Pros and Cons of a Conventional Loan
Conventional loans offer some of the most flexible and cost-efficient financing available — but they are not right for everyone. Here is an honest look at the advantages and the trade-offs.
Advantages
No upfront mortgage insurance premium
FHA loans charge an upfront mortgage insurance premium of 1.75% of the loan amount at closing. Conventional loans have no equivalent charge. On a $700,000 loan, that is a $12,250 difference at the closing table.
PMI can be cancelled
When you put less than 20% down, you will pay private mortgage insurance (PMI). But PMI is not permanent on a conventional loan. Under the federal Homeowners Protection Act, you can request cancellation once your balance reaches 80% of the original property value, and PMI automatically terminates at 78%. FHA MIP on loans with less than 10% down stays for the life of the loan.
Flexible loan amounts and property types
Conventional loans work for primary residences, second homes, and investment properties. FHA and VA loans are limited to primary residences only.
Higher loan limits in California
In high-cost California counties, conventional high-balance loans allow financing up to $1,249,125 on a single-unit property.
Competitive rates with strong credit
Borrowers with scores above 720–740 typically receive highly competitive rates. Loan-level price adjustments (LLPAs) reward stronger credit profiles.
No income limits on standard programs
Standard conventional loans have no income ceiling. Anyone who qualifies on credit, income, and assets can use one regardless of earnings.
Drawbacks
Stricter credit requirements
Most lenders require a 620 minimum credit score for conventional approval. FHA loans are more accessible for borrowers with credit challenges.
PMI costs money until you hit 80% LTV
PMI typically adds 0.2%–1.5% annually to the loan cost. On a $700,000 loan at 0.6%, that is $350 per month. It goes away — but it is a real cost in the meantime.
Larger down payment for investment properties
Investment properties require a minimum of 15–25% down under conventional guidelines. Significant capital is required to buy rentals with conventional financing.
A quick fit check
| Your situation | Leans conventional | Leans FHA |
|---|---|---|
| Credit score | Roughly 680 or higher | 580–640 range |
| Down payment | 5% or more, or a plan to reach 20% | Closer to 3.5% with limited reserves |
| How long you will own | Long-term, with mortgage insurance that can come off | Short-term or expect to refinance |
| Property use | Second home or rental | Owner-occupied only |
| Debt-to-income | Strong credit offsets a high ratio | Compensating factors may help a higher ratio |
These are tendencies, not rules. The right answer depends on your full profile.
An upfront-premium example (illustrative example, not a quote)
On an FHA loan of $500,000, the upfront mortgage insurance premium is 1.75%, or $8,750. Most borrowers finance it, so the loan becomes $508,750 before any other adjustments. A conventional loan of the same base amount has no upfront premium. FHA also charges an annual premium that stays for the life of the loan with less than 10% down. We compare the total cost of each path over the years you expect to keep the loan.
When conventional is a weak fit
- A credit score near or below 620 that you cannot raise before you need to buy.
- Very little savings after closing costs and reserves.
- A recent credit event, where FHA waiting periods may be shorter.
In these cases, read about FHA versus conventional before you commit.
Frequently asked questions
Can I start with FHA and switch later?
Yes. Many borrowers refinance into a conventional loan once their credit improves and their equity reaches the point where PMI is lower or avoidable. Weigh the closing costs against the savings first.
Is 3% down on a conventional loan realistic?
For eligible buyers, yes, using programs such as HomeReady or Home Possible, subject to income limits. The standard 97% option requires a first-time buyer.
Do conventional loans cost more with lower credit?
Pricing adjusts with credit score and loan-to-value, so lower scores usually mean higher costs. We compare the actual quotes side by side.
Related guides
- FHA vs conventional in detail
- FHA mortgage insurance explained
- Credit scores for conventional loans
- Is a conventional loan right for you?
Key takeaways
- No upfront mortgage insurance premium — unlike FHA which charges 1.75% at closing.
- PMI can be cancelled at 80% LTV — FHA MIP with less than 10% down stays for life of loan.
- Works for primary residences, second homes, and investment properties.
- Higher loan limits in California high-cost counties (up to $1,249,125).
- Stricter credit requirements than FHA — best pricing for scores above 740.
- Investment properties require 15–25% down; primary residences start at 3%.
- FHA upfront mortgage insurance of 1.75% on a $500,000 loan is $8,750 and is often financed.
- Conventional tends to fit stronger credit; FHA tends to fit thinner credit or savings.
- You can refinance from FHA into conventional later once your credit and equity improve.
Ready to explore your conventional loan options? Lendia can walk you through what you qualify for and find the right program for your goals.