Conventional Loans: Complete Guide
Conventional loans are the most widely used mortgage in the United States, not backed by any government agency. They offer flexible terms, competitive rates, and the ability to finance primary homes, second homes, and investment properties. For borrowers with strong credit and stable income, a conventional loan typically offers the lowest long-term cost of any mortgage type.
What Is a Conventional Loan?
A conventional loan is any mortgage that is not insured or guaranteed by a federal government agency. Unlike FHA, VA, and USDA loans, conventional loans are funded and backed entirely by private lenders — banks, credit unions, and mortgage companies — and sold on the secondary market to Fannie Mae or Freddie Mac if they meet conforming guidelines.
Most conventional loans follow Fannie Mae and Freddie Mac guidelines, which set standards for credit score, debt-to-income ratio, loan limits, and documentation. Loans that meet these standards are called conforming loans. Loans that exceed the conforming loan limit are called jumbo loans and carry different underwriting requirements.
2026 conforming loan limit: The Federal Housing Finance Agency (FHFA) set the baseline conforming loan limit at $806,500 for single-family homes in 2026, unchanged from 2025. High-cost areas may have limits up to $1,209,750. Loans above these thresholds are considered jumbo loans.
Conventional Loan Requirements
| Requirement | Conventional Guidelines (2026) |
|---|---|
| Minimum Credit Score | 620 minimum; 740+ for best rates and lowest PMI |
| Minimum Down Payment | 3% for primary residence (Fannie/Freddie programs); 5% standard; 10-20% for second homes and investment |
| Maximum DTI Ratio | 43-45% standard; up to 50% with strong compensating factors |
| Loan Limits (2026) | $806,500 conforming; up to $1,209,750 in high-cost areas |
| Private Mortgage Insurance | Required if down payment is less than 20%; cancels automatically at 20% equity |
| Property Types | Primary residence, second home, or investment property; 1-4 units |
| Employment History | 2 years stable employment history in the same field |
| Reserves | 2 months PITI reserves typical; more required for investment and second homes |
Private Mortgage Insurance (PMI)
Conventional loans with less than 20% down require private mortgage insurance (PMI). Unlike FHA MIP, conventional PMI is cancellable — it automatically terminates when your loan balance reaches 78% of the original home value, and you can request cancellation at 80% equity. This is one of the biggest financial advantages of conventional loans over FHA for borrowers who start with less than 20% down.
| Credit Score | Typical PMI Rate (5% down) | Typical PMI Rate (10% down) |
|---|---|---|
| 760+ | 0.20% – 0.40% annually | 0.15% – 0.25% annually |
| 720-759 | 0.40% – 0.70% annually | 0.25% – 0.45% annually |
| 680-719 | 0.70% – 1.10% annually | 0.45% – 0.70% annually |
| 640-679 | 1.10% – 1.50% annually | 0.70% – 1.00% annually |
| 620-639 | 1.50% – 2.00%+ annually | 1.00% – 1.40% annually |
PMI cancellation tip: You can request PMI cancellation in writing once your loan balance reaches 80% of the original purchase price. Your lender must cancel automatically at 78% of the original value based on scheduled payments. A new appraisal showing increased home value can also support early PMI removal.
Conventional Loan Types
There are several common types of conventional loans, each designed for different borrower situations:
| Loan Type | Key Features |
|---|---|
| Fannie Mae HomeReady | 3% down; allows non-borrower household income; reduced PMI rates for low-to-moderate income borrowers |
| Freddie Mac Home Possible | 3% down; income limits apply; reduced PMI; sweat equity accepted |
| Standard Conforming | 5%+ down; no income limits; most flexible property and occupancy options |
| Second Home Loan | 10% down minimum; must be used personally; not rented full-time |
| Investment Property | 15-25% down depending on units; rental income can offset DTI |
Conventional Loan Pros and Cons
Advantages
- PMI cancels at 20% equity — not permanent like FHA MIP
- Available for primary, second home, and investment properties
- No upfront mortgage insurance premium
- Higher loan limits than FHA in most markets
- No income limits or geographic restrictions
- Lower total cost for borrowers with 740+ credit
- Faster processing — no government agency involvement
- Fixed and adjustable rate options available
Disadvantages
- Higher credit score required than FHA (620 minimum)
- Stricter DTI and reserve requirements
- PMI required under 20% down
- Less flexible for borrowers with recent credit events
- Investment property down payments can be 15-25%
- Higher rates for lower credit scores compared to FHA
Conventional vs. FHA Loan: Which Is Right for You?
| Factor | Conventional Loan | FHA Loan |
|---|---|---|
| Minimum down payment | 3% (some programs) | 3.5% |
| Minimum credit score | 620 | 580 (500 with 10% down) |
| Mortgage insurance | PMI cancels at 20% equity | MIP for life of loan (under 10% down) |
| Upfront insurance cost | None | 1.75% upfront MIP |
| Annual insurance cost | 0.20%-2.00% (varies by credit) | 0.55% (most 30-yr loans) |
| Property types | Primary, second home, investment | Primary residence only |
| Loan limits | $806,500 (2026) | $541,287 (2026) |
| Best for | 620+ credit, planning to build equity | Below 620 credit, limited savings |
For borrowers with a 740+ credit score and 20% down, conventional is almost always the better choice — no PMI, no upfront fees, and the lowest total cost. For borrowers with 620-679 credit and less than 10% down, compare total costs carefully. FHA may offer lower monthly costs even with MIP, depending on the lender rate offered.
How to Qualify for a Conventional Loan
- Check your credit score. You need a minimum of 620 to qualify. However, scores above 740 unlock the best rates and lowest PMI costs. If your score is between 620 and 680, compare the total cost against FHA before deciding.
- Calculate your down payment. Primary residence loans can go as low as 3% with HomeReady or Home Possible programs. Standard loans typically start at 5%. Investment properties require 15-25% depending on number of units.
- Verify your DTI ratio. Add all monthly minimum debt payments and the proposed housing payment, then divide by gross monthly income. Keep this at or below 43% for the smoothest approval. Strong compensating factors may push this to 50%.
- Document your income and assets. Conventional loans require 2 years of W-2s or tax returns, recent pay stubs, and 2 months of bank statements. Self-employed borrowers must show 2 years of tax returns with consistent or increasing income.
- Check loan limits for your area. If your purchase price exceeds $806,500, you will need a jumbo loan with different requirements. In high-cost areas, check FHFA limits for your county — some areas allow up to $1,209,750.
Conventional Loan FAQs
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