None of these are dealbreakers for most buyers with solid credit — but they’re the reasons FHA still exists and still makes sense for a lot of people. Know your numbers, and don’t assume conventional is automatically the answer. If you’re early in the journey, our first-time buyer guide lays out how to figure out which loan fits your situation before you ever talk to a lender.
Frequently asked questions
Do I need 20% down for a conventional loan?
No — this is the most persistent myth in home buying. Qualified first-time buyers can get a conventional loan with as little as 3% down through Conventional 97, HomeReady, or Home Possible. Putting down less than 20% just means you’ll pay private mortgage insurance (PMI) until you build 20% equity, at which point it cancels.
What credit score do I need for a conventional loan?
Most conventional loans require a minimum score around 620. But higher scores unlock lower interest rates and cheaper PMI, so the difference between a 640 and a 760 score can be significant in monthly cost. If your score is below 620, an FHA loan is usually the more accessible route.
Does conventional PMI ever go away?
Yes, and this is a major advantage over FHA. You can request PMI cancellation once your loan balance hits 80% of the home’s original value, and your lender must cancel it automatically at 78%. This is required under the federal Homeowners Protection Act. FHA mortgage insurance, by contrast, often lasts for the life of the loan.
What’s the difference between HomeReady and Home Possible?
Very little. HomeReady is Fannie Mae’s program and Home Possible is Freddie Mac’s, but both allow 3% down, cap income at 80% of area median income, and offer reduced PMI. Which one you use usually depends on which enterprise’s automated underwriting approves your loan. A good lender will check both.
Who counts as a first-time buyer for these programs?
Fannie Mae defines a first-time buyer as someone who had no ownership interest in a residential property during the three years before the purchase. So even if you owned a home in the past, you may qualify again if it’s been more than three years. Conventional 97 generally requires at least one borrower to meet this definition.
What is the 2026 conforming loan limit?
For 2026, the baseline conforming loan limit for a one-unit home is $832,750 in most of the country, rising to $1,249,125 in designated high-cost areas. Loans above these limits are considered “jumbo” loans and carry stricter requirements. The FHFA sets these limits each year based on home-price changes.
Is a conventional loan always better than FHA?
No. Conventional usually wins for buyers with strong credit because PMI cancels and can be cheaper. But FHA is often better for buyers with lower credit scores or higher debt, since its mortgage insurance is priced the same regardless of credit. The only reliable way to decide is to compare both loans on the same home.
Can I use down payment assistance with a conventional loan?
Yes. HomeReady and Home Possible in particular are designed to accept gifts, grants, and down payment assistance programs to cover your 3% down and even some closing costs. This can dramatically reduce what you need out of pocket. Check our down payment assistance resources to see what’s available in your area.
Sources: Fannie Mae — HomeReady mortgage, 97% LTV options, and eligibility guidelines; Freddie Mac — Home Possible and HomeOne mortgage guidelines; Federal Housing Finance Agency (FHFA) — 2026 conforming loan limit values; Consumer Financial Protection Bureau (CFPB) — private mortgage insurance and the Homeowners Protection Act; U.S. Department of Housing and Urban Development (HUD) — FHA mortgage insurance premium comparison.
Last reviewed July 2026.