2026 Conventional Loan: Do You Qualify? (Full Breakdown)

Conventional Loan Highlights

📊 Most popular loan type - over 60% of all mortgage applications

💰 3% down payment available (not just 20%)

✂️ PMI drops off once you reach 20% equity

🏡 Primary residence, second home, or investment property

📋 No credit score minimum

What is a Conventional Loan?

Example checkbox

A loan ~~not backed by a government agency~~ (unlike FHA, VA, or USDA)

Follows guidelines set by Fannie Mae and Freddie Mac

Offered by banks, credit unions, and mortgage lenders

How AUS and dual AUS works

"Conforming" loans stay within loan limits; "non-conforming" (jumbo) exceed them

Minimum Down Payment

Property Type	Units	Minimum Down Payment
Primary Residence	1 Unit	3% - 5% (high cost; second time)
ㅤ	2-4 Units	5%
Second Home	1 Unit	10%
Investment	1 Unit	15%
Investment	2-4 Units	25%

20% down = no PMI

You can always put more down than the minimum

Conventional loans become cheaper with better credit and higher down payments

🏡 Ready To Start Your Home Buying Journey?

My team helps buyers in 49 states get pre-approved (everywhere except New York).

Here's what makes working with us different:

💳 Soft credit pull - Get pre-approved without impacting your credit score

🎯 Expert guidance - We specialize in helping first-time buyers navigate the process

⚡ Fast turnaround - Get your pre-approval and start house hunting

👉 Get pre-approved today: winthehouseyoulove.com

Pros and Cons

Pros	Cons
Preferred by sellers & realtors	Higher credit score requirements
Lower mortgage insurance (MI) with good credit	Stricter debt-to-income ratios
No upfront mortgage insurance fee	Typically higher rates than FHA (with lower credit)
MI drops off automatically at 78% LTV	Higher down payments on multi-units and investments
Higher loan limits	Less flexible credit guidelines

HomeReady & HomePossible

These are special conventional loan programs for moderate-income buyers — and they're often the best deal available.

Key Benefits

✅ 3% down payment

✅ Lower PMI rates than standard conventional

✅ No first-time buyer requirement

Income Limits

80% of Area Median Income (AMI) for the property location

Use Fannie Mae or Freddie Mac lookup tools to check your area

Closing Costs & Seller Credits

Typical Closing Costs

Same as all other types of loans

Lender fees

Appraisal

Title

Recording

Transfer taxes

Property taxes (escrow)

Insurance (escrow)

2% - 5% of the purchase price

Seller Credit Limits

Down Payment	Max Seller Credit
Less than 10%	3% of purchase price
10% - 24.99%	6% of purchase price
25%+	9% of purchase price
Investment property	2% of purchase price

$425k house with 5% down → $12,750 max credit

Proof of Funds

2 months of bank statements

No cash on hand

Crypto must be liquidated to USD

Vested stock options

Non-payroll large deposits can be checked

Where Can The Money Come From?

✅ Income from job (savings, tax return, etc)	❌ Personal loans
✅ Gift from family	❌ Unsourced money
✅ Stocks/bonds	❌ Credit cards
✅ Retirement account loan or withdraw	❌ Cash
✅ Documentable windfall (inheritance, settlement)	ㅤ

Gift Funds for Down Payment

Yes, you can use gift money for your down payment and closing costs.

Who Can Gift?

✅ Family members - parents, siblings, grandparents, aunts/uncles

✅ Non family members - fiancé, domestic partner, former relative, godparent

Requirements

Gift letter stating it's a gift, not a loan

Paper trail showing the transfer

No repayment expected

How Credit Score Affects Your Rate

2+ year credit history works best

No credit score can work

Your credit score can mean thousands of dollars in savings - or extra costs - over the life of your loan.

Credit Score	Estimated Rate Impact @ 5% Down
780	Best
760	+0.13%
740	+0.16%
720	+0.22%
700	+0.28%
660	+0.34%
640	+0.40%
620	+0.56%
Below 620	Allowed

Credit Issues

Event	Waiting Period
DIL/SS	4 years
FC	7 years (unless included in BK)
Ch 7	4 years
Ch 13	2 years

Private Mortgage Insurance (PMI)

PMI is required when your down payment is less than 20%.

How PMI Works

Protects the lender (not you) if you default

Paid monthly as part of your mortgage payment

Drops off once you reach 20% equity

PMI Removal Rules

Equity Level	What Happens
80% LTV	You can request PMI removal
78% LTV	PMI automatically terminates

Interest Rates & Buydowns

How Rates Work

Conventional loans use a risk-based pricing system called Loan Level Price Adjustments (LLPAs). Your rate depends on:

Credit score

Down payment

Property type

Loan purpose

Permanent Buydowns

You pay the lender "up-front interest" to lower your rate for the life of the loan.

Rate	Cost/Credit	Points	Breakeven
5.75%	$7,950	2	3 years
6.25%	$3,700	1	4 years
6.5%	$0	0 (Par)	-
7.125%	$3,900	-1	-
7.875%	$7,200	-2	-

Example: $400k purchase, 5% down, 740 FICO. Educational example only.

Temporary Buydowns

Seller gives you a credit that temporarily lowers your payment for the first few years.

Temporary buydowns work best if you plan to refinance when rates drop. The unused funds get applied to your principal if you refi early.

Common types:

3-2-1 — Rate reduced by 3% year 1, 2% year 2, 1% year 3

2-1 — Rate reduced by 2% year 1, 1% year 2

1-0 — Rate reduced by 1% year 1

Overlays

⚠️ Lenders may add extra guidelines beyond conventional minimums

🏦 Not all lenders will approve the same borrower

Example Home 1: Dayton, OH

🔗 Listing: 1549 Cory Dr, Dayton, OH

🏡 Price: $219,000

Estimated Monthly Payment

Principal & Interest	$1,273
PMI	$106
Property Taxes	$191
Homeowners Insurance	$80
HOA	$0
Total	$1,650

Estimated Cash to Close

3% Down Payment	$6,570
Closing Costs	$6,500
Seller Credit	$3,000
Total	$9,970

Public data — for educational purposes only.

Example Home 2: Phoenix, AZ

🔗 Listing: 3008 N 16th Dr, Phoenix, AZ

🏡 Price: $849,000

Estimated Monthly Payment

Principal & Interest	$4,937
PMI	$180
Property Taxes	$90
Homeowners Insurance	$200
HOA	$0
Total	$5,407

Estimated Cash to Close

5% Down Payment	$42,450
Closing Costs	$7,000
Seller Credit (2%)	$0
Total	$49,450

Public data — for educational purposes only.

2026 Loan Limits

Property Type	Baseline Limit (2026)
1 Unit	$832,750
2 Units	$1,066,750
3 Units	$1,288,800
4 Units	$1,601,750

High-cost areas (like parts of CA, NY, HI) can go up to $1,249,125 for a single unit

If you need more than these limits → jumbo loan (different rules)

Debt-to-Income Ratio (DTI)

DTI measures how much of your income goes toward debt payments.

How to Calculate DTI

Monthly Debt Payments ÷ Gross Monthly Income = DTI

What Counts as Debt?

✅ Future mortgage payment (PITIA)

✅ Car payments

✅ Student loans

✅ Credit card minimum payments

✅ Personal loans

✅ Child support / alimony

DTI Limits

49.99%

You can add a non-occupant co-borrower (5% down min)

💰 Want to Know Your Max Purchase Price?

Use my free calculator to see exactly how much home you can afford based on your income and debts.

👉 winthehouseyoulove.com/maxprice

Income Requirements

No minimum income requirement - it's about DTI, not a dollar amount.

What Lenders Look For

2 years of stable employment history (not necessarily same job)

Consistent or increasing income

Verifiable income through pay stubs, W-2s, tax returns

Income Sources That Count

✅ W-2 salary and wages

✅ Bonuses and overtime (with 2-year history)

✅ Commission income (with 2-year history)

✅ Self-employment income (2-year average)

✅ Rental income

✅ Social Security / disability (non-taxable grossed up 125%)

✅ Pension and retirement income

✅ Alimony and child support (if it continues 3+ years)

Self-Employed Borrowers

Self-employment adds extra steps, but you can absolutely qualify.

Requirements

2 years of tax returns (personal and business)

Income calculated as a 2-year average

Must show business is stable or growing

How Income is Calculated

Lenders use your net income from tax returns - not gross revenue.

Common deductions that reduce qualifying income:

Depreciation (can sometimes be added back)

Business use of home

Meals and entertainment

Vehicle expenses

Student Loans & DTI

Student loans affect your debt-to-income ratio differently depending on whether you go through Fannie Mae or Freddie Mac.

	Fannie Mae	Freddie Mac
Payment Used If Deferred	1% of balance	0.5% of balance
Income-Driven Repayment Allowed?	✅	✅
$0 Payment Allowed?	✅	❌

Example

$30k student loan balance on IDR at $0/month:

Fannie Mae → $0/month used

Freddie Mac → $150/month used

Rent History Bonus

12 months of on-time rental payments can nudge an approval in a positive direction.

Uses bank account history to verify regular rent payments

Helps borderline approvals get across the finish line

Community Property

Conventional loans don’t require spouse’s debts/income if they’re not on the loan

Community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin

Property Types Allowed

Conventional loans offer the most flexibility for property types.

Primary Residence

✅ Single-family home

✅ Condo / townhouse

✅ 2-4 unit property (e.g. you live in one unit)

✅ Manufactured home

Second Home

✅ Vacation home

✅ Cannot be rented full-time (personal use required)

Investment Property

✅ 1-4 unit rental property

✅ Higher down payment required (15-25%)

✅ Higher interest rates

✅ Stricter reserve requirements

Condo Requirements

Condos have additional requirements because the lender evaluates the entire complex, not just your unit.

What Lenders Review

HOA financial health (reserves, budget)

Owner-occupancy ratio (typically 50%+ owner-occupied)

Pending litigation against the HOA

Insurance coverage

Single-entity ownership (no one owner can own too many units)

Warrantable vs. Non-Warrantable

Warrantable = meets Fannie/Freddie guidelines → standard conventional loan

Non-warrantable = doesn't meet guidelines → need portfolio or non-QM loan

ADUs (Accessory Dwelling Units)

	Fannie Mae	Freddie Mac
1 Unit	1 ADU allowed	1 ADU allowed
2-3 Units	No ADUs	1 ADU allowed
4 Units	No ADUs	No ADUs

ADU Requirements

Must have separate kitchen, sleeping, bathing, and bathroom features

Must have its own entrance and exit

Occupancy Rules

Requirement	Timeline
Move-in Deadline	Within 60 days of closing
Minimum Occupancy Before Renting	1 year as primary residence
Exception to Rent Earlier	Refinance into investment loan
Minimum Occupancy Before Selling	None

Appraisals

🏠 3rd party hired by lender to verify the value of the home

🔍 You should still get an inspection

✅ Easiest of most loan types

🛡️ The appraisal mainly protects the lender

Property Requirements

Less strict than government loans (FHA, VA, USDA)

Big Issues	“As-Is” Allowed
Active roof leaks	Worn floor
Water seepage	Minor window cracks
Significant plumbing leaks	Minor damage to interior walls
Uncapped wiring	Damaged or missing interior doors
Curled or missing roof shingles	Missing handrails
Damaged or failing foundation	Missing hardware
Mechanical systems non-functional	Missing light fixtures
Failure of sanitary systems	Minor plumbing leaks
Mechanical system exceeding its expected life or non-functional	Deteriorated sidewalks
Sanitary system with evidence of failure	Damaged countertops
ㅤ	Missing hardware
ㅤ	Missing light fixtures
ㅤ	Damaged/missing trim
ㅤ	Minor plumbing leaks that don’t cause damage
ㅤ	Deteriorated sidewalks

Appraisal Types

The type of appraisal you get is decided by the underwriting software (AUS).

Appraisal Type	Value Source	Method
Traditional	Appraiser	Interior and exterior inspection
Value Acceptance (Appraisal Waiver)	Contract price	Data models
Value Acceptance + Property Data	Contract price	3rd party collects interior/exterior data
Hybrid	Appraiser	3rd party data given to appraiser

Appraisal waivers vs appraisal contingency waiver

House Hacking

Buy a 2-4 unit property, live in one unit, rent out the others.

Why It Works

Just 5% down for a 2-4 unit primary residence

Rental income can help you qualify (75% of rent counted)

Conventional doesn't require a self-sufficiency test (unlike FHA)

Build wealth while reducing your housing costs

The 1-Year Rule

If buying as a primary residence, you must live in the home for 1 year before converting to a full rental. Otherwise, you'll need to refinance into an investment loan.

Rehab Options

HomeStyle Renovation Loan

Covers purchase price + renovation costs in a single loan.

For repairs, remodeling, and improvements

Down payment based on the after-renovation value

Refinancing Options

Refinance Type	Waiting Period	Goal
Rate/Term (Limited Cash-Out)	Any time	Lower rate or change loan term
Cash-Out	6 months	Pull equity as a lump sum
Delayed Financing	Within 6 months	Buy with cash, get money back

Success Rate

Generally preferred by sellers

Seen as the "standard" option

Can be more preferable than cash if the offer is higher

Some buyers have a tendency to make risky offers

Offer Tips

✅ Strong pre-approval

💰 Higher earnest money

📋 Fewer contingencies

⏱️ Shorter inspection and closing timelines

How To Get One

🚀 Apply with our team at winthehouseyoulove.com

📋 Review loan options and terms

🏡 Shop for homes with confidence

✍️ Write offer and close on your loan