Conventional Financing: What to Know

When most people think about getting a mortgage, they’re often thinking about conventional financing—even if they don’t know it by name.

Conventional loans are one of the most common ways to finance a home, and for many buyers, they offer a great combination of flexibility, competitive interest rates, and multiple down payment options.

But conventional financing isn’t necessarily one-size-fits-all. Understanding how it works—and how lenders evaluate your application—can help you decide whether it’s the right mortgage for you.

What Is a Conventional Mortgage?

A conventional mortgage is a home loan that is not insured or guaranteed by a government agency such as the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), or U.S. Department of Agriculture (USDA).

Many conventional mortgages follow guidelines established by Fannie Mae and Freddie Mac, which purchase mortgages from lenders in the secondary mortgage market.

Because there is no government insurance protecting the lender, conventional financing tends to place more emphasis on the borrower’s overall financial profile.

That doesn’t mean you need perfect credit or a huge down payment to qualify.

How Much Do You Need for a Down Payment?

One of the biggest misconceptions about conventional financing is that you need 20% down.

You don’t.

Depending on the loan program and borrower qualifications, some conventional loans may allow down payments as low as 3%.

Putting 20% down does have an important advantage: you can generally avoid private mortgage insurance, commonly called PMI.

But waiting until you’ve saved 20% isn’t always the best financial decision. For some buyers, purchasing sooner with a smaller down payment may make more sense.

What Is PMI?

Private mortgage insurance protects the lender when a borrower makes a smaller down payment.

With conventional financing, PMI is typically required when the loan-to-value ratio is greater than 80%.

The cost isn’t the same for everyone. Factors such as your credit profile, down payment, loan amount, and other characteristics can affect the price.

One advantage of conventional financing is that PMI doesn’t necessarily remain on the loan forever. Depending on the circumstances and applicable requirements, borrowers may eventually be able to have it removed as they build sufficient equity.

What Credit Score Do You Need for a Conventional Loan?

Conventional loans generally require stronger credit than some government-backed mortgage programs, but you don’t need perfect credit.

A 620 credit score is commonly considered the minimum starting point for many conventional loan scenarios, although meeting a minimum score doesn’t automatically mean a borrower will qualify.

Credit score can also affect more than approval.

A stronger credit profile may help you qualify for better pricing, lower mortgage insurance costs, or more favorable financing terms.

That’s why I look at more than whether someone technically qualifies. Sometimes improving a borrower’s financial profile before applying can make a meaningful difference in the overall cost of the mortgage.

How Much Debt Can You Have?

Lenders use your debt-to-income ratio (DTI) to compare your monthly debt obligations with your qualifying monthly income.

Your DTI may include expenses such as:

• Your proposed mortgage payment

• Property taxes and homeowners insurance

• HOA dues, when applicable

• Car loans

• Student loans

• Credit card payments

• Other qualifying monthly obligations

There isn’t one DTI percentage that works for every conventional borrower.

Automated underwriting systems evaluate multiple pieces of the application together, including credit, income, assets, reserves, loan-to-value ratio and overall risk.

This is one reason two borrowers with similar incomes can receive very different financing results.

Conventional Financing for First-Time Homebuyers

Conventional financing can be an excellent option for first-time homebuyers.

Certain programs are specifically designed to make homeownership more accessible and may offer lower down payment requirements or other benefits for eligible borrowers.

And being a “first-time homebuyer” doesn’t always mean you’ve never owned a home in your life. Depending on the program, someone who hasn’t had an ownership interest in a principal residence during the previous three years may qualify as a first-time buyer.

Conventional vs. FHA Financing

I often get asked whether conventional or FHA financing is “better.”

The answer depends on the borrower.

A buyer with strong credit and a solid financial profile may find conventional financing more attractive. Another buyer may benefit significantly from FHA’s more flexible qualification guidelines.

The important thing is to compare the entire loan, not just the interest rate.

That includes the down payment, monthly mortgage insurance, upfront costs, estimated payment, cash needed at closing and long-term cost of the financing.

Can Self-Employed Borrowers Get Conventional Financing?

Absolutely—but documenting income can be more complicated.

Conventional underwriting generally evaluates qualifying income rather than simply looking at how much money comes into your business.

Tax returns, business structure, ownership percentage, length of self-employment, business expenses and income trends can all become important.

This is an area where reviewing the loan before you’re under contract can make a major difference.

A borrower can have excellent credit, significant money in the bank and a successful business and still run into problems if their income isn’t calculated correctly under conventional underwriting guidelines.

What Properties Can You Finance Conventionally?

Conventional financing can potentially be used for more than a traditional primary residence.

Depending on the transaction and borrower qualifications, conventional financing may be available for:

• Primary residences

• Second homes

• Investment properties

• Single-family homes

• Condominiums

• Townhomes

• Eligible multi-unit properties

• Certain manufactured homes

The down payment and underwriting requirements can vary considerably depending on how the property will be used.

Is Conventional Financing Right for You?

Conventional financing is popular for a reason. It can provide competitive rates, flexible property options, multiple down payment choices and the potential to eliminate mortgage insurance.

But choosing a mortgage shouldn’t start with picking a loan program.

It should start with understanding you.

Your income, credit, assets, debts, property, long-term plans and even how you earn your money can affect which mortgage makes the most sense.

At Legend Lending, we don’t believe every mortgage fits in a box.

I’m based in The Woodlands, Texas, and I work with homebuyers, homeowners, real estate investors and self-employed borrowers to evaluate their options and structure financing around their individual circumstances.

Whether you’re purchasing your first home, moving into your next one, buying an investment property or simply trying to figure out which mortgage program makes the most sense, the best place to start is with a conversation.