When you're an aspiring homeowner, you'll almost certainly run across the conventional home loan while doing research on mortgage fit. Conventional loans are the most common way Americans finance a home, and they're flexible: first-time buyers, move-up buyers, people buying a vacation home or an investment property, and even buyers doing construction-to-permanent financing all use them. Maybe a lender pointed you toward one, or a real estate agent did, or a friend who closed last year. But the idea that "conventional is the normal choice" can be hard to evaluate when the person recommending it also stands to earn from it, and advice can start to feel like a sales pitch in disguise.
The first thing to know is that "FHA = free money; conventional = no help" is one of the most stubborn myths in homebuying. Each loan has trade-offs. The right one for you depends on your credit score, how much you have saved, where you're buying, and how long you plan to stay.
Conventional loans dominate the market. They made up more than 75% of all new loans in April 2025.[1] And 64% of all homebuyers used one in 2025, according to the National Association of Realtors' annual buyer survey.[2] As for what one costs right now, the 30-year fixed conventional rate averaged 6.52% the week of June 11, 2026, down from 6.84% a year earlier, and it has hovered in the mid-6% range for most of 2026.[3] Your own rate will depend on your loan type, your down payment, and your credit score, among other factors, so it's worth pricing your options across as many loan types as you can before you commit.
We'll walk through the requirements, costs, programs, and trade-offs so you can decide whether a conventional loan fits your situation specifically.
What is a conventional home loan?
A conventional loan is a mortgage that isn't insured or guaranteed by a federal agency like the FHA, VA, or USDA.[4] It's backed by private lenders, and most are sold on the secondary market to a loan servicer according to guidelines from Fannie Mae or Freddie Mac, the government-sponsored enterprises that buy mortgages from lenders and bundle them into investments.
Conventional loans split into two big categories. Conforming loans meet Fannie Mae and Freddie Mac's underwriting guidelines, including the annual loan-limit cap. Nonconforming loans exceed the limit (those are called jumbo loans) or fail to meet other guidelines for some reason. Most first-time buyers end up with a conforming loan.
The 2026 baseline conforming loan limit is $832,750, up $26,250 from the 2025 limit of $806,500. The increase reflects a 3.26% rise in home prices between the third quarters of 2024 and 2025, per the FHFA House Price Index. In high-cost areas like the Bay Area, New York, and Seattle, the ceiling rises to $1,249,125. In Alaska, Hawaii, Guam, and the U.S. Virgin Islands, both the baseline and the ceiling are higher, topping out at $1,873,675.[5] If your loan amount lands above your county's limit, you're shopping a jumbo product, which carries its own, usually stricter, underwriting standards.
Conventional loan requirements in 2026
Most lenders look for the same core ingredients on a conventional application. Mark Cohen, founder and CEO of Cohen Financial Group in Beverly Hills and a working loan officer, sums up the standard package: "Lenders are looking for full income documentation, quality, 50% debt-to-income ratio, a minimum of a 5% down payment, and typically a credit score of 620 or more."
Those benchmarks hold for most borrowers most of the time. But the official guidelines and what your lender will actually approve can be two different things, especially on credit score.
Credit score
The standard conforming credit score floor has been 620 for years, and most lenders still treat it that way in practice. In late 2025, Fannie Mae officially removed its minimum credit score requirement, replacing the hard floor with what it calls a "holistic evaluation" of borrower risk.[1]
That sounds like good news for buyers with low scores. In practice, very little changed, because Fannie Mae's allowance isn't the same as your lender's allowance. Jay Hurst, co-founder and managing partner at Ribbon Home, works in the gap between official policy and what closes. Although Fannie Mae dropped the minimum credit score, he says, "most lenders haven't followed. That's where many buyers get burned when it comes to Fannie's allowance and what lenders actually do… At 3% down, most lenders want 640 to 660. You'll find 620 at some shops at 5% down. If you can get to 10% down, a few lenders will go to 600, but that's still uncommon."
The reason your lender's floor sits higher than Fannie's is a lender overlay. "Lenders sell their loans to investors, and investors impose their own credit rules over Fannie's rules," explains Hurst. "They are known as overlays. Fannie says that 580 is okay. The investor refuses to buy. The lender follows the investor."
Credit-score thresholds aren't the only thing lenders layer on top of Fannie's guidelines. Adam Smith, a mortgage broker with Colorado Real Estate Finance Group, sees overlays show up in less obvious places: "There are a few that tout 'no guideline overlays,' but very few. A lot of the guideline overlays are things like 'you can't have a late payment on consumer credit in the past 12 months.' Odds are good that if you have a 500 credit score that you've had some late payments. So they've found other ways to write the guidelines in order to make it where low credit score borrowers aren't going to fit despite not having a credit score guideline."
Smith also notes that the credit bureaus are private companies, and the contents of your file aren't always accurate. If a derogatory item is showing up incorrectly, a good broker can sometimes help you get it removed before you apply.
If you can get your credit score to 740 or higher, that's the band where you'll see the best rates and the most program options.[6] Below 680, with less than 20% down, mortgage insurance gets more expensive fast. And if one lender turns you down, keep shopping, because the floor varies from one shop to the next.
Debt-to-income ratio
Your debt-to-income (DTI) ratio is the share of your gross monthly income that goes toward debt payments. Conventional lenders generally cap DTI around 45%, though Fannie Mae's guidelines allow up to 50% with compensating factors like strong credit or significant cash reserves.[1]
For example, if you earn $75,000 gross per year, that's $6,250 per month. At a 45% DTI cap, your total monthly debt payments (housing plus everything else) can't exceed $2,812.50. If $500 a month already goes to a car payment and student loans, that leaves $2,312.50 for your mortgage payment, taxes, insurance, and any HOA dues.
Lenders look at two DTI numbers: front-end (housing costs only, typically capped around 28% to 36%) and back-end (all debts, where the 45% to 50% limits apply). Back-end DTI is what usually drives the approval.
Down payment
The minimum down payment on a conventional fixed-rate loan is 3%; on an adjustable-rate mortgage (ARM), most lenders want at least 5%.[7] Most first-time buyers land at 3%, 5%, or 10% down. The 20% threshold matters because it eliminates private mortgage insurance, but very few first-time buyers actually clear it.
Chris Kuclo, senior director of agent relations and sales at Best Interest Financial, puts the 20% myth in perspective: "Twenty percent I think is a rarity. We're talking second, third, fourth home buyers. At that point you have equity from a previous house to go towards 20%, or their parents are well off and they give them 20%."
If you can comfortably hit 20% without draining your reserves, you'll save on mortgage insurance and likely land a better rate. If you can't, putting down less and starting the equity clock is usually the better trade. Mortgage insurance on a conventional loan comes off once you reach 20% equity, but the house that fits your life may not still be on the market if you spend months (or years) saving to 20%.
One nuance that surprises a lot of first-time buyers: your earnest money deposit, the good-faith deposit you put down when an offer is accepted, counts toward your down payment at closing. It's not money on top of what you'll bring to the table. Keep it in a separate, traceable account, and never pay it directly to the seller; it should sit in escrow from the time your offer is accepted until the sale closes.
State-level and local down payment assistance (DPA) programs can stack with conventional loans in many cases and may cover part or all of your down payment and closing costs. Programs vary by state and by city, and your lender may not know about every one available to you, so it's worth researching grant and rebate programs in your area independently.
Conforming loan limit
The 2026 baseline conforming loan limit is $832,750. High-cost counties go up to $1,249,125, and Alaska, Hawaii, Guam, and the U.S. Virgin Islands have their own structure that tops out at $1,873,675.[5] If your loan amount lands above your county's limit, you're shopping a jumbo product, which has its own underwriting rules.
Conventional loan programs for first-time buyers
Three conventional loan programs let you put just 3% down, and one of them has no income limit at all. Most buyers don't know they exist. Some lenders don't either, which is part of the problem.
The catch on two of the three programs is the area median income (AMI) gate. Fannie Mae's HomeReady and Freddie Mac's Home Possible both cap household income at 80% of the AMI for your area, which is determined by your address, not a national average.[8] Many lenders skip the AMI check or look it up incorrectly. You can verify your own eligibility before your lender does by running your new home's address through the Fannie Mae AMI Lookup Tool.
Here's how the three 3%-down conventional programs compare:
- HomeReady (Fannie Mae). 3% minimum down payment. Household income capped at 80% of your area's AMI. Minimum credit score of 620. Reduced private mortgage insurance (PMI) compared to standard conventional.[9]
- Home Possible (Freddie Mac). 3% minimum down payment. Household income capped at 80% of AMI. Minimum credit score of 660.[10]
- Conventional 97 (Fannie Mae). 3% minimum down payment. Available to first-time buyers, or to anyone who hasn't owned a home in the past three years. No income limit.
If you're over the AMI cap for HomeReady and Home Possible but you're a first-time buyer (or returning after a three-year gap), Conventional 97 may still get you in at 3% down.[7]
If a lender tells you that you don't qualify for any first-time-buyer programs, ask specifically which programs they checked and whether they verified your AMI eligibility through Fannie Mae's tool. A different lender may give you a different answer. Hurst's overlay point applies here, too: what one shop won't do, another might.
By comparison, an FHA loan can get you into a house with 3.5% down and tends to have looser credit requirements, but if you put down less than 10%, you'll pay mortgage insurance for the life of the loan (until you sell or refinance).
What does a conventional loan actually cost?
A 5% down payment on a $400,000 home is $20,000, which most first-time buyers already know. What buyers consistently don't expect: closing costs that add another 2% to 5% on top, prepaid fees for taxes and insurance, and private mortgage insurance (PMI) that lands on the monthly payment until you hit 20% equity.
Rebecca Richardson, a 25-year loan officer with The Mortgage Mentor, says the way most people think about PMI is backwards: "PMI is a way to leverage… with how home prices have increased and just the cost of living, it's really hard to outpace housing affordability with also trying to save up 20%, so the end zone keeps moving. So PMI is a way to go ahead and get into a home. Let market appreciation work for you."
PMI isn't a penalty. It's the price of getting into a home before you've saved 20%, which is often a better deal than waiting another two years while prices climb. With that in mind, here's the math.
Private mortgage insurance (PMI)
PMI is required on any conventional loan with less than 20% down. The annual cost runs from 0.46% to 1.5% of the loan amount, according to research from the Urban Institute's Housing Finance Policy Center.[11]
On a $400,000 home with 5% down, your loan is $380,000. Plug in the PMI range:
- At 0.46% annually: about $146 a month
- At 1.5% annually: about $475 a month
That's a $329-a-month spread on the same loan, driven mostly by your credit score and DTI. Kuclo's working benchmark from real loan files matches the Urban Institute's high end: "If your DTI is over 40%, you're sitting with that credit score, private mortgage insurance is going to be very hot on the conventional spectrum," he says. "Expect probably $160 to $170 for every loan amount of $100,000."
On a $380,000 loan, $160 per $100,000 works out to roughly $608 a month in PMI. That's the high-DTI, lower-credit scenario, and it's the number that should motivate squeezing your score up before you apply if you have the time.
Credit score affects more than PMI. It also drives the loan-level price adjustment (LLPA) charged at origination. Richardson has the specific math: "According to the Loan Level Pricing Adjustments on Conventional loans, the difference between a borrower putting 5% down on a primary home with a 620 score will pay at least 1.625% more in points compared to someone with a 780 credit score."
On a $380,000 loan, 1.625% in extra points equals $6,175, paid either at closing or rolled into a higher interest rate over 30 years. Every few points of credit-score improvement you can make before you apply has real dollar value.
Closing costs
Closing costs on a conventional loan typically run 2% to 5% of the mortgage value.[2] On a $380,000 loan, that's somewhere between $7,600 and $19,000, on top of your down payment.
What's bundled into that range: lender origination fees, title insurance, appraisal, prepaid interest, prepaid property taxes, a homeowners insurance escrow, and various recording and government fees. The exact mix varies by lender and by state.
Seller concessions and lender credits can reduce what you bring to closing, but they rarely reduce it to zero. On a $400,000 deal with an $8,000 lender credit and $12,000 in seller-paid closing costs, a buyer can still need around $11,000 at closing once you factor in the down payment, prepaid taxes and insurance, and remaining costs. Budget for more than the down payment alone, because many buyers are caught off guard by how much cash they need on closing day.
One more line item didn't exist three years ago: buyer-broker compensation. The NAR settlement that took effect August 17, 2024 decoupled buyer-agent commissions from the listing-side commission.[12] In practice, the seller still pays the buyer's agent in many transactions because that's how it gets negotiated. In Colorado, for example, a standard listing agreement might call for the seller to pay 5%, with 2.5% routed to the buyer's agent, though the buyer's agent may have a separate agreement at a different percentage, and the seller's willingness to honor it is negotiable. Clever's own research shows buyer's agents take home an average of 2.82% of the home's sale price.[13]
What changed is that the negotiation now happens up front, in a written agreement before you tour homes, and the buyer can owe the difference if the seller's offered compensation falls short of what the buyer signed for. Ask your agent how they're structuring their fee before you make an offer.
PMI cancellation: 20% equity, not 20% down
PMI drops off when you reach 20% equity, not when you've paid 20% of the purchase price. The distinction matters because home appreciation counts toward equity.
Under the Homeowners Protection Act, you have the right to request PMI cancellation once your loan-to-value ratio hits 80% (20% equity), based on the home's current value. Your servicer is required to automatically terminate PMI at 78% LTV (22% equity) based on the original amortization schedule.[14] If your home has appreciated since you bought, you can pay for an appraisal and ask your servicer to remove PMI early.
This is one of the biggest differences between conventional PMI and FHA mortgage insurance. For FHA loans originated after June 3, 2013 with less than 10% down, the mortgage insurance premium (MIP) runs for the life of the loan, and the only exit is refinancing into a conventional loan. With 10% or more down, FHA MIP cancels after 11 years.[15] With conventional PMI, the meter eventually stops on its own.
Is a conventional loan right for you?
There is no universal answer. The right loan depends on your credit score, your down payment, your income, the property you're buying, and how long you plan to hold the loan.
The single biggest misconception working against first-time buyers is the 20%-down assumption, as Richardson put it: "The biggest misconception that still persists is that you need 20% down. I've been doing this for 25 years, and I feel like I've been busting the same myth for that time." You don't need 20% down to buy a home with a conventional loan, and you don't need to keep FHA in your back pocket. What you need is to match the loan product to your buyer profile.
Here's how the most common situations line up:
| Your situation | Likely best fit | Why |
|---|---|---|
| First-time buyer, income at or below 80% AMI, 620+ score | HomeReady or Home Possible | 3% down; reduced PMI on HomeReady; AMI-gated |
| First-time buyer or no homeownership in 3+ years, any income, 620+ score | Conventional 97 | 3% down; no income cap |
| Strong credit (740+), 5%+ down, W-2 income | Standard conventional | Best PMI pricing; lowest rate tier |
| Military, veteran, or surviving spouse with entitlement | VA loan | No down payment; no mortgage insurance |
| Rural-eligible buyer, modest income | USDA | Zero down; geographic restriction |
| Credit in the 600s, 3.5% down available | Run both FHA and conventional | FHA may win on monthly cost; conventional may win with DPA help |
| Fixer-upper or bank-owned property with condition issues | See "When a conventional loan isn't the right fit" below | Property condition may disqualify standard conventional |
If your lender has quoted you only a conventional loan and you're a sub-740 borrower with limited cash, ask them to run an FHA scenario too. A lender who can't or won't run both side by side is a signal to get a second quote elsewhere. If you're eligible for more than one loan product, insist on the actual math (or a Loan Estimate) for each one so you can compare them directly.
The other piece worth saying out loud: the perfect loan you'd qualify for in two years usually isn't better than the workable loan you can close on today. Kuclo closes the decision the way it should be closed: "Start with the loan that works for you," he advises. "Then you work towards the loan that would be the most ideal... So having a loan with PMI is not the worst thing in the world because you got the house. The expensive part is getting the house. It's less expensive to refinance down the road into a better loan program."
Conventional vs. FHA, VA, and USDA
Most buyers compare conventional against one government-backed alternative based on their own eligibility. Here are the four side by side, with current 2026 figures:
| Conventional | FHA | VA | USDA | |
|---|---|---|---|---|
| Down payment | 3%–20%+ | 3.5% (580+ score) | 0% | 0% |
| Credit score (typical minimum) | 620 standard; 640–660 common at 3% down | 580 with 3.5% down; 500–579 with 10% down | None set by VA; lender overlays typically 580–640 | 640 typically |
| Mortgage insurance | PMI until 80% LTV; cancellable | Upfront 1.75% MIP + annual MIP; may run for life of loan | None | Annual fee; lower than FHA |
| Loan limit (2026) | $832,750 baseline | $541,287 floor / $1,249,125 ceiling | No limit for veterans with full entitlement | Geographic restriction (rural/suburban) |
| Best for | Strong-credit buyers; buyers who want a PMI exit path | Lower credit, smaller down payment | Veterans, active duty, surviving spouses | Rural buyers with modest income |
The VA does not set a minimum credit score, and it does not impose a loan limit on veterans with full entitlement; the "no VA loan limit" change took effect with the Blue Water Navy Vietnam Veterans Act of 2019.[16] The 2026 FHA limits range from a $541,287 floor in most counties to a $1,249,125 ceiling in high-cost areas. https://www.hud.gov/hud-partners/single-family-lender
If your credit is 740 or higher and you can manage 5% down, conventional usually wins on total cost over the life of the loan. If your credit is in the mid-600s and you're putting down 3.5%, run both FHA and conventional scenarios. FHA may win on monthly cost even after mortgage insurance, and the right answer depends on how long you plan to hold the loan.
When a conventional loan isn't the right fit
Sometimes the loan that fails isn't your fault. The property, the loan size, or the type of housing knocks you out of standard conventional financing, and you have to find another path. The most frustrating version of this hits in the middle of the process, after you've already fallen for the place. As one buyer put it, you can afford to replace a furnace once you're in the home, but you can't perform a repair on a property you don't yet own just so it will qualify for financing. That catch-22 is common when a property has health-and-safety issues a seller won't touch.
Property condition issues
Conventional loan appraisals require the property to be safe, sound, and secure. A broken HVAC system, non-functional plumbing or electrical, structural concerns, or a roof at the end of its life will all trigger a required repair before the loan can close. On a bank-owned or estate property where the seller refuses to make repairs, this can kill a standard conventional deal.
Escrow holdbacks are available in some cases. A lender may hold a portion of the funds in escrow and release them to a contractor after closing, but health-and-safety items are categorically excluded. Holdbacks generally work only for cosmetic or non-essential repairs, and approval is at the lender's discretion.
Renovation loans
If a property needs work that disqualifies it from standard conventional financing, two purpose-built conventional products exist:
- Fannie Mae HomeStyle Renovation loan. Combines purchase and renovation costs in a single loan. The renovation budget can run up to 75% of the post-renovation appraised value.
- Freddie Mac CHOICERenovation loan. A similar structure with slightly different eligibility specifics.
One path that used to work but no longer does for primary residences is a hard-money bridge into a conventional refinance on an owner-occupied home. Smith was clear about this when asked directly: "It's no longer acceptable to go from a hard-money loan for rehab on an owner-occupied property into a conforming loan, whether it's VA or Fannie Mae or whatever. Some time ago, definitely a result of the stupidity in '07–'08, hard money loans became considered predatory. If we're talking about a real estate investor, and we're in a situation where they legitimately are going to convert it into an investment property, which limits us to conventional lending, then that's an option."
In other words, if you're an investor buying a fixer-upper to hold as a rental, the hard-money-then-refinance path still works for non-owner-occupied properties. If you're a primary-residence buyer, you need HomeStyle, CHOICERenovation, or a different loan product entirely.
Other situations where conventional doesn't fit
Loans above your county's conforming limit move you into jumbo territory, with stricter underwriting. Non-warrantable condos (associations with too many investor-owned units, pending litigation, or other Fannie/Freddie disqualifiers) may require a portfolio loan from a lender that holds the loan in-house. Manufactured housing qualifies for conventional financing only if it meets specific HUD and Fannie Mae standards, which many older units don't.
How to get a conventional loan
The process from start to close runs through six phases:
- Check your credit and pull your reports. Know your score before you talk to a lender, and dispute anything inaccurate.
- Gather documents. You'll need two years of W-2s, two years of tax returns, recent pay stubs, two to three months of bank statements, photo ID, and documentation for any large recent deposits or gifts.
- Get pre-approved by at least two or three lenders. Multiple mortgage inquiries within a 14- to 45-day window typically count as a single hit for credit-scoring purposes, so shop freely.
- Submit your application with the lender whose loan best fits your needs.
- Go through underwriting. Expect requests for additional documentation, and respond quickly.
- Receive the clear to close and prepare for closing day.
The rate-shopping piece is where buyers often go wrong. Cohen explains: "Lenders are all within an eighth of a point of each other, so borrowers should not evaluate rates alone. Focus should be on service and how they execute loans. A great rate means nothing if the lender can't close the deal."
Vet the people, not just the rate sheet. Look up your loan officer's NMLS record, search the CFPB consumer complaint database for the lender, and read recent reviews on Google, Zillow, and your state's regulatory site if it has one. Reviews and disciplinary history tell you more about whether a deal will close than a quoted rate ever will.
The other variable buyers underweight is time horizon. Smith puts it directly: "Consumers can be solely focused on 'what's best for our dollars at time of transaction,' and they don't take into account what that's going to look like in a year, or three, or five, or the life of the loan. How long are you going to live here and keep this mortgage?"
Two loans at the same purchase price can have very different lifetime costs depending on whether you'll refinance, sell, or hold for 30 years. If you know you're moving in five years, the math on a permanent rate buydown looks different than if you plan to stay for good. Make sure your lender is running the comparison that matches your actual timeline, not just the snapshot at closing.
See what you might prequalify for with a conventional home loan through Best Interest Financial.
FAQ
Does my earnest money count toward the down payment?
Yes. Your earnest money deposit, the good-faith deposit you make when an offer is accepted, gets credited toward your total cash due at closing. It reduces the amount you bring to the table on closing day, so it's part of your down payment, not an extra expense on top of it. Keep your deposit in a separate account where it's traceable, and never pay it directly to the seller.
Why does my lender require a 640 credit score when I thought the minimum was 620?
Fannie Mae officially removed its minimum credit score requirement in late 2025, but most lenders haven't followed. Lenders sell your loan to investors, and investors often impose stricter rules, called overlays, than what Fannie allows. In practice, most lenders want a 640 to 660 at 3% down and 620 at 5% down. If one lender rejects you, shop others, because the floor varies from one shop to the next.
How long does it take to cancel PMI on a conventional loan?
It depends on appreciation, not just paydown. Under the Homeowners Protection Act, you can request PMI cancellation when your loan-to-value ratio hits 80%, based on the home's current value, which may include market appreciation since you bought. Your servicer is required to automatically terminate PMI when you reach 78% LTV based on your original amortization schedule. In a rising-price market, an appraisal may get you there faster than paydown alone.
What's the difference between a 3%-down conventional loan and an FHA loan?
Both let you put as little as 3% to 3.5% down, but they work differently. Conventional PMI is private and cancellable at 20% equity. FHA charges an upfront fee of about 1.75% of the loan plus annual MIP, and with less than 10% down, FHA insurance runs for the life of the loan. If your credit is 740-plus with 5% down, conventional usually wins; with mid-600s credit, run both.
Can I get a conventional loan on a fixer-upper or bank-owned property?
Sometimes, depending on the property's condition. Standard conventional loans require the property to be safe, sound, and secure. If an appraisal flags health-and-safety issues like a broken furnace, plumbing problems, or structural concerns, the loan won't close until those are resolved. If the seller won't make repairs, look into a Fannie Mae HomeStyle Renovation loan or Freddie Mac CHOICERenovation loan, which bundle purchase and renovation into one loan.
What happens if a lender rejects my conventional loan application?
It doesn't end your shot at financing. Different lenders apply different overlays on top of Fannie Mae's guidelines, so a no from one shop isn't a no from all of them. Get two or three more quotes before accepting the first decision.