Conventional Loans Explained: Requirements, Rates & How to Qualify

A conventional loan is a mortgage not backed by a government agency—it's issued by private lenders like banks, credit unions, and mortgage companies. If you're buying a home and have decent credit with some savings for a down payment, a conventional loan is likely your best option. These loans typically offer lower total costs than government-backed alternatives for borrowers with good credit, and unlike FHA loans, the mortgage insurance can be removed once you reach 20% equity. In 2026, you can borrow up to $832,750 in most areas with a conforming conventional loan, and low-down-payment programs let you get started with as little as 3% down.

What Is a Conventional Loan?

A conventional mortgage is any home loan that isn't insured or guaranteed by a government agency such as the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), or U.S. Department of Agriculture (USDA). Instead, conventional loans are originated and funded by private lenders and may be backed by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac.

According to the Consumer Financial Protection Bureau (CFPB), conventional loans are the most common type of mortgage in the United States. They're available for primary residences, second homes, and investment properties.

Conventional vs. Government-Backed Loans

Understanding the difference between conventional and government-backed loans helps you choose the right mortgage for your situation:

If you're a first-time homebuyer with limited savings, a government-backed loan might offer easier qualification. However, if you have solid credit and can afford at least 3% down, conventional loans often provide better long-term value.

Conforming vs. Non-Conforming Loans

Not all conventional loans are created equal. The key distinction is whether your loan "conforms" to standards set by Fannie Mae and Freddie Mac.

Conforming Loans

Conforming loans meet the funding criteria established by Fannie Mae and Freddie Mac, including maximum loan amounts set annually by the Federal Housing Finance Agency (FHFA). These loans typically offer:

• Lower interest rates due to GSE backing
• Standardized qualification requirements
• More predictable terms and conditions

Non-Conforming (Jumbo) Loans

Non-conforming loans, commonly called jumbo loans, exceed the conforming loan limits or don't meet other GSE criteria. According to Investopedia, while all conforming loans are conventional, not all conventional loans qualify as conforming.

2026 Conforming Loan Limits

The FHFA announces new conforming loan limits each November. For 2026, the baseline conforming loan limit is $832,750 for single-family homes in most U.S. counties—an increase of $26,250 from the 2025 limit of $806,500.

2026 Loan Limits by Property Type

High-Cost Areas

In designated high-cost areas where home prices significantly exceed the national average, loan limits can reach up to 150% of the baseline—or $1,249,125 for a single-family home. Special provisions apply to Alaska, Hawaii, Guam, and the U.S. Virgin Islands, where the ceiling can reach $1,873,675.

The FHFA adjusts these limits annually based on changes in average U.S. home prices. The 2026 increase reflects a 3.26% rise in home prices from the third quarter of 2024 to the third quarter of 2025.

If you need to borrow more than the conforming limit in your area, you'll need a jumbo loan, which has stricter requirements but allows for higher loan amounts.

Credit Score Requirements

Your credit score plays a significant role in conventional loan qualification and the interest rate you'll receive.

Minimum Score Requirements

Most conventional loan programs require a minimum credit score of 620. However, this is just the floor—higher scores unlock better rates and terms:

Comparison to FHA Requirements

FHA loans allow credit scores below 580 with a larger down payment, making them more accessible for borrowers with credit challenges. However, borrowers with scores above 620 often find conventional loans offer better overall value due to removable mortgage insurance.

Down Payment Options

Contrary to popular belief, you don't need 20% down to get a conventional loan. Several programs allow much smaller down payments.

Low Down Payment Programs

Freddie Mac Home Possible®:

• Minimum down payment: 3%
• Income limit: 80% of Area Median Income (AMI)
• Flexible down payment sources (family gifts, employer assistance, secondary financing)
• Available for 1-4 unit properties, condos, and manufactured homes

Freddie Mac HomeOne®:

• Minimum down payment: 3%
• First-time homebuyers only
• No income limits or geographic restrictions
• Standard credit requirements apply

According to Freddie Mac, these programs make homeownership accessible for buyers who may not have large savings but can afford monthly payments. Additionally, many state and local down payment assistance programs can be combined with conventional loans to further reduce upfront costs.

Down Payment Impact on Your Loan

If saving for a down payment is challenging, consider reviewing your budget to identify areas where you can accelerate your savings. Understanding compound interest can also help you see how consistent saving grows over time.

Private Mortgage Insurance (PMI)

When you put less than 20% down on a conventional loan, lenders require private mortgage insurance. Understanding PMI—and how to remove it—is essential for managing your total housing costs.

What Is PMI?

According to the CFPB, private mortgage insurance protects the lender (not you) if you stop making payments. It doesn't prevent foreclosure or protect your credit—it simply reduces the lender's risk of loss.

PMI is typically paid in one of three ways:

1. Monthly premium (most common)—added to your mortgage payment
2. Upfront premium—paid at closing as a lump sum
3. Combination—some paid upfront, remainder monthly

PMI Cancellation Rules

One major advantage of conventional loans over FHA loans is that PMI can be removed. The Homeowners Protection Act establishes clear rules for PMI cancellation on loans originated after July 29, 1999:

At 80% Loan-to-Value (Borrower Request): You can request PMI cancellation in writing when your loan balance reaches 80% of the original home value. You must:

• Have a good payment history
• Be current on payments
• Certify no junior liens exist on the property
• Provide evidence that property value hasn't declined (appraisal may be required)

At 78% Loan-to-Value (Automatic): Your servicer must automatically terminate PMI when your principal balance is scheduled to reach 78% of the original value, provided you're current on payments.

Midpoint of Loan (Final Termination): PMI must be cancelled at the loan's midpoint (15 years for a 30-year mortgage) even if you haven't reached 78% LTV, as long as you're current on payments.

Debt-to-Income (DTI) Requirements

Your debt-to-income ratio measures how much of your gross monthly income goes toward debt payments. Lenders use DTI to assess your ability to manage mortgage payments.

DTI Guidelines

For conforming conventional loans, the general guidelines are:

• Front-end ratio (housing costs only): Typically 28-35% of gross income
• Back-end ratio (all debts): Generally capped at 50% for conforming loans

Your back-end DTI includes:

• Proposed mortgage payment (principal, interest, taxes, insurance)
• Credit card minimum payments
• Auto loans
• Student loans
• Child support/alimony
• Other recurring debt obligations

Compensating Factors

Higher DTI ratios may be acceptable with compensating factors such as:

• Credit scores above 740
• Down payment of 10% or more
• Significant cash reserves (6+ months of payments)
• Stable, verifiable employment history

Conventional vs. FHA Loans: Which Is Better?

Choosing between conventional and FHA loans depends on your specific financial situation. Here's a detailed comparison:

When to Choose Conventional

A conventional loan typically makes more sense when you:

• Have a credit score of 620 or higher
• Can make at least a 10-15% down payment
• Plan to stay in the home long enough to benefit from PMI removal
• Want to avoid permanent mortgage insurance

When to Choose FHA

An FHA loan may be better when you:

• Have a credit score below 620
• Can only afford a minimal down payment
• Have a higher debt-to-income ratio
• Need more flexible qualification requirements
• Want to buy a fixer-upper (consider the FHA 203(k) renovation loan)

The CFPB notes that for borrowers with good credit and a medium down payment (10-15%), FHA loans tend to be more expensive than conventional loans over time due to permanent mortgage insurance.

How to Apply for a Conventional Loan

Getting pre-approved for a mortgage before house hunting puts you in a stronger position. Here's what to expect during the application process.

Required Documentation

Proof of Income:

• 30 days of recent pay stubs
• Two years of federal tax returns
• Two years of W-2 statements
• Documentation for additional income (bonuses, alimony, rental income)

Asset Verification:

• 60 days of bank statements
• Investment account statements
• Proof of down payment source
• Gift letters if applicable (must certify funds aren't a loan)

Employment Verification:

• Current pay stubs
• Employer contact information
• Self-employed borrowers: additional business documentation and tax returns

Personal Information:

• Government-issued ID
• Social Security number
• Rental history for past two years
• Authorization for credit report pull

Application Steps

1. Choose a lender - Get quotes from multiple lenders to compare rates and fees
2. Complete the application - Provide all required documentation
3. Receive Loan Estimate - Lenders must provide this standardized form within three business days
4. Underwriting review - Lender verifies your information and assesses risk
5. Property appraisal - Lender orders appraisal to confirm home value
6. Final approval - Clear any remaining conditions
7. Closing - Sign documents and receive keys

During closing, you'll pay closing costs that typically range from 2-5% of your loan amount. Understanding these costs upfront helps you budget appropriately.

Interest Rates and Costs

Conventional loan interest rates depend on several factors within and outside your control.

Factors Affecting Your Rate

Borrower factors:

• Credit score (higher = lower rate)
• Down payment size
• Debt-to-income ratio
• Loan amount relative to limits

Market factors:

• Federal Reserve policy
• Economic conditions
• Inflation expectations
• Bond market performance

Rate Types

Fixed-rate mortgages maintain the same interest rate for the entire loan term (typically 15 or 30 years). Monthly payments remain predictable, making budgeting easier.

Adjustable-rate mortgages (ARMs) start with a lower rate that adjusts periodically after an initial fixed period. Common structures include 5/1 ARMs (fixed for 5 years, adjusting annually thereafter) and 7/1 ARMs. If you're considering an ARM, read our detailed ARM guide to understand how rate adjustments work and whether this option fits your situation.

Closing Costs

Expect to pay 2-5% of the loan amount in closing costs, which may include:

• Origination fees
• Appraisal fee
• Title insurance
• Attorney fees
• Prepaid taxes and insurance
• Recording fees

Frequently Asked Questions

Conclusion

Conventional loans remain the most popular mortgage choice for good reason—they offer competitive rates, flexible terms, and the ability to remove mortgage insurance once you build sufficient equity. With 2026 conforming loan limits reaching $832,750 and low-down-payment programs available for as little as 3% down, conventional mortgages are more accessible than many buyers realize.

The key to success is understanding the requirements: maintain a credit score of at least 620 (higher is better), keep your debt-to-income ratio manageable, and save for both your down payment and closing costs. If your credit needs work or you're struggling to save for a down payment, an FHA loan might be a better starting point—but if you have solid credit and some savings, a conventional loan will likely save you money over the life of your mortgage.

Start by getting pre-approved to understand exactly what you can afford, then compare offers from multiple lenders to ensure you're getting the best deal available for your situation.