What Is a Conventional Loan? The Loan Type Most Buyers Use
A conventional loan is one of the most common mortgage options available. It follows the guidelines created by Fannie Mae and Freddie Mac. Because these programs have clear standards for credit, income, and debt-to-income ratios, they often offer competitive interest rates and predictable terms.
For borrowers who earn a steady paycheck, qualifying can be straightforward. Lenders review W-2s, pay stubs, and tax returns to verify income and determine what you qualify for. These loans must also fit within the conforming loan limits, which adjust every year and are higher in many coastal areas of Southern California.
One of the reasons conventional loans are so popular is their flexibility. They can be used for a primary residence, a second home, or an investment property. Down payments can begin as low as 3%, and buyers with stronger credit or higher down payments often receive the most favorable pricing.
For many people, a conventional loan is the simplest path to homeownership. But for self-employed buyers whose tax returns do not reflect their full income, traditional guidelines can feel restrictive. When that happens, alternative financing options, such as a bank statement loan, may be a better fit.
Frequently Asked Questions About Conventional Loans:
What credit score is needed?
Most lenders look for a score of 620 or higher. Buyers with scores in the 700s often receive the most competitive pricing.
How much do I need for a down payment?
Some programs allow as little as three percent down. Many buyers choose five to twenty percent depending on their comfort level and long-term plans. A twenty percent down payment removes private mortgage insurance.
Do conventional loans require mortgage insurance?
Only if your down payment is below twenty percent. The advantage is that mortgage insurance can be removed once you reach twenty percent equity through payments or appreciation.
What are the main benefits of a conventional loan?
They often come with competitive rates, lower long-term costs, and the ability to remove mortgage insurance. They also offer flexibility for investment properties and follow predictable guidelines.
What is the loan limit and why does it matter?
Loan limits change each year and vary by county. High-value areas have higher limits, which helps buyers stay within conventional pricing instead of moving into jumbo loan territory.
How does a conventional loan compare to FHA?
Conventional financing often benefits buyers with stronger credit and stable income. FHA loans can be helpful for those with lower credit scores or higher debt-to-income ratios.
Can self-employed buyers qualify for a conventional loan?
Yes. Lenders usually require two years of tax returns showing consistent income. Because many business owners write off expenses, some choose to explore bank statement loans when taxable income appears lower on paper.
How long does approval take?
If the file is complete, many lenders can approve the loan within twenty-four to seventy-two hours. Timing can vary based on the lender and how quickly documents are provided.
What debt-to-income ratio do lenders prefer?
Most lenders prefer a ratio around forty-five percent or below, although strong buyers may qualify with a slightly higher percentage.
Can I use a conventional loan to buy an investment property?
Yes. These loans can be used for investment properties, often requiring fifteen to twenty-five percent down depending on the program.
What documents are needed?
Most borrowers will provide W-2s, pay stubs, tax returns, bank statements, identification, and proof of funds to close.
Is a conventional loan good for first-time buyers?
Yes. Many first-time buyers choose conventional financing because it offers flexible down-payment options, competitive pricing, and the ability to remove mortgage insurance once equity builds.
Understanding your loan options is an important part of the homebuying process. If you would like guidance, my husband, Josh, and I are here to help you navigate your choices. We can also introduce you to our in-house lender at Circa Properties, who can provide tailored insight and answer any questions about financing.
Contact us HERE or give us a call at (424) 212-3859.
Best regards,
Lindsay Woolf | CA DRE #02236711
Josh Woolf | CA DRE #02252408
Circa Properties | CA DRE #02182130
Disclaimer: The information in this blog post is provided for general informational purposes only and does not constitute legal, financial, or lending advice. Real estate transactions and loan programs can vary based on individual circumstances and local regulations. For guidance related to your specific situation, please consult the appropriate licensed professional.
