A conventional loan is a home loan that isn't insured by a government agency like FHA, VA, or USDA. Most follow Fannie Mae and Freddie Mac guidelines and must stay under the conforming loan limit, which is higher in some expensive counties. You can use one for a primary home, a second home, or an investment property. With less than 20 percent down, you'll usually pay private mortgage insurance, but unlike FHA insurance, it can be removed once you build enough equity.
"Conventional" is one of those mortgage words that sounds like it means "normal." In a way, it does. It's simply a loan that isn't insured by FHA, VA, or USDA.
For borrowers with solid credit and some money to put down, a conventional loan is often the least expensive way to buy or refinance. But "often" isn't "always," and the details matter. Here's how conventional loans work and how to tell whether one fits you.
It may not be the best fit if your credit score is lower, your down payment is very small, or your debts are high compared with your income. FHA or VA may cost less in those cases. See FHA Loans and VA Loans.
Most conventional loans are "conforming," which means they meet the guidelines set by Fannie Mae and Freddie Mac. Lenders sell many of these loans to Fannie and Freddie after closing, which is why the rules are so standardized.
You can choose:
Every year, the Federal Housing Finance Agency sets the conforming loan limit. In most counties, that's the cap for a conforming loan. In higher-cost counties, there's a higher "high-balance" limit. Several counties in our states fall in that higher tier.
A high-balance loan works like a regular conforming loan, though pricing can be a little different. If your loan is above your county's limit, it's a jumbo loan. See Jumbo Loans.
The minimum down payment depends on the program, the property type, and whether you're a first-time buyer. Primary homes allow the smallest down payments. Second homes and investment properties require more. The exact figures change, so I'll show you what applies to you.
Your down payment can come from savings, the sale of another home, retirement accounts, or, for a primary or second home, a gift from family.
Conventional loans have minimum credit scores, and your score also changes your price. A higher score generally means a better rate and lower PMI. If your score is close to a pricing break, sometimes a small change, like paying down a credit card, can save you money. Ask us before you apply.
You'll need steady, documented income and a total monthly debt load that fits the guidelines. W-2 employees usually provide pay stubs and W-2s. Self-employed borrowers usually provide tax returns.
Some loans, especially on second homes, investment properties, and multi-unit homes, require cash left over after closing, called reserves.
The appraisal confirms the value. Conventional loans don't use FHA's property standards, and if the appraisal turns up a repair issue, the lender decides what has to be fixed before closing. Condos need the project to meet Fannie Mae or Freddie Mac guidelines.
If you put down less than 20 percent, you'll usually pay PMI. It protects the lender, not you, and it's usually added to your monthly payment. Your credit score and down payment set the cost.
The good news is that PMI doesn't have to last forever. Under the Homeowners Protection Act, for most loans on a primary home:
Paying extra on your principal can get you there sooner. Some loans also let you ask to remove PMI based on a new appraisal if your home's value has gone up, depending on the rules for your loan.
There's also lender-paid mortgage insurance, where the lender pays the premium and charges a higher rate instead. It can lower your payment, but it generally can't be canceled the way borrower-paid PMI can. I'll show you both so you can compare.
You'll have lender fees, appraisal, title, escrow, recording, and prepaid items like property taxes and homeowners insurance. Sellers can contribute toward closing costs, up to limits that depend on your down payment and property type.
You'll get a Loan Estimate within 3 business days of applying, so you can see every cost before you commit.
The honest answer is to price both, the same day, with your real numbers. I'll lay out the monthly payment, upfront costs, and how long the mortgage insurance will last on each.
Conventional loans can be used for a vacation home or a rental property, which most government loans can't.
If you're buying a rental as a business and want to qualify on the property's rent instead of your personal income, a business-purpose DSCR loan may fit. See Investment Property and DSCR Loans.
It depends on the program and property. Some first-time buyer programs allow very small down payments. I'll show you the options for your situation.
No. Twenty percent down avoids PMI, but many people put down less and remove PMI later.
Once your balance reaches 80 percent of the original value, you can ask your servicer to cancel it, and it ends automatically at 78 percent, for most loans on a primary home.
It's set every year by the FHFA and is higher in some counties. Tell me your county, and I'll tell you the current limit.
Yes, with a larger down payment and stricter rules.
Sometimes. With strong credit and a larger down payment, conventional often costs less. Otherwise, FHA may. We'll compare both.
Want to see how a conventional loan compares with your other options? Get a rate quote, see your buying power, or call us at 530-888-6000. Buying soon? Start with Buy a Home. Already own? See Refinance.
