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 — far above FHA limits in most markets.

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.