Conventional Loans

How Conventional Loans Work

At NEXA Mortgage, we want to help you understand how a conventional mortgage loan works. Unlike FHA or other government-backed loans, conventional loans are not insured by the federal government. Instead, they follow guidelines set by Fannie Mae and Freddie Mac and are issued by private lenders. Because they are not government-insured, conventional loans often have stricter qualification requirements but offer more flexibility in terms of loan amounts, property types, and mortgage insurance options. Our role is to help you qualify for a conventional mortgage and structure your loan to best suit your financial needs.

Conventional Loan Benefits

Conventional loans are one of the most popular mortgage options because they offer flexibility, competitive rates, and various financing options. Below are some of the key benefits of a conventional mortgage:

More Loan Options – Conventional loans come in fixed-rate, adjustable-rate, and jumbo loan varieties, offering flexibility based on your financial goals.

No Upfront Mortgage Insurance – Unlike FHA loans, conventional loans do not require an upfront mortgage insurance premium (UFMIP), which can save you money at closing.

No Mortgage Insurance with 20% Down – If you put down 20% or more, private mortgage insurance (PMI) is not required, reducing your monthly payment.

Lower Overall Loan Costs – While FHA loans have mortgage insurance for the life of the loan (unless refinanced), conventional loans allow PMI to be removed once you reach 20% home equity.

Higher Loan Limits – In 2024, the baseline loan limit for a conventional loan is $766,550, with higher limits in high-cost areas, making it a great option for buyers looking for more expensive homes.

More Property Choices – Unlike government-backed loans, conventional loans allow financing for second homes, vacation homes, and investment properties.

Stronger Credit, Better Rates – With a higher credit score, borrowers can access lower interest rates and better loan terms than with FHA or other government-backed loans.

Conventional Loan Checklist

Employment Information

Past two years of completed tax returns
Past two years of W-2s, 1099s, or other income statements
One month of the most recent pay stubs
Self-employed borrowers: Three years of tax returns and a year-to-date Profit & Loss Statement

Savings & Asset Information

Past three months of full bank statements for all checking and savings accounts
Most recent statements from investment accounts (retirement, 401(k), mutual funds, stocks, etc.)

Personal Information

Driver’s License or official state identification
Social Security Card
Any divorce, alimony, or child support documents (if applicable)
Green card or work permit (if applicable for non-U.S. citizens)

Conventional Loan Checklist

General Questions

What is a conventional loan?

A conventional loan is a mortgage that is not insured or guaranteed by a government agency (such as FHA, VA, or USDA). It is backed by private lenders and typically follows guidelines set by Fannie Mae and Freddie Mac.

Who qualifies for a conventional loan?

Borrowers with stable income, good credit, and a reasonable debt-to-income ratio (DTI) can qualify. Conventional loans often require higher credit scores and down payments than government-backed loans.

What is the minimum credit score required for a conventional loan?

Most lenders require a minimum credit score of 620, but a higher score (typically 740+) can help secure better interest rates and terms.

How much is the down payment for a conventional loan?

First-time homebuyers may qualify for a 3% down payment through certain programs.

Most buyers put down 5% – 20% depending on their financial situation.

If you put down less than 20%, private mortgage insurance (PMI) is required.

Can I use gift funds for the down payment?

Yes, gift funds from family members or approved sources can be used, but lenders may require documentation showing the money is a gift, not a loan.

Loan Limits & Property Requirements

What are the loan limits for conventional loans?

Conventional loan limits are set annually by the Federal Housing Finance Agency (FHFA).

In 2024, the baseline loan limit is $766,550 in most areas, but high-cost areas may have higher limits.

What types of properties can I buy with a conventional loan?

Primary residences (single-family homes, condos, multi-unit homes)

Second homes/vacation homes

Investment properties

Does the home have to meet specific requirements?

Unlike FHA loans, conventional loans have more flexibility regarding property condition, but the home must still meet lender requirements for safety, habitability, and value.

Mortgage Insurance & Costs

Do conventional loans require mortgage insurance?

If you put down less than 20%, private mortgage insurance (PMI) is required.

PMI can be removed once you reach 20% equity or automatically cancels at 22% equity based on the original loan amount.

What are the closing costs for a conventional loan?

Closing costs typically range from 2% to 5% of the loan amount and include lender fees, title fees, appraisal costs, and prepaid taxes/insurance.

Income & Debt Considerations

What is the maximum debt-to-income (DTI) ratio for a conventional loan?

Most lenders allow a DTI up to 45%.

In some cases, DTI up to 50% is allowed with strong compensating factors, such as high credit scores or large cash reserves.

Are there income limits for conventional loans?

Standard conventional loans do not have income limits.

Some 3% down programs (like HomeReady® and Home Possible®) have income restrictions based on the area.

Refinancing & Special Programs

Can I refinance a conventional loan?

Yes, borrowers can refinance to lower their rate, shorten their loan term, or take cash out. Common options include:

Rate-and-term refinance (to reduce monthly payments or loan term)

Cash-out refinance (to access home equity)

Are there special programs for first-time homebuyers?

Yes, Fannie Mae and Freddie Mac offer 3% down programs like HomeReady® and Home Possible®, which provide low down payments and reduced PMI costs for eligible first-time buyers.

Can I use a conventional loan for an investment property?

Yes! Conventional loans are one of the few mortgage options that allow you to finance investment properties and second homes, but they may require a higher down payment (15%–25%) and stricter credit requirements.

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The information provided on this website is for general informational purposes only and does not constitute financial, legal, or mortgage advice. Conventional loan guidelines, eligibility requirements, and mortgage insurance policies are subject to change based on federal regulations and lender policies. Loan approval is not guaranteed and is subject to credit approval, verification of income and assets, and property eligibility. NEXA Mortgage is not acting on behalf of or at the direction of Fannie Mae, Freddie Mac, or any government agency. Borrowers are encouraged to consult with a licensed mortgage professional to discuss their specific financial situation and loan options. For the most up-to-date conventional loan requirements and limits, please visit the Federal Housing Finance Agency (FHFA) website.