Understanding
Conventional Loans

Conventional purchase financing can serve borrowers with large down payments, but it also includes low-down-payment options. Fannie Mae and Freddie Mac both support eligible conventional purchase programs that can reach 97% loan-to-value, allowing qualified borrowers to purchase with as little as 3% down.

That does not mean every 3% down conventional loan is identical. Some programs are designed around first-time buyers. Others use income limits. Some provide reduced mortgage-insurance requirements or allow specific forms of subordinate financing and assistance.

Fannie Mae’s HomeReady® program, for example, currently allows down payments as low as 3% for eligible borrowers and includes reduced mortgage-insurance features.

First-time buyers have additional conventional options worth comparing. Programs such as Fannie Mae’s 97% options and Freddie Mac HomeOne® can provide 3%-down financing when the borrower meets the applicable first-time-buyer requirements.

Because those programs have their own eligibility, education, assistance, gift-fund, and PMI considerations, we cover them separately on our First-Time Home Buyer Conventional Loan page.

The client’s original draft incorrectly implied that a conventional mortgage could be defined as a mortgage without mortgage insurance. That is not correct. Conventional mortgages can absolutely require private mortgage insurance.

PMI commonly applies when a conventional first mortgage exceeds 80% of the applicable property value. The cost can vary with credit score, loan-to-value ratio, loan program, property characteristics, and the mortgage-insurance provider.

A major conventional advantage is that borrower-paid PMI may later be cancelable when federal, investor, servicer, payment-history, and equity requirements are satisfied. That topic has enough nuance that we address it separately in Understanding Mortgage Insurance.

Conventional financing is also widely used to replace an existing mortgage. A rate-and-term refinance may change the rate, payment, term, or loan structure. A cash-out refinance may convert part of the home’s equity into cash. A HELOC or second mortgage may preserve the current first mortgage while adding separate equity financing.

The right structure depends on the existing mortgage, current rates, equity position, closing costs, loan term, and the borrower’s financial objective. A homeowner with a very low first-mortgage rate may not want to replace the entire balance simply to access a smaller amount of equity.

Those tradeoffs are covered in depth on our Conventional Refinance Loan page.

Unlike many government-backed purchase programs, conventional financing can be available for qualified second homes and investment properties as well as primary residences.

The underwriting is not identical. Down-payment or equity requirements can be higher, pricing can differ, reserves may be required, rental income may need to be documented, and property-type restrictions can apply. The fact that a property is eligible for conventional financing does not mean it receives the same terms as an owner-occupied primary residence.

Conventional underwriting evaluates the complete file: credit history, income, employment, monthly debts, assets, down payment or equity, reserves when required, property, occupancy, and transaction type.

Many conventional programs are submitted through automated underwriting systems such as Fannie Mae Desktop Underwriter or Freddie Mac Loan Product Advisor. Those systems evaluate the transaction against applicable guidelines, but documentation still has to verify the information submitted.

Individual lenders can also add overlays beyond the underlying Fannie Mae, Freddie Mac, or investor minimums. That is one reason a borrower who does not fit one conventional lender’s credit box may still have another conventional option worth reviewing.

Credit score can affect eligibility, interest-rate pricing, PMI cost, and which conventional programs are realistically available. A score by itself does not create an approval; the entire loan file still has to work.

There is no useful universal debt-to-income number that guarantees conventional approval. The acceptable ratio depends on the program, automated underwriting findings, compensating factors, loan characteristics, and lender requirements.

Purchase down payment and refinance equity affect LTV, PMI, pricing, and program eligibility. Conventional financing can accommodate very different equity positions depending on the transaction.

A conventional mortgage is secured by real property, so the lender and investor must establish that the property is eligible and adequately supports the mortgage.

An appraisal may be required to develop an opinion of market value and evaluate relevant property characteristics. Some eligible Fannie Mae or Freddie Mac transactions may receive valuation alternatives instead of a traditional appraisal, subject to current automated underwriting and investor requirements.

Property type matters. Condominiums, manufactured housing, multi-unit properties, second homes, and investment properties can carry additional eligibility rules beyond the borrower’s own qualification.

Conventional closing costs can include lender charges, discount points when applicable, appraisal or valuation costs, title and settlement fees, recording charges, prepaid interest, homeowners insurance, property-tax items, initial escrow deposits, and other transaction-specific expenses.

Seller credits, lender credits, gifts, or eligible assistance can sometimes reduce the borrower’s direct cash requirement, but each source has its own rules. A lender credit may also be associated with a different interest rate than a loan where the borrower pays more costs directly.

The useful comparison is the entire Loan Estimate: rate, payment, mortgage insurance, lender costs, credits, prepaid items, and cash to close.

Conventional financing often competes directly with FHA on lower-down-payment purchases. Conventional may offer cancelable PMI and strong pricing for borrowers with better credit. FHA may provide greater underwriting flexibility in files where conventional financing is less forgiving.

For eligible veterans and service members, VA financing can be difficult to beat because it can offer zero-down financing and no monthly mortgage insurance. USDA can serve eligible borrowers and properties in qualifying areas.

That is why MortgageFriend does not start by asking which loan program sounds best. The comparison starts with the borrower, property, cash available, monthly payment goal, and long-term plan.

These are some of the questions borrowers commonly ask when they first begin comparing conventional loans.

No. Eligible conventional purchase programs can allow down payments as low as 3%. The specific program determines the borrower, income, occupancy, and other requirements.

They can. PMI is commonly required when the conventional first mortgage exceeds 80% LTV, although the exact insurance structure depends on the loan.

No. They do not make mortgage loans directly to consumers. They purchase eligible mortgages from lenders and provide liquidity and standards to the conventional mortgage market.

Potentially yes. Conventional financing can serve qualifying investment properties, subject to different down-payment, reserve, pricing, property, and underwriting requirements.

No. Conventional can be very attractive for borrowers with stronger credit or those who value cancelable PMI. FHA may provide better underwriting flexibility in other files. The correct comparison is transaction-specific.

Yes. Conventional options include rate-and-term, limited/no-cash-out, cash-out, and other refinance structures depending on the investor and transaction.