What is a conventional loan? A mortgage no government agency insures or guarantees, which is most home loans; the conforming ones are written to the standards of the agencies that buy them.
A conventional loan is a mortgage that is not insured or guaranteed by a federal agency. That is the whole definition, and it is a definition by exclusion: not an FHA loan, not a VA loan, not a USDA loan, so the lender carries the credit risk itself or passes it to whoever buys the loan. Conventional loans then divide again. A conforming loan is written to the underwriting standards of the two government-sponsored enterprises that buy most American home loans, and can be sold to them. A non-conforming loan cannot, either because it is too large or because something in the file falls outside those standards. Lenders and buyers use "conventional" and "conforming" as though they were one word. They are not.
What separates conforming from non-conforming most often is size. A baseline conforming loan limit is set for one-unit properties and recalculated every year: the Federal Housing Finance Agency moves it by the change in average national home prices, publishing the new figure in the autumn for the year ahead, and it does not fall below the previous year's number. Counties where prices run well above the national picture are designated high-cost and get a higher limit, capped under current law at a multiple of the baseline. Do not carry a dollar figure in your head; look up the year and the county. The trade for staying inside the line is real. Conforming underwriting is narrower on credit, ratios and documentation than a lender writing for its own balance sheet, and in exchange the loan is cheaper, because the agencies' buying makes it liquid.
The difference a borrower actually feels is mortgage insurance. Conventional mortgage insurance is private, and it ends. Under the Homeowners Protection Act a borrower may request cancellation once the balance reaches 80 percent of the original value, and the servicer must terminate it automatically at 78 percent, so on a conventional loan the insurance is a stage the loan passes through rather than a permanent cost. FHA's premium on most current loans is not: it runs for the term, and the exit is a refinance. Over ten years that gap is worth more than the small difference in rate that usually decides the conversation. Conventional down payments also start lower than people expect, as little as 3 percent on some agency programs, which is not far above FHA's floor.
A worked example
A $450,000 valley purchase with 10 percent down is a $405,000 conventional loan at 90 percent loan-to-value. At an illustrative 0.40 percent of the balance, private mortgage insurance runs about $135 a month. Amortizing at an illustrative 6.5 percent, the balance passes 80 percent of the original value, about $360,000, around year eight, when the borrower may request cancellation, and 78 percent, about $351,000, around year nine, when the servicer must terminate it. The same buyer with 20 percent down borrows $360,000 and never pays it at all.
Price a payment with and without mortgage insurance
Questions people ask
Is a conventional loan better than an FHA loan?
Neither is better in the abstract. Conventional costs less over time when the credit and the down payment are there, because private mortgage insurance cancels at an equity threshold. FHA tolerates weaker credit and a smaller down payment, and on most current loans its premium runs for the term instead. The comparison is total cost over how long the loan will really be held.
What is the conforming loan limit in Clark County?
Whatever the Federal Housing Finance Agency has set for the coming year. It publishes a baseline limit each autumn, moved by the change in average national home prices, with higher limits in designated high-cost counties. Clark County has historically been assigned the baseline rather than a high-cost figure. Look up the current year's number rather than trusting a remembered one.