Conventional Loans
The most popular mortgage option for Arizona homebuyers
Conventional loans are the most common type of mortgage in the United States, accounting for approximately 70% of all home purchases. Backed by private lenders and conforming to standards set by Fannie Mae and Freddie Mac, these loans offer competitive rates, flexible terms, and numerous advantages for qualified borrowers. Whether you’re a first-time homebuyer, moving up to a larger property, or refinancing your existing mortgage, understanding conventional loans is essential to making informed financing decisions.
Unlike government-backed loans (FHA, VA, USDA), conventional loans are not insured by federal agencies, which means they typically require stronger credit profiles and larger down payments. However, they also offer significant benefits including lower overall costs, the ability to cancel mortgage insurance, more flexible property eligibility, and faster closing times. With over a decade of experience helping Arizona homebuyers secure conventional financing, I’ll guide you through everything you need to know about these popular mortgage products and help you determine if a conventional loan is the right choice for your home purchase or refinance.
What Is a Conventional Loan?
A conventional loan is a mortgage that’s not insured or guaranteed by a government agency. These loans are issued by private lenders—banks, credit unions, and mortgage companies—and typically follow guidelines established by Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that purchase mortgages from lenders on the secondary market.
Two Types of Conventional Loans:
- Conforming Loans: Meet Fannie Mae and Freddie Mac guidelines including loan limits ($766,550 for most of Arizona in 2024). These are the most common conventional loans.
- Non-Conforming Loans: Don’t meet GSE standards, typically because they exceed loan limits (jumbo loans) or have other non-standard features. Learn more about jumbo loans.
Key Characteristics:
- Private Insurance: Not government-backed; may require private mortgage insurance (PMI) if down payment is less than 20%
- Flexible Terms: Available in 10, 15, 20, 25, and 30-year fixed terms, plus adjustable-rate options
- Credit Requirements: Generally require 620+ credit score, though 740+ gets best rates
- Down Payment: As low as 3% for qualified first-time buyers, 5% for repeat buyers (though 20% avoids PMI)
- Property Types: Available for primary residences, second homes, and investment properties
- Competitive Rates: Often lower than government-backed loans for borrowers with strong credit
Conventional vs. Government-Backed Loans
Understanding the differences helps you choose the right loan type:
| Feature | Conventional | FHA | VA | USDA |
|---|---|---|---|---|
| Minimum Credit Score | 620 (580 possible) | 580 (500 w/10% down) | Typically 620+ | 640 |
| Minimum Down Payment | 3% | 3.5% | 0% | 0% |
| Mortgage Insurance | PMI if <20% down (cancellable) | MIP (lifetime for most) | Funding fee (one-time) | Guarantee fee + annual fee |
| Loan Limits | $766,550 (most areas) | $498,257 (Maricopa County) | $766,550 | No set limit |
| Property Requirements | More flexible | Stricter standards | Meet VA minimums | Must be rural |
| Best Interest Rates | 740+ credit | Lower credit accepted | Competitive rates | Competitive rates |
| Investment Property | Yes | No | No | No |
| Second Home | Yes | No | No | No |
Learn more about other loan types: FHA Loans, VA Loans, and USDA Loans.
Benefits of Conventional Loans
Conventional loans offer numerous advantages that make them the preferred choice for many homebuyers:
1. Cancellable Mortgage Insurance
Private Mortgage Insurance (PMI) on conventional loans can be removed once you reach 20% equity through payments, appreciation, or home improvements. FHA loans, by contrast, require mortgage insurance for the life of the loan for most borrowers. This makes conventional loans significantly cheaper long-term if you start with less than 20% down.
2. Lower Down Payment Options
Contrary to popular belief, you don’t need 20% down for a conventional loan. Fannie Mae’s HomeReady and Freddie Mac’s Home Possible programs allow just 3% down for first-time buyers. Repeat buyers typically need 5% down. This makes homeownership accessible while avoiding the lifetime mortgage insurance of FHA loans.
3. Competitive Interest Rates
Borrowers with strong credit (740+) typically get lower interest rates on conventional loans compared to government-backed options. The difference of even 0.25% can save thousands over the life of your loan. The better your credit and larger your down payment, the better your rate.
4. Higher Loan Limits
Conventional conforming loan limits for 2024 are $766,550 in most Arizona counties—significantly higher than FHA limits of $498,257 in Maricopa County. This makes conventional loans the only conforming option for mid-to-upper-tier homes in Phoenix, Scottsdale, and other Arizona markets. Check current conforming loan limits from the Federal Housing Finance Agency (FHFA).
5. More Flexible Property Standards
Conventional loans have less stringent property condition requirements than FHA loans. Minor cosmetic issues, older roofs, and properties needing light updates are generally acceptable. FHA requires all safety issues to be addressed before closing, which can complicate transactions or eliminate properties from consideration.
6. Investment and Second Home Options
Conventional loans are available for second homes and investment properties—something FHA, VA, and USDA loans don’t allow. This flexibility makes conventional financing ideal for vacation homes, rental properties, and real estate investors. Learn more about investment property loans and second home financing.
7. Faster Closing Times
Without government agency involvement, conventional loans often close faster than FHA or VA loans. This can be a competitive advantage in hot markets where sellers prefer quick, certain closings. Conventional loans typically close in 30-35 days compared to 40-45+ days for government loans.
8. No Upfront Funding Fees
Unlike FHA (1.75% upfront MIP), VA (2.15%-3.3% funding fee), and USDA (1% guarantee fee), conventional loans have no upfront mortgage insurance premium. Your closing costs are typically lower, and you’re not financing a large upfront fee into your loan balance.
Conventional Loan Requirements
To qualify for a conventional loan, you’ll need to meet these standards:
Credit Score
Minimum Requirements:
- 620: Minimum for most programs
- 640: Better rates and more options
- 680: Good rates available
- 700+: Very competitive rates
- 740+: Best rates and lowest PMI
- 760+: Top tier pricing
Higher credit scores significantly impact your interest rate and PMI costs. Even a 20-point improvement can save you money. Read our guide on optimizing your credit score.
Down Payment
Options Available:
- 3%: First-time buyers (HomeReady, Home Possible, Standard Conventional)
- 5%: Repeat buyers minimum
- 10%: Better rates, lower PMI
- 15%: Even better terms
- 20%: No PMI required, best rates
- 25%+: Investment property minimum
Down payment can come from savings, gifts from family, employer assistance, or approved down payment assistance programs.
Debt-to-Income Ratio
DTI Guidelines:
- Front-end ratio: 28% maximum (housing expenses only)
- Back-end ratio: 43% maximum (all monthly debts)
- 50% possible: With strong compensating factors (high credit score, reserves, down payment)
- Includes: mortgage payment, property taxes, insurance, HOA fees, credit cards, car loans, student loans, personal loans
Use our DTI calculator to see where you stand.
Documentation
Required Documents:
- 2 years of W-2s or tax returns
- Recent pay stubs (30 days)
- 2 months of bank statements
- Proof of down payment funds
- Employment verification
- Identification documents
- Credit authorization
- Rental history (if applicable)
Reserve Requirements: Most programs require 2-6 months of mortgage payments in reserves (liquid assets) after closing. Investment properties typically require 6 months. These reserves demonstrate financial stability and ability to handle unexpected expenses.
HomeReady & Home Possible
Special programs from Fannie Mae (HomeReady) and Freddie Mac (Home Possible) designed for low-to-moderate income borrowers.
Key Features:
Understanding Private Mortgage Insurance (PMI)
If you put down less than 20% on a conventional loan, you’ll pay Private Mortgage Insurance (PMI) to protect the lender against default risk. Here’s what you need to know:
PMI Costs
PMI typically costs 0.3% to 1.5% of the original loan amount annually, depending on your:
- Credit score (higher scores = lower PMI)
- Down payment amount (larger down payment = lower PMI)
- Loan type (adjustable vs. fixed)
- Property type (single-family, condo, multi-unit)
Example: On a $400,000 loan with 5% down and 0.5% PMI rate, you’d pay about $2,000 per year ($167/month) in PMI. Learn more from the Consumer Financial Protection Bureau’s guide to mortgage insurance.
Removing PMI
PMI can be removed when you reach 20% equity through:
- Automatic termination: At 22% equity based on original value (required by law)
- Request removal: At 20% equity with current appraisal showing sufficient value
- Home appreciation: If your home value increases significantly, you can request removal based on new appraisal
- Extra payments: Pay down principal faster to reach 20% equity sooner
- Home improvements: Increase property value to reach 20% equity threshold
Pro Tip: The ability to remove PMI is one of the biggest advantages of conventional loans over FHA loans, which require mortgage insurance for the life of the loan for most borrowers. This can save you tens of thousands of dollars over time.
Who Should Choose a Conventional Loan?
Conventional loans are ideal for:
- Borrowers with good to excellent credit (680+): You’ll get the best rates and terms with strong credit
- Buyers who can put down 5-20%: Maximize benefits while still having reasonable down payment
- Those buying above FHA loan limits: Conventional is your only conforming option for mid-to-upper-tier homes
- Buyers wanting to cancel mortgage insurance: Remove PMI once you reach 20% equity
- Investment property buyers: Conventional loans are available for rentals and investment properties
- Second home purchasers: Finance your vacation home with conventional financing
- Buyers seeking flexibility: More lenient property condition standards than FHA
- Repeat homebuyers with equity: Roll equity into larger down payment for better rates
- Self-employed borrowers with good income documentation: Tax returns showing strong income qualify easily
- Those who want faster closing: Less red tape than government-backed loans
Bottom Line: If you have decent credit (680+), some down payment funds (5-20%), and want the lowest long-term cost with maximum flexibility, conventional loans are likely your best option.
Frequently Asked Questions
What credit score do I need for a conventional loan?
The minimum is typically 620, though some programs accept 580. However, 680+ gives you access to better rates, and 740+ qualifies you for the best pricing. The higher your score, the more you’ll save. Check out our guide to optimizing your credit score.
Can I get a conventional loan with 3% down?
Yes! First-time buyers can use Fannie Mae’s HomeReady, Freddie Mac’s Home Possible, or standard 97% LTV conventional loans with just 3% down. Repeat buyers typically need 5% minimum. You’ll pay PMI with less than 20% down, but you can remove it later.
How is PMI calculated on a conventional loan?
PMI rates range from 0.3% to 1.5% of your loan amount annually, based primarily on your credit score and down payment percentage. For example, on a $400,000 loan with 5% down and 0.5% PMI, you’d pay about $167/month. Higher credit scores and larger down payments result in lower PMI costs.
What’s the difference between conventional and FHA loans?
Conventional loans aren’t government-backed, require higher credit scores (620+ vs 580), have higher loan limits, offer cancellable mortgage insurance, and typically have more flexible property standards. FHA loans allow lower credit scores and smaller down payments but require lifetime mortgage insurance for most loans. Compare both options: Learn about FHA loans.
Related Resources
Explore more about mortgages and homebuying:
Ready to Explore Conventional Loan Options?
Let’s discuss your home financing goals and determine if a conventional loan is right for you. I’ll review your situation, compare all available loan options, and help you secure the best possible terms for your Arizona home purchase or refinance.
Todd Uzzell | Arizona Mortgage Expert | NMLS# 1525192