What Is a Conventional Loan?
A conventional loan is a mortgage not insured or guaranteed by a government agency. Most conventional loans are "conforming," meaning they follow guidelines set by Fannie Mae or Freddie Mac and fall within conforming loan limits. Conventional loans are the most common mortgage type in the U.S. and are available for primary residences, second homes, and investment properties.
For buyers with strong credit and a stable income, conventional loans often offer better long-term value than FHA loans — particularly because private mortgage insurance (PMI) can be removed once you reach 20% equity.
Conventional Loan Requirements
- Minimum credit score typically 620 or higher (higher scores qualify for better rates)
- Down payment as low as 3% for certain first-time buyer programs
- Debt-to-income ratio generally up to 45–50% depending on the loan profile
- 2 years of employment history preferred; self-employed borrowers have additional documentation requirements
- Loan must be at or below conforming loan limits (which are higher in high-cost California counties)
- Property appraisal required; fewer property condition restrictions than FHA or VA
Low Down Payment Options: HomeReady and Home Possible
Many buyers are surprised to learn that conventional loans do not require 20% down. Some conventional loan programs allow as little as 3% down, including programs like HomeReady (Fannie Mae) and Home Possible (Freddie Mac).
HomeReady® (Fannie Mae)
Designed for low-to-moderate income buyers, HomeReady allows 3% down, permits income from a boarder or co-borrower who does not live in the home to be counted, and offers reduced mortgage insurance rates compared to standard PMI. Buyers must complete a short homebuyer education course.
Home Possible® (Freddie Mac)
Home Possible also allows 3% down for qualified buyers and offers flexible income sources and reduced MI pricing. It is well-suited for first-time buyers and low-to-moderate income households in areas like Southern California.
Both programs require the property to be a primary residence and have income limits that vary by location. In many Southern California zip codes, income limits are higher than national averages due to area median income adjustments.
Private Mortgage Insurance (PMI)
If your down payment is less than 20%, PMI is typically required on conventional loans. Unlike FHA mortgage insurance, PMI on a conventional loan can be removed once you reach 20% equity — either through paying down the loan balance or through home appreciation.
- PMI can be canceled when your loan-to-value ratio reaches 80%
- Lenders are required to automatically cancel PMI when the LTV reaches 78%
- PMI rates vary based on credit score, down payment, and lender
- Some lenders offer "lender-paid PMI" options at a slightly higher interest rate
Available for Multiple Property Types
One of the key advantages of conventional loans is flexibility in property type:
- Primary residences — typically the lowest rates and most flexible terms
- Second homes / vacation properties — available with higher down payment requirements
- Investment properties — available with higher down payments and slightly higher rates
- Condos and PUDs — eligible with standard approvals; warrantable condo requirements apply
Pros and Cons
Advantages
- PMI removable once 20% equity reached
- Available for investment & second homes
- No upfront mortgage insurance premium
- 3% down via HomeReady / Home Possible
- Fewer property condition restrictions
Considerations
- Stricter credit requirements than FHA
- Higher credit score needed for best rates
- Low down payment programs have income limits
- Higher rates for investment properties