Conventional Loans | LoanApproval101

Overview

What Is a Conventional Loan?

A conventional loan is a mortgage that is not insured or guaranteed by the federal government. Most conventional loans follow guidelines set by two government-sponsored enterprises:

Fannie Mae

Federal National Mortgage Association — established in 1938 to create a reliable mortgage market by buying loans from lenders and freeing up capital for new originations.

Freddie Mac

Federal Home Loan Mortgage Corporation — created in 1970 with a similar mission. Together with Fannie Mae, they set the guidelines most conventional loans must follow.

How It Works

Both entities buy mortgages from lenders after closing, ensuring banks and credit unions always have capital available to fund new loans. When a lender says a loan is "conventional," it means it's eligible to be sold to Fannie Mae or Freddie Mac.

Qualification

Requirements at a Glance

These are the baseline guidelines. Meeting minimums does not guarantee approval — lenders take a holistic view of your full financial profile.

Factor	Requirement
Minimum Down Payment	3% for qualified first-time buyers or certain income levels · 5% for most others
Minimum Credit Score	Generally 620 or higher. Scores below 760 may result in higher rates or added conditions.
Maximum DTI	Up to 50%. A lower DTI (below 43%) significantly improves approval odds and rate offers.
Mortgage Insurance	Required if down payment is less than 20%. Cancels automatically when LTV reaches 78%.
Property Types	Primary residence, second home, or investment property
Conforming Loan Limits (2026)	$832,750 in most areas. Some counties qualify for higher conforming loan limits — look up your county here.

Flexibility in Approval

A high DTI (above 40%) may require a larger down payment or higher credit score. Strong compensating factors — such as significant cash reserves or a long employment history — can offset weaker areas. Lenders evaluate the full picture, not just minimums.

Important Note

These figures represent common industry guidelines — not universal requirements. Individual lenders set their own overlays, and some — particularly credit unions and portfolio lenders — may offer terms that differ significantly from Fannie Mae and Freddie Mac guidelines. For example, some credit unions offer 0% down on conventional loans, which falls outside standard agency guidelines. Always confirm specific requirements with a licensed loan officer.

Low Down Payment

3% Down Requirements

Conventional loans offer a 3% down payment option through specific programs. Each has its own eligibility requirements — here's how they compare.

HomeReady (Fannie Mae)

◆Household income must be at or below 80% of the area median income (AMI)
◆Do NOT need to be a first-time homebuyer
◆Minimum 620 credit score
◆Primary residence only
◆Homebuyer education course required
◆Reduced PMI rates compared to standard conventional

Home Possible (Freddie Mac)

◆Household income must be at or below 80% of the area median income (AMI)
◆Do NOT need to be a first-time homebuyer
◆Minimum 620 credit score
◆Primary residence only
◆Homebuyer education course required for first-time buyers
◆Reduced PMI rates compared to standard conventional

Standard 97 (Fannie Mae)

◆At least one borrower must be a first-time homebuyer (no ownership in last 3 years)
◆No income limits
◆Minimum 620 credit score
◆Primary residence only
◆Homebuyer education course required
◆Standard PMI rates apply

HomeOne (Freddie Mac)

◆At least one borrower must be a first-time homebuyer (no ownership in last 3 years)
◆No income limits
◆Minimum 620 credit score
◆Primary residence only
◆Homebuyer education course required for first-time buyers
◆Standard PMI rates apply

How to Check Income Limits

Area median income (AMI) limits vary by county and household size. Use the official lookup tools below to check eligibility for a specific property address:

Mortgage Insurance

PMI — Private Mortgage Insurance

PMI is required on conventional loans when your down payment is less than 20%. It protects the lender — not you — in case of default.

When It Applies

< 20%

Down payment below 20% of the purchase price triggers PMI requirement

Typical Cost

0.3–1.5%

Annual rate of loan amount, paid monthly. Varies by credit score and LTV.

When It Cancels

78% LTV

PMI cancels automatically when your loan balance reaches 78% of the original purchase price

Key Advantage Over FHA

Unlike FHA mortgage insurance, PMI on a conventional loan cancels automatically once you reach 78% LTV — or you can request removal at 80% LTV. FHA mortgage insurance, in many cases, remains for the life of the loan. This is one of the biggest reasons borrowers who qualify prefer conventional over FHA.

Analysis

Benefits & Trade-Offs

Benefits

PMI cancels automatically at 78% LTV — unlike FHA
No upfront mortgage insurance premium
Available for primary residences, second homes, and investment properties
Wide variety of lenders and competitive rates
3% down available for qualified first-time buyers and buyers under 80% of area median income

Trade-Offs

Higher credit score requirements than FHA
Lower DTI tolerance compared to FHA or VA
Stricter guidelines for self-employed borrowers

Program Comparison

Conventional vs. Other Programs

See how conventional stacks up against the other major loan programs across the factors that matter most.

Feature	Conventional	FHA	VA	USDA
Min. Down Payment	3%–5%	3.5%	0%	0%
Min. Credit Score	620	500–580	No VA min.*	640*
Mortgage Insurance	PMI — cancels at 78% LTV	MIP — life of loan*	None	Low guarantee fee
Max DTI	~50%	~56.99%	No fixed cap*	41%*
Property Types	Primary, second, investment	Primary only	Primary only	Primary only (rural)
Income Limits	None	None	None	≤ 115% AMI
Eligibility	US Citizens, Permanent Residents, Non-Permanent Residents	US Citizens, Permanent Residents	Military only	Location + income

* Most lenders impose their own minimums above program floors. Consult a licensed loan officer for specifics. · * FHA MIP for life of loan applies to down payments less than 10%.

Summary

Key Takeaways

Conventional loans are not government-insured — most follow Fannie Mae and Freddie Mac guidelines.
Minimum down payment starts at 3%, but 5% is more common. A 20% down payment eliminates PMI entirely.
Maximum DTI is generally 50%, but lower ratios significantly improve your approval odds and the rate you receive.
PMI cancels automatically at 78% LTV.
Conventional loans allow investment properties and second homes — FHA, VA, and USDA do not.
A conforming loan limit of $832,750 applies in most counties. Some high-cost areas qualify for higher limits.