Conventional loans: how they work and who they fit best

What is a conventional loan?

A conventional loan is a mortgage that is not insured or guaranteed by the government. That means it is not an FHA, VA or USDA loan.

Most conventional loans follow the rules of Fannie Mae or Freddie Mac. These two companies buy mortgages from lenders. Loans that meet their rules are called conforming loans. They also have to stay under the loan limits set each year by the Federal Housing Finance Agency (FHFA).

Why does this matter to you? When I call a loan “conventional,” I mean it has to pass Fannie Mae's or Freddie Mac's rulebook. It usually has to pass their computer underwriting system too. Those rules are public and detailed. I'd rather you understand them up front than be surprised later.

What are the 2026 conforming loan limits?

For 2026, FHFA set the baseline limit for a one-unit home at $832,750. In high-cost areas, the ceiling is $1,249,125. Higher limits by law apply in Alaska, Hawaii, Guam and the U.S. Virgin Islands.

Every county in Georgia is at the baseline for 2026. For Alabama and Florida, check your county on FHFA's lookup tool, because a few areas around the country have higher limits.

These limits are for the contiguous states, DC and Puerto Rico, per Fannie Mae and FHFA. A loan bigger than your county's limit is a jumbo loan, which follows a different set of rules.

How does a conventional loan work, from application to closing?

1. Application and credit. I pull a tri-merge credit report (your report from all three credit bureaus). I also gather your income, savings and housing details. Most of the real decisions happen here.
2. Automated underwriting. Your file runs through Fannie Mae's Desktop Underwriter (DU) or Freddie Mac's Loan Product Advisor (LPA). These are computer systems that check if the loan is eligible. They also list exactly which documents the underwriter will need.
3. Documents and verification. This means pay stubs, W-2s, tax returns when needed, bank statements, and a check with your employer. The system sets this list, so it may be shorter or longer depending on your situation.
4. Home value. Usually this is a full appraisal. On some loans, the system offers an option other than a traditional appraisal. The system decides that, not me.
5. Underwriting and conditions. A person (the underwriter) reviews everything against the system's findings and Fannie Mae's Selling Guide. Then they list any remaining items needed, called conditions.
6. Clear to close and closing. In Georgia, a closing attorney conducts your closing, and the attorney's firm handles title and the entire closing. In Alabama and Florida, closings follow those states' customs.

Here is the biggest mistake I see: people think “approved” happens once. It doesn't. The system's answer can change if anything in your file changes. That includes a new credit check, a new car payment, or a large deposit you can't explain. Keeping things steady until closing is part of getting approved.

Who is a conventional loan best for?

• Buyers with good credit and income they can document. Conventional pricing and mortgage insurance reward strong credit more than FHA does.
• Buyers who want mortgage insurance that goes away. Conventional PMI can be cancelled. In many cases, FHA's yearly premium cannot.
• Second home and rental property buyers. FHA and VA are for homes you will live in. Conventional lets you finance a lake house or a rental.
• Condo buyers in buildings that meet Fannie or Freddie standards. The condo project is reviewed on its own, so I always ask about the HOA early.
• Homeowners with equity who want to refinance. Both rate-and-term (a new rate or term) and cash-out refinances are available within the agencies' limits.
• Buyers who want the most flexibility on the home. Conventional loans don't have the government property standards that FHA and VA appraisals check. The home still has to be good security for the loan.

How do you qualify for a conventional loan?

What credit score do you need for a conventional loan?

This rule changed recently, and many websites haven't caught up. For loan files created on or after November 16, 2025, Fannie Mae no longer requires a minimum credit score for loans run through Desktop Underwriter. DU now judges credit with its own full risk review.

For manually underwritten Fannie Mae loans (reviewed by a person instead of the system), the minimum is still 620 for fixed-rate loans and 640 for ARMs (adjustable-rate mortgages), per Selling Guide B3-5.1-01. Freddie Mac has its own rules. Many lenders also add their own extra minimums, called overlays.

What I tell my clients: no hard minimum does not mean credit stopped mattering. Your score still affects your pricing and your mortgage insurance cost. A thin or damaged credit file is still harder to get through DU. The change mostly helps people who were just under a cutoff but strong everywhere else.

What debt-to-income ratio do you need?

Your DTI (debt-to-income ratio) shows how much of your monthly income goes to debt payments, including your new house payment. It uses your gross income, meaning before taxes.

Under Fannie Mae's Selling Guide (B3-6-02), the maximum DTI for DU loans is 50 percent. For manually underwritten loans it is 36 percent. It can go up to 45 percent if you meet the credit score and reserve (savings left after closing) requirements in Fannie Mae's Eligibility Matrix.

Getting approved at a high ratio is not the same as being comfortable at it. I'll show you the guideline limit. Then we'll talk about where your budget actually wants to be. Our affordability calculator is a good place to start.

Does your income need to be steady?

Yes. Underwriters care whether your income is steady and likely to continue, not just how much it is. A salary is the simplest. Overtime, bonus and commission usually need a history.

Self-employed income is reviewed under Fannie Mae's self-employment rules (B3-3.5-01) and usually needs tax returns. Rental income is covered in B3-3.8-01 and B3-3.8-02. If your income has moving parts, the sooner I see it, the better I can set up your loan. If you're self-employed, also read my page on self-employed mortgages.

How long after bankruptcy or foreclosure can you get a conventional loan?

Conventional loans have longer waiting periods after a major credit event than FHA or VA. Here are the rules from Fannie Mae's Selling Guide (B3-5.3-07). “Extenuating circumstances” means a one-time event outside your control, like a serious illness or job loss, that you can document.

If you're inside one of these windows, you may still be able to buy. FHA or VA may be the better path for now, with a conventional refinance later.

What documents do I need for a conventional loan?

• Recent pay stubs and W-2s for the time period the system asks for
• Federal tax returns, when required (for self-employment, rental income and some other income types)
• Recent bank and investment statements, all pages
• An explanation and proof of where large deposits came from, if they aren't paychecks
• A gift letter and paperwork from the giver if family is helping with money to close
• Divorce decree or child support order, if it applies to you
• Homeowners insurance details before closing, plus HOA details for condos and many townhomes

The system sets the final list. I don't ask for paperwork just to ask. If something here doesn't apply to you, I won't ask for it.

How much do I need for a down payment on a conventional loan?

Conventional loans offer low down payment options for qualified buyers. Fannie Mae and Freddie Mac also have lower-cost programs called HomeReady and Home Possible. These have income limits based on the area's median income.

But a better question than “what's the least I can put down?” is “what changes at each down payment level?”

On a conventional loan, your down payment affects three things: whether you need mortgage insurance, what it costs, and how your loan is priced. Your equity also affects your refinance options later. Use the down payment calculator to compare options side by side. I'll help you weigh keeping cash in savings against putting more down.

Gift money from family is generally allowed when it's properly documented. The seller can also pay some of your closing costs (called interested party contributions), within limits based on how you'll use the home and your loan-to-value (your loan amount compared to the home's value).

What is PMI and how do you get rid of it?

When a conventional loan needs mortgage insurance, it's private mortgage insurance (PMI). PMI protects the lender, and it comes from a private company, not the government. You can pay it monthly, all at once at closing, or through a setup where the lender pays it. Each option has trade-offs. The right one depends on how long you expect to keep the loan.

How does PMI come off?

• When you ask, at 80 percent. Under the federal Homeowners Protection Act, you can ask your servicer (the company you send payments to) in writing to cancel PMI. You can do this when your loan balance is scheduled to reach 80 percent of the home's original value, or sooner if extra payments get you there. You must be current on payments and have no second loans on the home. You may need to show the home's value hasn't dropped.
• Automatically, at 78 percent. The servicer generally must end PMI when your scheduled balance reaches 78 percent of the original value, if you're current.
• At the halfway point. PMI must end the month after you reach the middle of your loan's payment schedule, if you're current.
• Based on a new value. Fannie Mae's Servicing Guide (B-8.1-04) also allows removal based on your home's current value for a home you live in. This is generally at 75 percent loan-to-value after two to five years, or 80 percent after five years, with on-time payments. Rules vary by investor, so ask your servicer which rules apply to your loan.

What are the benefits of a conventional loan?

• Mortgage insurance that can come off. For many buyers, this is the biggest long-term advantage over FHA.
• Works for any type of home use. The home you live in, a second home, or a rental property.
• Higher loan limits than FHA in most counties. In baseline counties, the conforming limit is well above FHA's lowest limit.
• No upfront government fee. FHA has an upfront mortgage insurance premium (MIP). VA has a funding fee for veterans who aren't exempt. Conventional has neither.
• Flexible options. Fixed and adjustable terms, plus options like a seller-paid temporary buydown (a lower payment for the first year or two). See the buydown calculator.

What are the downsides of a conventional loan?

• Credit affects the cost more. If your scores are lower, FHA may cost less overall, even with FHA's mortgage insurance.
• Longer waits after bankruptcy or foreclosure. See the table above.
• Condo project review. Some condo buildings don't meet agency standards. That can push a buyer to a different loan.
• Loan limits. Above your county's conforming limit, you need a jumbo loan.
• Lender overlays. Lenders can add their own rules on top of Fannie and Freddie's. The agency rule is the minimum, not always the final word.

Conventional vs. FHA vs. VA vs. jumbo: which is better?

Run your own numbers with the mortgage payment calculator, or read more in the mortgage FAQ.

Common questions about conventional loans

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