Conventional Loans 101: Why You Probably Don't Need 20% Down

Conventional loans have a reputation problem. Say the word "conventional" to most buyers and they picture the vanilla ice cream of mortgages — boring, basic, and out of reach unless you're sitting on a mountain of cash for a 20% down payment.

That reputation is wrong. And on this episode of The Mortgage 101 Podcast, Manley Haines and Anthony Valentino prove it using the numbers of one real buyer.

Meet Maya: The Buyer Who Almost Talked Herself Out of a House

Maya is 31. She's been renting for two years, saving every month because she wants to buy her first home. She's got $18,000 set aside, a 680 credit score, and she's shopping in the $350,000 range.

Somewhere along the way, Maya picked up a "rule": conventional loans mean 20% down. On a $350,000 home, that's $70,000. Maya had $18,000. In her mind, she was $52,000 short — so she just kept renting and kept saving.

Then somebody asked her a simple question: Who told you that you needed 20% down?

She couldn't really answer. She'd heard it from friends, seen it online, absorbed it from her parents. It had never actually been tested against the real guidelines.

Maya didn't have a $52,000 savings problem. She had an information problem. That gap is the whole point of this episode — and it's a gap a lot of buyers are sitting in right now without realizing it.

How Much Down Payment Does a Conventional Loan Actually Require?

For an eligible first-time buyer, conventional financing can go as low as 3% down — through programs like Conventional 97, HomeReady, and Home Possible. That's actually a half a percent lower than FHA's minimum. For a typical repeat buyer, 5% down is the standard minimum.

To be clear: this isn't a blanket "everyone should put 3% down" statement. The math still has to work — your payment, your reserves, your overall budget. But the 20% figure Maya built her entire timeline around was never a rule to begin with.

What Credit Score Do You Need for a Conventional Loan?

This is where conventional gets genuinely interesting, and where something changed less than a year ago.

Most lenders still work with a practical minimum around 620. But in November 2025, Fannie Mae removed the hard 620 minimum credit score requirement from loans run through its automated underwriting system, Desktop Underwriter (DU).

That doesn't mean credit stopped mattering — DU now evaluates overall credit risk rather than applying a flat cutoff, and individual lenders and mortgage insurance companies can still set their own minimums. But it does mean the ceiling most buyers assume exists isn't as rigid as it used to be.

Maya's 680 score isn't hovering near an exception — it's comfortably above the floor most lenders are still using.

What Debt-to-Income Ratio Do You Need?

Manually underwritten conventional loans generally cap debt-to-income (DTI) around 36%. But run through Fannie Mae's automated underwriting system, a well-qualified borrower can potentially go as high as 50%.

Maya's DTI sits around 18% — nowhere close to either edge.

Here's the pattern worth noticing: nothing about Maya's actual financial life changed during this conversation. She didn't get a raise or pay off her car. She was just being measured against the guidelines that actually exist instead of the ones she assumed existed.

What Does PMI Actually Cost — and When Does It Go Away?

Any conventional loan with less than 20% down generally requires Private Mortgage Insurance (PMI). Unlike FHA, there's no 1.75% upfront mortgage insurance premium tacked onto the loan amount. Instead, conventional PMI is priced on risk — the better your credit and the larger your down payment, the less you pay.

The part most buyers don't know: PMI isn't forever.

• Once your loan balance hits 80% of the home's original value, you can generally request cancellation.
• Once it hits 78% on the scheduled amortization schedule, the lender is required to cancel it automatically, as long as the loan is current.

There's also a newer wrinkle: PMI became tax-deductible again in 2026 under recent federal tax law, for taxpayers who qualify and itemize. That's a conversation for a tax professional, but it's another piece of the cost equation that's shifted.

The real question isn't whether PMI costs money — it does. It's what that money buys you, and how long you're actually paying it.

Where Did Conventional Loans Come From? Fannie Mae, Freddie Mac, and 2008

Understanding conventional loans means understanding who's actually behind them.

• 1938: In the aftermath of the Great Depression, the government had already created FHA to insure mortgages — but FHA didn't buy loans from lenders. Banks still needed somewhere to sell the loans they made so they could keep lending. Fannie Mae was created to buy those FHA-backed mortgages and keep money moving through the housing system.
• 1970: Freddie Mac was created, opening another outlet for the mortgage market — including conventional loans not insured by the federal government. This is the real definition of "conventional": a mortgage that isn't insured or guaranteed by FHA, VA, or USDA, and instead follows standards set by Fannie Mae or Freddie Mac so it can be sold into the secondary mortgage market.
• 2008: During the financial crisis, Fannie Mae and Freddie Mac ran into serious financial trouble. The federal government placed both companies into conservatorship through the Federal Housing Finance Agency — in plain English, the government took control to stabilize them and the mortgage system underneath them.

That conservatorship, started in 2008, is still in place today. There are active efforts in 2026 to move Fannie Mae and Freddie Mac out of government control, but as of this recording, it hasn't happened. Understanding this history explains why a change like the November 2025 credit score update isn't some random lender promotion — it's a shift inside one of the institutions underneath a massive share of the American mortgage market.

Conventional vs. FHA: Which One Actually Wins?

This is the mistake Manley and Anthony see constantly: buyers want a flat answer — "conventional is better" or "FHA is better." That's not how it works. The right move is to run both scenarios side by side, using the same buyer, same house, same day.

Where conventional tends to win:

• PMI can eventually cancel — it doesn't have to run the life of the loan.
• No 1.75% upfront mortgage insurance premium.
• More property flexibility — conventional financing can be used for a primary home, a second home (generally at least 10% down), or an investment property (as low as 15% down, though 20% is often more practical once PMI and pricing are factored in). FHA and VA are owner-occupied programs only.
• For stronger credit borrowers (roughly 720+), pricing can be extremely competitive.
• Special programs like HomeReady and Home Possible can offer pricing and mortgage insurance advantages for eligible buyers at or below 80% of area median income.
• Seller contributions toward closing costs and gift funds — which can potentially cover an entire down payment on an eligible primary residence when properly documented — add flexibility.

Where FHA tends to win:

• At the lower end of the credit spectrum — FHA allows down payments as low as 3.5% with a 580 credit score, subject to lender requirements.
• FHA can sometimes stretch DTI further than conventional when compensating factors support it.
• Because FHA mortgage insurance isn't priced based on credit score the way conventional PMI is, a lower-credit borrower can sometimes come out ahead on FHA.

For Maya specifically — a first-time buyer with a 680 credit score, $18,000 saved, a low DTI, and a primary residence purchase — both loan types get priced and compared side by side. She walked in believing FHA might be her only realistic path, or that she wasn't ready to buy at all. She walked out with a conventional pre-approval, using the same $18,000, the same 680 score, the same income, and the same debt she'd had all along.

Maya didn't get more qualified. She got more informed.

This Week's Mortgage Rate Update

As of this recording, the 30-year fixed rate is averaging around 6.65%–6.71%, according to Freddie Mac — among the highest levels of the year, driven in part by a global bond market sell-off tied to geopolitical tension and energy prices. The 10-year Treasury is sitting around 4.71%, still elevated with plenty of volatility.

The takeaway: rates aren't dropping off a cliff, so building an entire strategy around waiting for a "magical" rate isn't a plan. Sometimes the bigger opportunity is understanding the financing options already sitting in front of you.

FAQ: Conventional Loans

Do I need 20% down for a conventional loan? No. Eligible first-time buyers can qualify for conventional loans with as little as 3% down through programs like Conventional 97, HomeReady, and Home Possible. Repeat buyers typically face a 5% minimum. Twenty percent down avoids PMI, but it is not a requirement to get a conventional loan.

What credit score do I need for a conventional loan? Most lenders work with a practical minimum around 620, but as of November 2025, Fannie Mae's Desktop Underwriter no longer applies a hard 620 cutoff — it evaluates overall credit risk instead. Individual lenders and mortgage insurers can still set their own minimums.

How long do I have to pay PMI on a conventional loan? Not forever. You can generally request cancellation once your balance reaches 80% of the home's original value, and the lender must cancel it automatically at 78% of the scheduled amortization, as long as the loan is current.

What's the difference between conventional and FHA loans? Conventional loans follow standards set by Fannie Mae or Freddie Mac and are not insured by a government agency. FHA loans are insured by the Federal Housing Administration, generally allow lower credit scores, but carry an upfront mortgage insurance premium that conventional loans don't have.

Can I use a conventional loan for an investment property? Yes. Conventional financing can be used for a primary residence, a second home (generally at least 10% down), or an investment property (as low as 15% down, though 20% is often more practical). FHA and VA loans are limited to owner-occupied properties.



This breakdown is part of The Mortgage 101 Podcast's Loan Program 101 series with Manley Haines and Anthony Valentino. Next up: VA loans and bank statement loans.