What is a Conventional Loan?
A conventional loan is any mortgage that is not insured or guaranteed by a government agency (FHA, VA, or USDA). Conventional loans are the most common mortgage type, accounting for roughly 70% of all home purchase mortgages. They are originated by private lenders and may be sold to Fannie Mae or Freddie Mac on the secondary market.
Conventional loans come in two categories: conforming loans that meet Fannie Mae/Freddie Mac guidelines (including loan amount limits), and non-conforming loans that exceed those limits (jumbo loans) or do not meet other guideline requirements.
Conventional loan requirements
- Down payment: 3% minimum for first-time buyers, 5% typical, 15-25% for investment properties
- Credit score: 620 minimum, with better rates at 740+
- DTI ratio: Generally 45% maximum, up to 50% with strong compensating factors
- PMI: Required below 20% down, removable at 80% LTV
- Conforming limit (2026): $766,550 for most areas, higher in designated high-cost areas
Conventional vs. government loans
Conventional loans offer more flexibility for investors. Unlike FHA and VA loans, conventional financing is available for investment properties (non-owner-occupied) with 15-25% down. There is no upfront mortgage insurance premium. PMI can be removed once equity reaches 20%, unlike FHA MIP which persists for the life of the loan. However, qualification requirements are stricter: higher credit scores, larger down payments, and lower DTI ratios compared to government programs.
Conventional loans and investors
Most rental property investors use conventional loans. Fannie Mae and Freddie Mac allow up to 10 financed properties per borrower, though requirements tighten after 4 properties (higher reserves, higher down payment). Interest rates on investment properties are typically 0.5-0.75% higher than owner-occupied rates, and down payments start at 15% for single-family and 25% for 2-4 units.
For wholesalers, understanding conventional financing helps you evaluate which properties will appeal to financed buyers. Properties that need significant work may not appraise or meet lender condition requirements, limiting your buyer pool to cash buyers and hard money borrowers.