Conventional Loans, Explained

A conventional loan is simply a mortgage that isn’t backed by a government agency like the FHA, VA, or USDA — CFPB’s plain-English definition covers the basics if you want an independent source. It’s the loan type most of my clients in Phoenix, Denver, Sacramento, and Omaha end up with, because if your credit and income are reasonably solid, a conventional loan is usually cheaper and more flexible over the life of the loan than its government-backed cousins. But “conventional” isn’t one-size-fits-all — there’s a conforming/non-conforming split, PMI rules that catch people off guard, and credit/DTI thresholds that determine your pricing. Let’s get into what actually matters.

Conforming vs. Non-Conforming: Why the Line Matters

A conforming loan meets the underwriting guidelines set by Fannie Mae and Freddie Mac — including a loan amount that falls under that year’s county-specific limit. Most of Nebraska, plus a good chunk of Arizona and Colorado outside the pricier corners of Denver and Boulder, falls under the standard limit. California is trickier: counties like San Francisco, Santa Clara, and Los Angeles routinely sit at the high-cost ceiling because home values push well past the baseline.

Once you go above that county limit, you’re in non-conforming territory — most commonly a jumbo loan. Jumbo loans aren’t bad, but they typically come with:

• Stricter credit score minimums (often 700+, sometimes higher depending on the lender and loan size)
• Larger cash reserve requirements after closing
• More documentation on income, especially for self-employed borrowers
• Pricing that can be better or worse than conforming, depending on the market — it genuinely varies week to week

I tell clients shopping in Scottsdale or the Bay Area to check the conforming limit for their exact county before they fall in love with a price point, because crossing that line by even a few thousand dollars changes the entire underwriting conversation.

PMI: What It Is and When It Actually Goes Away

If you put down less than 20% on a conventional loan, you’ll pay private mortgage insurance (PMI). It protects the lender, not you, but it’s also what lets people buy a home without waiting years to save a full 20% down payment — which, in markets like Denver or Sacramento, could take a very long time.

Here’s the part people don’t fully understand: PMI isn’t permanent, and it’s not automatic. There are two paths off:

• Automatic termination: By federal law, PMI must be removed once your loan balance hits 78% of the original home value, as long as you’re current on payments.
• Borrower-requested cancellation: You can ask your servicer to drop PMI once you reach 80% of the original value — sooner if you’ve made extra principal payments or your home has appreciated. This usually requires a written request and sometimes a new appraisal to confirm value.

That second option is the one people leave money on the table with. If home values in your neighborhood have climbed — which has happened in plenty of Phoenix suburbs and parts of Colorado over the past several years — you might be able to request removal well before you’d hit it through normal amortization alone. It’s worth calling your servicer and asking what they need.

Credit and DTI: What Underwriters Are Actually Looking At

Conventional guidelines are more flexible than people assume, but there are real thresholds that affect both approval and pricing.

Credit Score

Conforming conventional loans can go down to the mid-600s in many cases, though your rate and PMI cost improve noticeably as your score climbs — the jump from the low 700s to the mid-to-upper 700s tends to matter more than people expect. I’ve had clients in Omaha assume a 680 score locks them out of a good deal; it doesn’t, but it does mean I’m going to shop harder for them.

Debt-to-Income Ratio (DTI)

Most conventional programs want your total monthly debts — including the new mortgage payment — at or under 45% of gross monthly income, with some automated underwriting approvals stretching higher if you’ve got strong compensating factors like significant reserves or a very stable job history. Below roughly 36% is where things get comfortable and flexible.

A quick example: say a Sacramento buyer earns $9,000 a month gross. At a 45% DTI ceiling, that’s $4,050 in total monthly debt allowed — mortgage payment (principal, interest, taxes, insurance) plus car payments, student loans, credit cards, everything. If they’re already carrying $900 in other debt, their housing payment budget is roughly $3,150. That’s the number I build a purchase price around, not the other way around.

Down Payment Reality Check

You do not need 20% down for a conventional loan. Programs exist with as little as 3% down for qualified first-time buyers, and 5% down is common more broadly. The trade-off is PMI, as covered above, plus slightly different pricing tiers. In high-cost California markets, even a 5% down payment on a conforming loan can be a real stretch, which is one reason I spend so much time with clients running actual numbers rather than rules of thumb. You can run the numbers yourself to see how different down payment levels shift your monthly payment and PMI cost before you talk to anyone.

When a Conventional Loan Isn’t the Right Fit

I’ll say this plainly because I think honesty matters more than closing volume: if your credit is still recovering, or you’re a veteran with VA eligibility, a government-backed loan might genuinely serve you better upfront. Conventional loans reward stronger credit and lower DTI with better pricing — that’s the whole design of the product. If you’re not there yet, there’s no shame in an FHA loan now and a conventional refinance later once your profile improves.

Getting Started

If you’re buying in Arizona, California, Colorado, or Nebraska, a conventional loan is worth exploring first for most buyers with steady income and decent credit. The best next step is usually a pre-approval conversation where we look at your actual credit pull, your real DTI, and the conforming limit in your specific county — not a generic online estimate. You can start that process anytime on our purchase loan page.

FAQ

Can I remove PMI before reaching 20% equity?

Sometimes. If your home’s value has risen, you may be able to request cancellation earlier by providing evidence of value, often through a new appraisal, once you’re near the 80% loan-to-value mark.

Is a conventional loan always cheaper than FHA?

Not always — it depends on your credit score, down payment, and how FHA’s mortgage insurance compares to conventional PMI in your specific scenario. It’s worth comparing both, subject to credit approval.

What happens if my loan amount exceeds the conforming limit?

It becomes a jumbo (non-conforming) loan, which usually means stricter credit and reserve requirements and a separate underwriting process, even though it’s still technically a conventional loan.

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This article is general education, not financial advice or a commitment to lend. Loan programs, terms, and availability are subject to credit approval and may change. Loanatik LLC is an Equal Housing Lender. See our licensing & disclosures.