Conventional Loan Guide: PMI, Credit Score & Down Payment Options

By the SimpleCalc Mortgage Editorial Team · Updated July 2026 · 6 min read · Loan Types

Conventional loans are the default mortgage for most American homebuyers — and for good reason. They're flexible, widely available, and for borrowers with solid credit, often the cheapest option over the life of the loan. But the word "conventional" covers a lot of ground, and the details — down payment options, how your credit score affects your rate, when PMI goes away — are things you need to understand before you sit down with a lender.

What Actually Makes a Loan "Conventional"

A conventional loan is simply a mortgage that isn't backed by a federal government agency. No FHA, no VA, no USDA. These loans are made by private lenders and typically sold to Fannie Mae or Freddie Mac on the secondary market. Because Fannie and Freddie have to buy them, the loans must meet their guidelines — which sets the floor for credit score minimums, DTI limits, loan amounts, and property standards. Follow the rules, and the lender can offload your loan quickly and price it competitively. Break the rules, and the lender has to hold the risk — which is why non-conforming loans cost more.

Conforming Limits vs. Jumbo: Where the Line Is

The FHFA sets the conforming loan limit annually. In 2025, the standard limit is approximately $806,500 for a single-family home in most areas, with higher ceilings in expensive markets like Los Angeles, New York City, and San Francisco. Borrow at or below that number and you're in conforming territory — lenders price this paper competitively because they can sell it easily. Exceed that limit and you're in jumbo territory: the lender is taking on more risk, which means tighter requirements (typically 720+ credit, 10–20% down) and rates that run 0.25%–0.5% higher.

Down Payment Options — More Flexible Than Most People Think

The conventional loan market is not all-or-nothing at 20% down. Here's the actual range:

• 3% down via Fannie Mae HomeReady or Freddie Mac Home Possible, for borrowers who meet income limits. These programs exist specifically to make conventional loans accessible to moderate-income buyers — worth asking about if your household income is under the area median.
• 5% down is the standard minimum for most conventional loans for primary residences.
• 10% down reduces your PMI rate significantly and opens up better pricing tiers.
• 20% down eliminates PMI entirely — a monthly cost that can run $100–$300 depending on your loan size and credit score.

One advantage conventional loans have over FHA: they can be used for second homes and investment properties. FHA is primary residence only. If you're thinking about a rental or vacation property, conventional is your path.

How Your Credit Score Sets Your Interest Rate

This is where conventional loans are unforgiving in a way that FHA is not. Conventional pricing runs through a system of loan-level pricing adjustments (LLPAs) — essentially a grid that assigns surcharges based on your credit score and down payment. A 20-point credit score difference can shift your rate by 0.25%–0.5%. On a $350,000 loan over 30 years, 0.5% is roughly $37,000 in total interest.

If your score is sitting at 698, spending three to six months getting it above 720 before applying isn't perfectionism — it's tens of thousands of dollars.

PMI on Conventional Loans: What It Costs and When It Ends

Private Mortgage Insurance is required on any conventional loan where your down payment is below 20%. It typically costs 0.5%–1.5% of your loan amount per year, billed monthly. On a $300,000 loan, that's $125–$375/month depending on your credit and LTV.

The critical difference from FHA: conventional PMI can go away. When your loan balance drops to 80% of the home's original appraised value, you can formally request cancellation. At 78%, the lender is legally required to cancel it automatically. If your home has appreciated significantly, you may be able to get a new appraisal and cancel PMI even earlier. FHA's mortgage insurance, by contrast, sticks around for the life of the loan if you put down less than 10% — which is a real cost that doesn't get enough attention in lender pitches for FHA loans.

DTI Requirements for Conventional Loans

Standard conventional guidelines target a front-end DTI (housing costs / gross income) of 28% or below and a back-end DTI (all debts / gross income) of 36%–43%. Fannie Mae's automated underwriting system, Desktop Underwriter, can approve loans with back-end DTIs up to 50% for borrowers with strong compensating factors — high credit scores, significant cash reserves, or larger down payments. But 50% DTI means half your pre-tax income is going to debt payments. That's not a comfortable place to be, regardless of what the system approves.

Conventional vs. FHA: Which Should You Pick?

The answer depends almost entirely on your credit score and down payment size.

• Score above 680, down payment 10%+: Conventional is almost always better. Your PMI will cost less than FHA's MIP and will eventually disappear.
• Score 620–679 or limited down payment: Run the numbers on both. FHA may offer a more accessible rate, but the permanent MIP is an ongoing cost that adds up fast.
• Score below 620: FHA is likely your realistic option — most conventional lenders won't approve below this threshold.
• Eligible veteran: Neither. A VA loan outperforms both for qualifying borrowers — no PMI, lower rates, zero down possible.