Conventional Loan Guide

What is a conventional loan?

A conventional loan is a mortgage that is not insured or guaranteed by a federal agency. FHA loans are insured by the Federal Housing Administration, VA loans are guaranteed by the Department of Veterans Affairs, and USDA loans are backed by the Department of Agriculture. Conventional financing sits outside those programs and is instead underwritten to private-market standards.

In practice, most conventional loans are conforming loans. That means the loan is underwritten to guidelines published by Fannie Mae or Freddie Mac, the two government-sponsored enterprises that purchase qualifying mortgages from lenders, and the loan amount falls within the annual conforming loan limit for the county and the number of units.

Because those guidelines are published and widely used, conventional financing is the most standardized category in the market. It is also the most flexible in terms of occupancy: conventional loans can finance primary residences, second homes, and investment properties, while FHA, VA, and USDA financing is generally limited to owner-occupied primary residences.

A conventional loan that exceeds the conforming limit is generally a jumbo loan. Jumbo financing is still conventional in the sense that no agency insures it, but it is underwritten to individual investor or portfolio guidelines rather than agency guidelines.

Conventional means no government insurance. Conforming means the loan follows agency guidelines and stays within the loan limit.

Conventional, conforming, high-balance, and jumbo

These four terms are used loosely in everyday conversation, and the distinction matters because it changes the guideline set, the pricing, and sometimes the documentation.

Conforming loan limits are published annually and vary by county and unit count. Confirm the current figure for your county before assuming a loan is jumbo.

Who conventional financing tends to suit

Conventional financing is often the lowest long-term cost option for borrowers with solid credit, because pricing is risk-based and because mortgage insurance can generally be removed once equity requirements are met. It is also the only mainstream category that finances second homes and investment property.

That does not make it the automatic answer. A borrower with a rebuilding credit profile, limited reserves, or a property that will not meet conventional appraisal expectations may find FHA financing produces a better payment or a cleaner approval. Eligible veterans frequently find VA financing produces the lowest cash to close and no monthly mortgage insurance at all.

What conventional eligibility involves

Eligibility is reviewed across three dimensions at once: the borrower, the property, and the transaction. A strong borrower with an ineligible property will not close, and an excellent property does not fix an unsupported income calculation.

Most conventional files are run through an automated underwriting system, which returns findings and a document list. Those findings, not a generic rule of thumb, define what your specific file must document.

Credit: scores, history, and pricing tiers

Conventional pricing is risk-based, which means credit score interacts with loan-to-value to determine both eligibility and cost. Two borrowers with identical loan amounts and identical down payments can receive materially different rates because of score alone.

Score is not the whole picture. Underwriting also reviews the depth of the credit history, the number of active tradelines, recent inquiries and new debt, the pattern of late payments, collections and charge-offs, and the seasoning of any major derogatory event such as a bankruptcy, foreclosure, short sale, or deed in lieu.

Because the three bureaus can report differently, lenders typically use a defined selection method across borrowers and bureaus rather than a single score. Improving the weakest of your scores is often more valuable than improving the strongest one.

Underwriting commonly re-checks credit and liabilities shortly before closing. Financial changes during the process can alter or invalidate an approval.

Income, employment, and how earnings are calculated

Qualifying income is not the same as gross pay. Underwriting calculates income that is stable, verifiable, and reasonably likely to continue, which means variable earnings are usually averaged and unsupported income is excluded.

Salaried income is typically the most straightforward. Hourly income with fluctuating schedules, overtime, bonus, commission, tips, and shift differentials generally require a documented history, often averaged over one to two years, with attention to whether the trend is stable, rising, or declining.

Self-employed borrowers are generally qualified from tax returns and business documentation rather than deposits. Business structure matters: sole proprietorships, partnerships, S corporations, and C corporations are each analyzed differently, and add-backs such as depreciation may be permitted while certain deductions reduce qualifying income.

Other income types — retirement distributions, Social Security, pension, alimony or child support, disability, rental income, trust income, and asset-based income — each carry their own documentation and continuance rules.

If your income is variable or newly structured, share the details early. Income calculation is the single most common source of surprises late in a file.

Debt-to-income ratio

Debt-to-income compares your total monthly obligations, including the proposed housing payment, against qualifying monthly income. The proposed housing payment generally includes principal, interest, property taxes, homeowners insurance, mortgage insurance where applicable, flood insurance where required, and homeowners or condominium association dues.

There is no universal conventional debt-to-income cap. Automated underwriting evaluates the ratio alongside credit, reserves, loan-to-value, and other factors, so one borrower may be approved at a ratio that another borrower cannot reach.

Living costs that are not credit obligations — groceries, utilities, insurance premiums paid outside escrow, childcare, streaming subscriptions — are generally excluded from the ratio, which is why an approval amount can exceed what feels comfortable. Set your own target payment before you shop.

Down payment: from 3 percent to 20 percent

The idea that conventional financing requires 20 percent down is one of the most persistent myths in housing. Twenty percent is simply the equity threshold at which private mortgage insurance is generally not required. Conventional programs allow substantially less.

Eligible first-time buyers may access 3 percent down conventional programs. Repeat buyers commonly use 5 percent, 10 percent, or 15 percent. Second homes and investment properties require larger down payments, and multi-unit properties generally require more than single-family.

A larger down payment lowers the loan amount, lowers or eliminates mortgage insurance, and often improves pricing. A smaller down payment preserves cash for reserves, moving costs, and immediate home expenses. The right answer depends on your total financial picture, not on a rule.

Down payment is not the same as cash to close. Closing costs, prepaid items, and escrow funding are additional.

Gift funds, sourcing, and reserves

Conventional guidelines permit gift funds from eligible donors on many transactions, typically with a signed gift letter confirming the funds are a gift and not a loan, plus documentation of the transfer. Donor eligibility can differ by occupancy type, so confirm before money moves.

Every dollar used to close generally must be sourced and seasoned. Large deposits that do not match documented income will be questioned, and cash on hand is generally not usable. The cleanest approach is to consolidate funds into one account before applying and to avoid unusual deposits during the transaction.

Reserves are funds remaining after closing, usually measured in months of the new housing payment. Reserve requirements vary with occupancy, property type, credit, and findings; second homes, investment properties, and multi-unit purchases typically require more.

Private mortgage insurance: how it works

Private mortgage insurance protects the lender against loss when the loan-to-value ratio exceeds 80 percent. It is a cost of financing paid by the borrower, and it is priced by risk: the higher the loan-to-value and the lower the credit score, the higher the premium.

PMI is not a single product. Borrower-paid monthly PMI is the most common structure, but single-premium PMI paid at closing, split-premium structures, and lender-paid PMI built into the rate are also used. Each shifts cost between the closing table and the monthly payment.

The important structural difference from FHA is removability. On many FHA structures the annual premium remains for the life of the loan, and refinancing is the only exit. Conventional PMI is designed to end.

Lender-paid PMI is not free. It is priced into the rate for the life of the loan.

How to remove private mortgage insurance

There are generally three paths off PMI. The first is automatic termination, which the servicer applies when the loan balance reaches a defined percentage of the original value based on the amortization schedule, provided payments are current. The second is borrower-requested cancellation once the balance reaches the applicable threshold, again subject to payment history and servicer requirements, sometimes supported by a current valuation.

The third path is a change in value. If the property has appreciated or you have completed improvements, some servicers will consider cancellation based on a new appraisal or broker price opinion, subject to seasoning requirements and their own policy.

Refinancing is the fourth practical route. If equity now exceeds 20 percent and current pricing supports it, refinancing into a loan without mortgage insurance can lower the payment even at a similar rate.

Conforming loan limits and high-balance financing

The Federal Housing Finance Agency publishes conforming loan limits annually. There is a baseline limit that applies to most counties, higher ceilings in designated high-cost counties, and larger limits for two-, three-, and four-unit properties.

A loan above the standard baseline but within a high-cost county ceiling is generally called high-balance conforming. It remains an agency loan, but pricing adjustments typically apply and some guideline parameters tighten.

Above the applicable ceiling, financing becomes jumbo. Jumbo loans are underwritten to investor or portfolio guidelines, which often means higher reserve requirements, tighter credit expectations, and more detailed documentation — though pricing on strong jumbo files can be very competitive.

Because limits change annually and vary by county, a purchase price that required jumbo financing last year may be conforming this year. Always confirm the current figure.

Occupancy and property types

Occupancy is a core pricing and guideline input. Primary residences receive the most favorable terms, second homes sit in the middle with occupancy and distance expectations, and investment properties require the largest down payments and typically carry the highest pricing adjustments.

Property type matters just as much. Single-family detached homes are the baseline. Condominiums require a project review that examines budget, reserves, owner-occupancy, litigation, insurance, and delinquency, and a project that fails review can stop an otherwise strong file. Planned unit developments, townhomes, manufactured housing, and two-to-four-unit properties each carry additional requirements.

Occupancy is certified at closing. Misrepresenting occupancy is mortgage fraud, not a technicality.

Appraisal, value, and appraisal waivers

The appraisal establishes an independent opinion of value used to calculate loan-to-value. Conventional appraisals focus on value and marketability. They note obvious condition issues, but they are not the health-and-safety review that an FHA appraisal performs, and they are never a substitute for an independent home inspection.

On some conventional transactions with strong data and sufficient equity, automated underwriting may offer an appraisal waiver or a limited valuation product. That can save time and cost, but it is offered by the system rather than requested by the borrower, and it may be revoked if the file changes.

If the appraised value comes in below the contract price, the loan amount is generally based on the lower of value or price. The usual options are renegotiating the price, bringing additional funds, requesting reconsideration of value with supporting comparable sales, or terminating under the contract's appraisal contingency if one exists.

How conventional rates are priced

Conventional pricing starts with market conditions and is then adjusted for the specific risk characteristics of the loan. These adjustments are applied consistently across the industry, which is why quotes from different lenders on the same profile tend to cluster.

Because pricing is layered, small changes to structure can produce meaningful savings. Moving from 3 percent down to 5 percent, or from just under a credit tier to just above it, sometimes changes both the rate and the mortgage insurance premium at once.

A rate is only comparable alongside its points, credits, and mortgage insurance. Compare the full Loan Estimate, not the headline number.

Fixed-rate versus adjustable-rate structures

Fixed-rate conventional loans hold the same interest rate for the entire term. Thirty-year fixed financing produces the lowest payment among common fixed terms; fifteen- and twenty-year terms cost more per month but dramatically reduce total interest and build equity faster.

Adjustable-rate mortgages carry a fixed introductory period followed by periodic adjustments tied to an index plus a margin, subject to caps. They can be appropriate when the expected holding period is shorter than the fixed period, but they carry payment uncertainty afterward and should be evaluated against the worst-case cap scenario, not just the introductory rate.

Closing costs, credits, and cash to close

Closing costs fall into three broad buckets: lender fees for originating and underwriting the loan, third-party services such as appraisal, title, settlement, and recording, and prepaid items such as homeowners insurance, property taxes, and initial escrow funding plus per-diem interest.

Prepaid items are not really a cost of the loan. They are your own future expenses collected early, which is why an escrow account can make cash to close look larger than expected while lowering ongoing budgeting risk.

Seller credits toward closing costs may be negotiated in the contract, subject to conventional limits that vary by occupancy and loan-to-value. Lender credits can also be used, funded by accepting a slightly higher rate. Neither can generally be converted into cash back to the buyer.

Your Loan Estimate and later Closing Disclosure are the authoritative documents. Review both line by line with your advisor.

Conventional versus FHA

This is the most common comparison in first-time-buyer transactions, and there is no universal winner. FHA tends to be more forgiving on credit and ratios and often produces a lower rate at lower scores. Conventional tends to win on total long-term cost for stronger credit profiles, largely because mortgage insurance is removable and there is no upfront insurance premium financed into the balance.

Run both scenarios side by side on your actual numbers. The comparison should include payment, cash to close, and cost over your expected holding period.

Conventional versus VA and USDA

For eligible veterans, service members, and surviving spouses, VA financing is usually difficult to beat: no monthly mortgage insurance, no down payment on many transactions, and competitive pricing, offset by a funding fee that is waived for some borrowers.

USDA financing serves eligible properties in designated rural areas with household income limits and provides a zero-down structure with its own guarantee fees. Conventional financing generally becomes the better answer when the property or income falls outside USDA parameters, or when a buyer is putting meaningful money down.

Conventional versus jumbo

When the loan amount exceeds the applicable conforming ceiling, the file moves to jumbo guidelines. Jumbo underwriting is typically more conservative on reserves and documentation and often expects stronger credit, but it opens financing above agency limits and can offer flexible structures for complex income.

Some buyers near the limit intentionally structure the transaction to stay conforming — a slightly larger down payment, or a combination of a conforming first mortgage with a second lien — because the pricing and documentation burden can be lighter. That analysis should be run on real numbers rather than assumed.

Refinancing a conventional loan

A rate-and-term refinance replaces the existing loan to change the rate, the term, or both, and it may also be used to remove mortgage insurance when equity supports it. A cash-out refinance increases the loan balance and returns the difference to you at closing, subject to loan-to-value limits that are generally tighter than purchase limits and pricing adjustments that reflect the added risk.

The right decision is rarely about the rate alone. Compare the total cost of the new loan against the remaining cost of the current one over the period you expect to hold the property, and be careful about restarting a thirty-year amortization schedule when you are years into the existing loan.

The conventional loan process, step by step

Most conventional purchases follow the same sequence. Knowing the order helps you anticipate what will be requested and when.

Many conventional purchases close in roughly thirty to forty-five days. Appraisal timing, condominium review, and document turnaround are the usual variables.

Document checklist

Preparing documents before application is the single most effective way to shorten a transaction. Provide complete documents — every page, including pages that appear blank — because incomplete files generate repeat requests.

Common mistakes to avoid

Notes for Florida buyers

Florida transactions carry a few recurring considerations that affect conventional financing more than they do in many other states. Homeowners insurance availability and pricing should be investigated early, because the premium feeds directly into the escrow payment and therefore into the debt-to-income calculation.

Flood zone determination matters throughout the state, and coastal and near-coastal properties may require separate windstorm coverage. Condominium buyers should ask about reserve studies, structural inspection status, and any special assessments, since project review can affect eligibility even when the borrower is exceptionally strong.

Property taxes on a newly purchased home may be reassessed after the sale, so budgeting from the seller's current tax bill can understate the eventual escrow payment. Homestead exemption timing should also be discussed for primary residences.

These items are highly property-specific. Raise them with your advisor before writing an offer rather than during underwriting.

Conventional buyer checklist

Important disclosure

Document requirements, eligibility, rates, costs, mortgage insurance, loan limits, and loan terms vary by mortgage program, lender, investor, property, transaction type, and borrower profile. This guide is educational and is not a loan approval, a commitment to lend, a Loan Estimate, or legal or tax advice. Vabasso Mortgage is not affiliated with, endorsed by, or acting on behalf of Fannie Mae, Freddie Mac, or the Federal Housing Finance Agency. Program rules and conforming loan limits change; current requirements should be confirmed with your licensed mortgage advisor and with official agency guidance.