What Is a Conventional Loan?

A conventional loan is a mortgage not backed by the government. It follows Fannie Mae and Freddie Mac guidelines, can start at 3% down, and the mortgage insurance drops off once you reach 20% equity. Here is how it works and when it beats an FHA loan.

Get help comparing your loan options and whether conventional fits.

What conventional means: not government-backed

The word "conventional" does not mean ordinary or boring. It means the loan is not insured or guaranteed by a government agency such as FHA, USDA, or VA. No federal backstop, which means the lender carries the risk and sets the rules, and that is exactly why the loan works the way it does for you.

Fannie Mae explains that conventional loans can be fixed-rate or adjustable-rate and may be available with as little as 3% down for eligible borrowers. ^[1] Fannie Mae So the "conventional" label is really about who backs the money, and the practical difference shows up in what it costs you, especially the mortgage insurance.

The guidelines: Fannie Mae and Freddie Mac rules

Conventional loans are commonly delivered to Fannie Mae or Freddie Mac when they meet the applicable underwriting rules. Those two companies buy the loans after closing, which is why their guidelines decide who gets approved.

What the lender checks: your income, employment history, credit, debts, assets, the property, and your ability to repay. There is no single magic formula, but a clean income stream, stable job, and manageable debts go a long way.

Some conventional products are built for first-time and lower-income buyers. Freddie Mac Home Possible offers a 3% down-payment option, flexible funding sources, and income eligibility generally limited to 80% of area median income. ^[3] Freddie Mac Single-Family

Down payment: 3% to 20%

Conventional down payments run from 3% up to 20% or more, and the number you choose drives two things: your monthly payment and whether you carry private mortgage insurance.

On a $300,000 house, 3% down is $9,000, 5% is $15,000, and 20% is $60,000. The more you put down, the smaller the loan, the lower the payment, and the sooner you reach the equity where the mortgage insurance comes off. Many Texas first-time buyers start with 3% to 5% down and treat the PMI as a bridge until their equity grows.

Down payment assistance can also be used with eligible conventional loans. Fannie Mae describes grants and Community Seconds, which are subordinate financing arrangements that may be accepted when they meet the Selling Guide. ^[4] Fannie Mae That is a bigger deal than most buyers realize, because it means conventional is not locked out of DPA. In Texas, TDHCA My Choice Texas Home includes Fannie Mae HFA Preferred and Freddie Mac HFA Advantage options, with current program-specific income, credit, education, and DPA requirements. ^[5] MCTH_Program_Matrix

PMI: what it costs and when it drops off

If your down payment is below 20%, private mortgage insurance is usually required. Fannie Mae says PMI protects the lender against loss and is generally removable once the borrower meets applicable cancellation requirements and reaches the required equity level. ^[2] Fannie Mae

Here is the part that separates conventional from FHA: conventional PMI is built to be temporary. Once your equity hits about 20% of the home's value, you can generally request cancellation, and many loans terminate the coverage on their own around 78% loan-to-value. On a $300,000 loan, that can be $150 to $250 a month that simply disappears from your payment while FHA insurance keeps charging.

The catch: the lower your score, the higher the PMI rate, and at scores under about 680 the monthly conventional insurance can actually cost more than FHA's. The PMI payoff is real, but it is a payoff for a stronger credit profile.

The 2026 conforming limit and what jumbo means

Conventional loans come in two sizes: conforming and jumbo. For 2026, the standard conforming loan limit is $832,750 in most counties, and the same standard applies in San Antonio and Bexar County. Any loan amount above that line is a jumbo loan, which is not bought by Fannie Mae or Freddie Mac, so the rules get stricter.

Most Texas homes in the $300K to $800K range buyers actually shop stay well inside the conforming line. When you push above it, expect a 700-plus credit score, a 10% to 20% down payment, healthy reserves, and slightly higher pricing. If your target house sits near the line, the loan structure matters, and that is exactly the kind of decision we run the numbers on before you make an offer.

Pros, cons, and who it is right for

The pros: PMI that can be canceled at 20% equity, 3% down programs for eligible buyers, DPA compatibility in Texas, no upfront mortgage insurance premium, and more property-type flexibility than government loans in many cases.

The cons: stricter credit expectations than FHA, a higher down payment than FHA's 3.5% at the most common tiers, mortgage insurance that costs more than FHA's when your score is below about 680, and conforming limits that force a jumbo loan once you pass the line.

Who it is right for: buyers with 620-plus credit who want the long-term payoff of cancellable mortgage insurance, first-time buyers on the 3% down programs, anyone staying in the home 7 to 10 years, and borrowers pairing conventional with Texas DPA. A conventional loan is not automatically better than FHA, so compare mortgage insurance, credit pricing, cash needed, assistance terms, and the total monthly payment before you pick.

Watch Patrick break down the conventional loan

This is the video I send buyers who want to see the conventional case and the FHA comparison in plain English, the same way we talk at the kitchen table.