Conventional Loans in Utah: Requirements, Benefits, and When to Use One

What Conventional Loans Are

A conventional loan is a mortgage that is not insured or guaranteed by the federal government. Banks and lenders originate these loans, then sell them on the secondary mortgage market to investors like Fannie Mae and Freddie Mac. Because these loans are not government-backed, lenders set their own requirements for credit scores, down payments, and debt-to-income ratios, though they must stay within guidelines set by Fannie Mae and Freddie Mac.

Conventional loans fall into two categories: conforming loans (which meet Fannie Mae and Freddie Mac guidelines) and jumbo loans (which exceed conforming limits). Most homebuyers in Utah use conforming loans because they offer lower rates and easier qualification than jumbo loans.

Because lenders take on more risk with conventional loans, they generally have stricter requirements than government-backed loans like FHA. However, if you qualify, conventional loans often offer better long-term value through lower rates and the ability to eliminate mortgage insurance.

Credit Score Requirements for Conventional Loans

Most lenders require a minimum credit score of 620 to qualify for a conventional loan. However, the specific rate and terms you receive depend heavily on your credit score. Borrowers with scores of 740 or higher typically qualify for the best rates and most favorable terms.

How Credit Score Affects Your Loan

If your credit score is between 620 and 660, you will likely qualify for a conventional loan, but your interest rate will be higher than someone with a 740+ score. Lenders view lower credit scores as higher risk, so they charge you more to offset that risk. The difference between a 620 credit score and a 780 credit score might be 0.5% to 1% in interest rate, which translates to tens of thousands of dollars over the life of the loan.

If your credit score is below 620, most lenders will not approve a conventional loan. This is where FHA loans become attractive. If you are in the 500-620 range, FHA may be your better option, even with the mortgage insurance costs.

Many buyers in Northern Utah who start with FHA loans later refinance into conventional loans as their credit score improves and they build equity in their home. This is a valid strategy if you know you plan to stay in the home long enough to recoup the refinancing costs.

Down Payment Options

Conventional loans offer more flexibility in down payments than FHA loans. You can put down as little as 3% or as much as 20% or more. The amount you put down affects your interest rate, monthly payment, and whether you need to pay mortgage insurance.

3% Down Payment

Fannie Mae HomeReady and Freddie Mac Home Possible programs allow borrowers to put down as little as 3% of the purchase price. However, these programs have income limits and other restrictions. If you qualify, 3% down offers the same benefit as FHA: you can purchase a home while saving a larger down payment for investments or emergencies.

With 3% down, you will pay private mortgage insurance (PMI) monthly. Your PMI cost depends on your credit score and loan-to-value ratio, but it is typically $150-400 per month on a $300,000 loan.

5-10% Down Payment

Putting down 5-10% of the purchase price is common for conventional loans in Utah. At 5% down, you still pay PMI, but your PMI cost is slightly lower than with 3% down because you have more equity in the home. Many borrowers find 5-10% down to be the sweet spot between keeping cash reserves and minimizing PMI costs.

15-20% Down Payment

If you can put down 15% or more, you are in a strong position. Lenders offer better rates to borrowers with higher down payments because the loan-to-value ratio is lower, reducing the lender's risk. At 20% down, you avoid PMI entirely, which can save you $100-300 per month.

20%+ Down Payment

Putting down 20% or more eliminates private mortgage insurance completely. You will qualify for the best rates available, and your monthly payment will be lower than with any other down payment option. However, this requires significant savings upfront, which many first-time buyers do not have available.

Understanding Private Mortgage Insurance (PMI)

If you put down less than 20% on a conventional loan, you will pay private mortgage insurance. PMI protects the lender if you default on the loan. Your PMI payment is added to your monthly mortgage payment.

How PMI is Calculated

PMI is calculated as a percentage of your loan amount. The percentage varies based on your credit score and down payment amount. Generally, borrowers with higher credit scores pay lower PMI rates, and borrowers who put down more money pay lower PMI. For example, a borrower with a 640 credit score putting down 5% might pay 1.2% annually, while a borrower with a 760 score putting down 5% might pay 0.8% annually.

The Key Advantage: PMI Goes Away

The biggest advantage of conventional PMI over FHA mortgage insurance is that PMI goes away. Once you reach 20% equity in your home (either through paying down the loan or through home appreciation), you can request to have PMI removed. This typically takes 8-12 years, depending on your down payment, interest rate, and home appreciation.

This is very different from FHA loans, where mortgage insurance lasts for the life of the loan if you put down less than 10%. For many borrowers, this means conventional loans will be cheaper over time, even if the initial down payment is slightly higher.

When PMI is Automatically Removed

Under the Homeowners Protection Act, PMI must automatically be removed once you reach 22% equity in the home. However, you can request removal earlier once you reach 20% equity. If the value of your home has appreciated since you bought it, you may be able to remove PMI sooner by getting a new appraisal showing increased equity.

Types of Conventional Loans

Fixed-Rate Conventional Loans

The most popular type of conventional loan is a fixed-rate loan. With a fixed-rate conventional loan, your interest rate stays the same for the entire life of the loan, typically 15 or 30 years. Your principal and interest payment never changes, which makes budgeting predictable.

Most first-time buyers choose 30-year fixed-rate loans because the monthly payment is lower than a 15-year loan. However, 15-year loans build equity much faster and cost less in total interest over the life of the loan.

Adjustable-Rate Mortgages (ARMs)

Some conventional loans are adjustable-rate mortgages, or ARMs. With an ARM, the interest rate stays fixed for an initial period (typically 5 or 7 years) and then adjusts periodically based on market conditions. ARMs typically start with a lower initial rate than fixed-rate loans, but the rate can increase significantly after the initial period.

For example, a 5/1 ARM has a fixed rate for 5 years, then adjusts annually thereafter. A 7/1 ARM has a fixed rate for 7 years, then adjusts annually. While ARMs can be attractive if you plan to sell or refinance before the rate adjusts, they carry risk if you plan to stay in the home long-term and rates increase dramatically.

Most first-time buyers in Northern Utah should stick with fixed-rate loans unless they have a specific reason to choose an ARM and have done careful financial planning to account for rate increases.

Who Conventional Is Best For

Borrowers with Strong Credit

If your credit score is 680 or higher, conventional loans will likely offer better rates and terms than FHA loans. The better interest rate will more than offset any PMI costs over time.

Borrowers Who Can Put Down 10-20%

If you can put down 10% or more, conventional loans become even more attractive. Your PMI costs are lower, your interest rate is better, and you reach 20% equity (and eliminate PMI) more quickly.

Move-Up Buyers

If you have owned a home before and have built up equity, conventional loans are usually the best choice. You likely have a good credit score and enough savings from your previous home sale to put down a substantial amount.

Buyers Planning to Stay Long-Term

If you plan to stay in the home for 10+ years, the ability to eliminate PMI at 20% equity makes conventional loans very attractive compared to FHA loans with lifetime MIP.

Conforming Loan Limits in Utah

Conforming loan limits are the maximum loan amounts that Fannie Mae and Freddie Mac will purchase. These limits are updated annually and are based on national median home prices. In most of Utah, the conforming loan limit is the same as the national limit, which is updated each year by the Federal Housing Finance Agency (FHFA).

If the home you want to buy costs more than the conforming loan limit in your county, you will need a jumbo loan, which has stricter requirements and higher rates. Before you fall in love with a property, ask your lender what the current conforming loan limit is in that area.

Conventional Loans vs. FHA Loans Comparison Table

Key Takeaways