What is a conventional mortgage?
A conventional mortgage is a home loan that is not insured or guaranteed by a government housing agency such as FHA or VA. Most conventional loans follow Fannie Mae or Freddie Mac guidelines, although some lenders also offer conventional programs with their own requirements. Conventional financing is commonly used for primary homes, second homes, and investment properties.
Where conventional financing can fit
Conventional financing can work for many different types of residential purchases and refinances. Depending on the program and the borrower’s qualifications, it may be available for a primary residence, second home, investment property, single-family home, condominium, or certain multi-unit properties.
Down payment and mortgage insurance
The amount you need to put down depends on the type of property, how you plan to use it, the loan amount, your credit profile, and the specific loan program. If your down payment is less than 20%, private mortgage insurance (PMI) may be required. PMI adds to the monthly payment, and the cost can vary based on the loan structure and borrower profile. That’s why it is important to compare the full monthly payment and cash to close—not just the interest rate.
What I compare with borrowers
- Property type and occupancy
- Borrower profile, income, assets, and overall qualifications
- Conventional versus FHA, VA, or other available alternatives
- Interest rate and points
- Mortgage insurance structure and potential removal
- Monthly payment
- Cash needed to close
- How the loan fits the borrower’s expected time in the property
The goal
Conventional financing can be an excellent option for the right borrower and transaction. The goal is to compare the rate, payment, mortgage insurance, cash to close, and overall loan structure against other available options, such as FHA or Non-QM financing, so you can see which one makes the most sense.
Common Questions
Do I need 20% down for a conventional loan?
No. Many conventional loans allow down payments below 20%, including 5%, 10%, or 15%. Some programs may allow as little as 3% down for eligible borrowers, but those options can be subject to income limits and other requirements that may make them difficult to use in higher-priced areas. If you put less than 20% down, private mortgage insurance (PMI) is generally required. The amount that makes sense depends on the loan amount, qualifying debt-to-income ratio, available funds, credit profile, and overall loan structure.
Can PMI be removed after I purchase the home?
In many cases, yes. Private mortgage insurance may be removed after purchase once certain loan-to-value, payment history, and other requirements are met. The exact process can depend on the loan, servicer, current property value, and applicable guidelines.
Is conventional always better than FHA?
No. Conventional and FHA each have strengths depending on the borrower and transaction. Conventional may offer advantages with mortgage insurance, property type, or overall loan structure, while FHA can sometimes offer more favorable pricing or more flexible qualifying guidelines. I compare the full payment, mortgage insurance, cash to close, credit profile, and property details rather than assuming one is automatically better.
Can conventional financing be used for investment property?
In many instances, yes. Conventional financing can be used for eligible investment properties, but the down payment, reserve requirements, pricing, and qualifying guidelines are typically different from an owner-occupied purchase. The property type and number of financed properties can also affect the available options.
Can I use gift funds with a conventional loan?
In many cases, yes. Gift funds from an eligible donor may be used toward the down payment and/or closing costs, depending on the occupancy, loan program, and transaction. The source of the gift and documentation requirements will need to meet the applicable guidelines.
Can conventional financing be used for a condo?
Yes. Conventional financing can be used for eligible condominium purchases and refinances, but both the borrower and the condo project may need to meet applicable guidelines. HOA finances, insurance, ownership concentration, litigation, and other project factors can affect eligibility.