At a glance
- Guidelines
- Fannie Mae, Freddie Mac
- Occupancy
- Any
- Primary, second home or investment
- Mortgage insurance
- Removable
- As your equity grows
Educational overview, not a loan offer. Requirements vary by lender and borrower.
Overview
A conventional loan is a mortgage that is not insured by a government agency. Most follow guidelines set by Fannie Mae and Freddie Mac and must stay within the conforming loan limit set each year by the Federal Housing Finance Agency.
Conventional financing works for a primary residence, a second home or an investment property, and offers fixed-rate and adjustable-rate options.
How a conventional loan works
A conventional loan is made by a private lender with no government insurance or guarantee behind it. Most follow the rules of Fannie Mae or Freddie Mac, two government-sponsored companies that buy mortgages from lenders. A loan that meets their rules and fits within the federal loan limit is called a conforming loan, and the lender can sell it instead of keeping it.
Underwriting usually runs through the agencies' automated systems: Fannie Mae's Desktop Underwriter (DU) or Freddie Mac's Loan Product Advisor (LPA). These systems weigh credit, income, debts, assets and the property together and return a recommendation along with a list of the documents the lender must collect. A lender may add stricter requirements of its own, called overlays.
Who a conventional loan can fit
Conventional financing covers every occupancy type and has no program-specific eligibility test such as military service or a rural location. It tends to work smoothly when credit, income and savings can be documented in the standard way.
- An employee with steady pay buying a main home who wants mortgage insurance that can end once enough equity builds
- A buyer of a vacation home or rental, which FHA, VA and USDA loans generally don't finance
- A homeowner refinancing to change the rate structure or take cash out within agency limits
- A buyer whose parent or relative is helping with a documented gift
General eligibility: agency rules and lender overlays
The agencies set the baseline rules: who can borrow, which properties and occupancy types are allowed, how much can be borrowed compared with the value and what must be documented. Fannie Mae and Freddie Mac accept U.S. citizens as well as lawful permanent and non-permanent residents. On a main-home loan, at least one borrower generally must live in the property, with narrow exceptions such as a service member away on active-duty orders.
Lenders can be stricter than the agencies. One lender might set its own minimum credit score, another might cap the debt-to-income ratio below what the automated findings allow, and a third might avoid certain condo projects. Different lenders can therefore reach different answers on the same application, which is why a loan officer explains which rule is the agency's and which is the lender's.
How credit is judged on a conventional loan
For loans run through Desktop Underwriter, Fannie Mae's current guide sets no fixed minimum credit score. DU analyzes the credit report itself, including payment history, balances, recent inquiries and any serious events, alongside the rest of the file. Manually underwritten Fannie Mae loans do have published minimums, Freddie Mac sets its own standards, and many lenders apply a score floor of their own.
Scores also shape cost. The agencies apply loan-level price adjustments that vary with credit score and loan-to-value ratio, so two approved borrowers can be priced differently. Fannie Mae currently relies on classic FICO scores from all three credit bureaus and has approved VantageScore 4.0 for lenders taking part in its rollout. If your credit is frozen at two or more bureaus, a Fannie Mae loan isn't eligible until the freezes are lifted.
See also
Loan-to-value, equity and private mortgage insurance
Conventional rules tie the minimum down payment to the loan-to-value ratio (LTV): the loan amount divided by the home's value, which on a purchase is the lower of the price and the appraised value. The agencies allow the most financing on a one-unit main home, generally when at least one buyer is a first-time homebuyer or the loan is an income-limited program, less on multi-unit homes and less again on second homes and rentals.
When the loan is a large share of the value, the agencies' charters require extra protection, usually private mortgage insurance (PMI). PMI protects the lender rather than you. It is most often paid monthly, though single up-front and split premiums exist, and some lenders build the cost into the rate instead. Borrower-paid PMI on a main home can be cancelled under federal law as the balance falls.
Cash to close can come from:
- Your own savings and other verified assets
- Gifts from relatives or people with a close family-like relationship, with a signed gift letter
- Assistance through Fannie Mae Community Seconds or Freddie Mac Affordable Seconds programs
- Seller-paid closing costs, within agency limits that depend on occupancy and LTV
What a conventional lender asks you to document
Conventional loans are fully documented. Wage earners typically provide recent pay stubs and W-2 forms, and the lender confirms employment again shortly before closing. Self-employed borrowers usually supply personal and business tax returns, which the lender analyzes to find stable income after business expenses. Bonus, overtime, commission and part-time income can count when there is a history of receiving it and it's likely to continue.
Assets are shown with recent account statements, and large deposits that aren't payroll usually need a paper trail. If you know your pay is about to drop, for example because of retirement or a new job, Fannie Mae requires the lender to use the lower amount. The automated findings list the exact documents required, so two borrowers may be asked for different paperwork.
If business deductions make the income on your tax returns much lower than your business's cash flow, bank statement and profit and loss programs follow lender guidelines outside the agency rules and are covered on their own pages.
How debt-to-income is counted on a conventional loan
Your debt-to-income ratio (DTI) compares monthly debt payments, including the new housing payment with property taxes, homeowners insurance, mortgage insurance and association dues, with your gross monthly income. Fannie Mae's guide sets one maximum for manually underwritten loans, allows a higher one when credit and reserves are strong, and permits a higher ceiling still for loans approved through DU. Freddie Mac has its own limits, and lenders may set lower ones.
What counts as debt follows agency rules: installment loans (Fannie Mae can leave out one with ten or fewer payments left unless the payment significantly affects your budget), minimum payments on credit cards, car leases, student loans, child support, alimony and the payment on any other home you keep. Paying off a card or a nearly finished car loan can change the ratio, but talk with your loan officer before moving money, because the funds used must still be documented.
Homes and occupancy types conventional loans can finance
Conventional loans can finance one- to four-unit homes, condos and townhomes in projects that meet agency standards, homes in planned communities, co-op units in markets where lenders offer them, and manufactured homes that meet agency requirements. You declare occupancy on the application, and it drives eligibility and pricing: a principal residence, a second home you use part of the year, or an investment property.
The appraiser rates the home's condition. Fannie Mae accepts an as-is appraisal when remaining issues are minor, but defects that affect safety, soundness or structural integrity must be fixed before the loan can be sold. Some files with strong data receive value acceptance, Fannie Mae's form of appraisal waiver, while two- to four-unit homes, manufactured homes and several other cases always need a full appraisal. Larger repairs can be financed through a renovation loan.
Conforming loan limits for 2026
Fannie Mae and Freddie Mac can only buy loans whose original amount is within the conforming limit set each year by the Federal Housing Finance Agency (FHFA). For 2026, FHFA's baseline limit for a one-unit home is $832,750 in most of the country. Counties with high home values have higher limits, up to a 2026 ceiling of $1,249,125 for one unit, and Alaska, Hawaii, Guam and the U.S. Virgin Islands have their own higher limits.
Limits rise with the number of units. For 2026, the baseline is $1,066,250 for two units, $1,288,800 for three units and $1,601,750 for four units. A loan above the county's limit is a jumbo loan and follows each lender's own rules. FHFA usually announces the next year's limits in late November.
Where conventional financing tends to fit
Whether a conventional loan is the right fit depends on the borrower, but its main strengths are breadth and flexibility.
How conventional pricing compares with an FHA loan depends heavily on credit score and equity, so that comparison is worth running with your own numbers.
- One loan family covers main homes, second homes and investment properties
- Borrower-paid mortgage insurance can end as equity grows, under federal law and agency servicing rules
- No government program fee, such as FHA's upfront mortgage insurance premium or the VA funding fee
- Fixed and adjustable options, plus agency versions for moderate incomes and renovation
- Gifts, assistance programs and seller credits can help with cash to close, within agency limits
Credit sensitivity, mortgage insurance and other costs
Conventional loans are more sensitive to credit than government-backed loans. Price adjustments and mortgage insurance premiums both rise as credit scores fall and as LTV climbs, so a lower score can make the loan noticeably more expensive even when it is approved. Second homes and investment properties carry their own price adjustments, and project problems can make some condos ineligible.
Other costs to plan for include the appraisal, title and settlement charges, prepaid taxes and insurance, and any reserves the findings require. Mortgage insurance doesn't protect you if you fall behind, and if you pay a single up-front premium and then sell or refinance early, you may not get any of it back.
Talk it through with Ruben
Conventional compared with FHA and VA loans
The table compares features only. What each option costs depends on your credit, equity, the property and market conditions, so the reliable comparison is between actual Loan Estimates for your situation.
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| Feature | Conventional | FHA | VA |
|---|---|---|---|
| Backing | None; Fannie Mae or Freddie Mac rules | FHA insurance | VA guaranty |
| Occupancy | Main home, second home or rental | Main home | Main home |
| Who can use it | Any eligible borrower | Any eligible borrower | Eligible veterans, service members and some surviving spouses |
| Mortgage insurance | PMI when equity is low; can end | Upfront and annual FHA premiums | None monthly; funding fee unless exempt |
| Property standards | Agency appraisal standards | HUD minimum property standards | VA minimum property requirements |
| Loan size | County conforming limit | County FHA limit | No VA cap with full entitlement |
Conventional scenarios: a first condo, a lake cabin, a family gift
These illustrations show how the rules play out; they aren't offers, and the outcome always depends on the full application.
- A nurse with steady pay buys her first condo. The building must pass project review, so her loan officer checks its status before she writes an offer rather than after.
- A couple keeping their main home buy a lake cabin for weekends. It's financed as a second home, both housing payments count in their DTI, and any occasional rent is left out of qualifying.
- A buyer receives help from a grandparent. The gift is documented with a signed letter and proof of the transfer, and the loan officer confirms whether any of the buyer's own money is needed for that property type.
- Years after buying with a small down payment, a homeowner whose home has gained value asks the servicer about cancelling PMI based on the current value.
See also
From application to closing on a conventional loan
After you apply, the lender must send a Loan Estimate within three business days. The file then moves through automated underwriting, document collection, the appraisal or a waiver decision, title work and final conditions. You receive a Closing Disclosure at least three business days before closing so you can compare the final terms with the estimate.
Timing depends on how quickly documents arrive, appraisal scheduling, condo or association questionnaires and title issues. Avoid new credit, job changes or large unexplained transfers before closing without checking with your loan officer, because the lender re-verifies key information near the end and a change can send the file back through underwriting.
Conventional loan myths about down payments, PMI and credit
Conventional loans carry some persistent assumptions that do not match the agency rules.
- Myth: conventional loans need a large down payment. Reality: the agencies allow small down payments on many main-home purchases, with mortgage insurance covering the added risk.
- Myth: PMI lasts as long as the loan. Reality: Borrower-paid PMI on a main home can be cancelled on request once the balance falls far enough, on schedule or through extra payments, and ends automatically later; lender-paid coverage works differently.
- Myth: credit must be perfect. Reality: the automated systems weigh the whole file, though lower scores usually cost more and some lenders set their own minimums.
- Myth: the purchase price decides whether a loan is conforming. Reality: the loan amount does, measured against the county's limit.
- Myth: once approved, the decision can't change. Reality: new debt, a job change or a low appraisal before closing can change the outcome.
See also
Common questions
14 questions
When is private mortgage insurance required?
Usually when the loan is more than a set share of the home's value, because Fannie Mae and Freddie Mac then require mortgage insurance or another form of credit protection. For borrower-paid mortgage insurance on your main home, federal law lets you ask in writing to cancel it once the balance reaches a set share of the original value, on schedule or sooner through extra payments, if your payment history is good, there are no other liens on the home and its value hasn't fallen. The servicer must end it automatically at a later scheduled point if your payments are current. Lender-paid coverage follows different rules.
Can I use a conventional loan for a rental property?
Yes, for one- to four-unit rentals, but the rules are stricter than for a home you live in: more cash down, larger reserves, price adjustments, no gift funds and special rules for counting rent. The borrower generally must be an individual, not an LLC. Your loan officer can walk you through the agency rules for rentals.
Can non-citizens get a conventional loan?
Often, yes. Fannie Mae and Freddie Mac rules allow loans to lawful permanent residents and to lawful non-permanent residents who document their status, generally under the same underwriting standards as U.S. citizens. Some lenders add their own requirements, such as which residency or work authorization documents they accept, so ask your loan officer what applies.
Can I buy a second home with a conventional loan?
Yes. Fannie Mae treats a home as a second home when it is a one-unit home suitable for year-round use, you live there for part of the year and you have exclusive control over it. It can't be set up as a rental property or timeshare or be controlled by a management company, and any rental income from it can't be used to qualify.
Can I buy a home for my parents or for an adult child with a disability?
In some cases, yes, and it can count as a principal residence even though you won't live there. Under Fannie Mae's rules, a child buying a home for a parent, or a parent or legal guardian buying for an adult child with a disability, is treated as the owner-occupant when the person who will live there can't work or doesn't have enough income to get a mortgage on their own. Your loan officer can explain how this is documented.
Can family members give me money for a conventional loan?
Yes, for a primary residence or second home. Fannie Mae accepts gifts from relatives and from people with a close family-like relationship, such as a fiancé, domestic partner or long-time mentor, documented with a signed gift letter that says no repayment is expected. Gifts can't be used on an investment property, and some multi-unit and second-home purchases also require some of your own money.
What is the difference between conventional and conforming?
Conventional describes any mortgage without a government guarantee or insurance. Conforming is narrower: a conventional loan that follows Fannie Mae or Freddie Mac rules and fits within FHFA's limit for the county, so one of them can buy it. Jumbo loans and most Non-QM loans are conventional but not conforming, because they are too large or follow a lender's own guidelines instead of agency rules.
Is there a minimum credit score for a conventional loan?
It depends on how the loan is underwritten and on the lender. Fannie Mae's guide sets no fixed minimum score for loans approved through Desktop Underwriter, which reviews the credit report as a whole, but manually underwritten loans have published minimums. Freddie Mac has its own requirements, and many lenders add a minimum of their own. Your loan officer can tell you which standards apply to your application.
Can I get a conventional loan if my credit is frozen?
You'll need to lift at least some freezes. Fannie Mae accepts a credit report when data is frozen at one of the three bureaus as long as the other two can report, but the loan isn't eligible when credit is frozen at two or more. Temporarily lifting freezes before you apply avoids delays. Ask your loan officer when to restore them, since lenders often check credit again before closing.
Can I cancel PMI early if my home has gained value?
Possibly. Federal law sets cancellation points based on the home's original value, but Fannie Mae's servicing rules also let you ask the servicer to end mortgage insurance based on the current value, once the loan has been in place for a minimum period and the balance is low enough compared with that value. You usually pay for a valuation that includes an interior inspection. The servicer won't raise this on its own, so you need to ask.
Do I need two years at the same job for a conventional loan?
Not necessarily. Fannie Mae's guide focuses on whether income is stable, has a documented history of receipt and is likely to continue, and the history needed depends on the type of income. Moving to a new employer in the same line of work is common, while a switch to commission pay, self-employment or a new field gets closer review. If you know your pay will drop, the lender must qualify you on the lower amount.
What is an appraisal waiver on a conventional loan?
Fannie Mae calls it value acceptance. For some loans, Desktop Underwriter accepts the estimated value without a new appraisal, generally relying on a prior appraisal of the same home in its data. It's offered case by case and is never available for two- to four-unit homes, manufactured homes, many construction and renovation loans, or when the price or estimated value is $1,000,000 or more. The lender can still order an appraisal if it believes one is needed.
Can I get a conventional loan if I'm self-employed?
Yes. Self-employed borrowers are underwritten under the same agency rules, usually with personal and business federal tax returns, and the lender averages income after business expenses, adding back certain non-cash deductions such as depreciation. A shorter self-employment history can sometimes work when it follows experience in the same field. If your returns show much less income than the business brings in, bank statement or profit and loss programs outside agency rules work differently.
Can the seller pay my closing costs on a conventional loan?
Yes, within limits. Fannie Mae and Freddie Mac call these interested party contributions and cap them as a share of the price or value, with the cap depending on occupancy and how much you borrow compared with the value; investment properties have the tightest cap. The money can cover closing costs and prepaid items but not your down payment or reserves, and anything above the cap is subtracted from the price used to figure the loan.
This page explains how this type of loan generally works. Programs, guidelines and availability vary by lender and change often. Contact Ruben to see which options are available for your scenario today.