A Field Manual on the loan structure that finances the majority of American mortgages — and the variants most lenders never bring up.
"Conventional loan" is the default term most Americans use for "mortgage" — and most don't realize how many variants live underneath that umbrella. Fannie Mae HomeReady. Freddie Mac Home Possible. Conventional 97. The 1% Down Conventional. State HFA bond-rate conventional. Conforming, super-conforming, and jumbo. Each one solves a different problem.
Conventional is also the loan structure that buyers GRADUATE to. If you start with FHA, you typically refinance to conventional once you have 20% equity (to drop the mortgage insurance). If you used a state HFA bond program, you may eventually refinance to standard conventional. Understanding the conventional loan family is essential to long-term mortgage planning.
This playbook is the conventional financing reference we wish someone had handed us when we were comparison-shopping our first home.
Inside you'll find:
A "conventional" loan is any mortgage not insured by the federal government (i.e., not FHA, VA, or USDA). Most conventional loans are purchased and held by Fannie Mae or Freddie Mac — the Government-Sponsored Enterprises (GSEs) that provide the secondary-market liquidity making 30-year fixed mortgages possible.
Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) don't make loans directly. They buy conforming loans from lenders, package them into mortgage-backed securities, and sell them to investors. This secondary-market activity is what allows private lenders to offer 30-year fixed-rate financing — without GSE buying activity, the 30-year mortgage as we know it wouldn't exist.
A "conforming loan" is a conventional loan that meets the GSEs' underwriting standards: loan amount under the conforming limit, borrower credit and DTI within their guidelines, property type within their parameters. A "non-conforming" or "jumbo" loan exceeds those guidelines (typically the loan limit) and is held on the originating bank's balance sheet or sold to private investors.
Above these limits, the loan becomes "jumbo" — typically held by portfolio lenders with their own underwriting standards. Hero places jumbo files with portfolio lenders that specialize in higher-balance mortgages.
Conventional financing fits a broader range of buyers than FHA — particularly buyers with strong credit, savings, or career stability.
Conventional rewards higher credit scores with lower rates and lower PMI. A 740 FICO conventional file typically prices below FHA after the first year of homeownership and FHA's MIP. If your credit is 680+, conventional should be on the table.
If you can put 10-20% down, conventional almost always beats FHA. With 20% down, you avoid PMI entirely. With 10-19% down, PMI is required but is REMOVABLE — automatically at 78% LTV per the Homeowners Protection Act (HPA), or sooner via appraisal-supported request at 80% LTV.
Conventional has longer waiting periods after past credit events (4 years after Ch. 7 bankruptcy, 7 years after foreclosure — versus FHA's shorter timelines). If your credit history is clean for the past several years, conventional is open.
FHA and VA only finance primary residences. USDA only finances primary residences in rural areas. Conventional is the only program that finances non-owner-occupied properties — investment property purchases require 15-25% down, second-home purchases require 10% down.
FHA's 2026 single-family limit is $524,225 in most counties. Conventional's conforming limit is $832,750. If your target home falls between those numbers, conventional is the better fit.
If you're VA-eligible, VA almost always beats conventional (no down, no PMI, lower rates). If your credit is 580-680 with limited down payment, FHA is often the better entry point. If you're in a rural area within USDA's geographic eligibility, USDA may beat both.
Conventional typically caps DTI at 45%, with exceptions to 50% with strong compensating factors (large reserves, high credit, low LTV). FHA's DTI ceiling is higher — buyers with DTI 45-57% who don't otherwise qualify for conventional often go FHA.
Required when down payment is less than 20%. PMI rate varies by credit, LTV, and loan amount — typically 0.3% to 1.5% annually. Removable in three ways:
This removable feature is the main long-term advantage of conventional over FHA, where MIP stays for the life of the loan.
3% down, reduced PMI rate, accepts non-borrower household income for qualifying, lower credit threshold. Eligibility: household income ≤ 80% of area median income (AMI). Strong fit for working-class buyers in many of our 12 states.
3% down, reduced PMI, similar income limits to HomeReady. Slight differences in qualifying criteria — we run files against both to see which fits better.
3% down for first-time buyers (defined as no homeownership in past 3 years). No income limit. PMI required, standard rate. Cleanest option for buyers with strong credit and limited cash.
Buyer brings 1% down. Lender contributes 2%. Closing day, buyer has 3% equity. Income limit: 80% of AMI. Designed for working-class American families. PMI required, standard rate.
Every state HFA we serve offers conventional bond-rate loans paired with DPA. CalHFA Conventional, CHFA SmartStep Plus (CO), MSHDA MI Home Loan (MI), THDA Great Choice Conventional (TN), PHFA HFA Preferred (PA), etc. Below-market bond rate + DPA stack = the most powerful working-class conventional structures available.
Above the conforming limit ($832,750 baseline). No GSE backing. Held by portfolio lenders with their own credit standards — typically tougher (720+ credit, larger reserves, lower DTI). Hero places jumbo files with portfolio lenders that specialize in high-balance financing for first-responder and military households.
Most FHA buyers refinance to conventional once they hit 20% equity to drop MIP. The math:
This is the planned exit strategy for nearly every FHA file we close. The first-pass FHA gets you into the home; the second-pass conventional removes the MIP.
Once your primary residence is in place, conventional is typically the next step for investment property purchases under 4 financed properties. Common structure: 25% down, 30-year fixed, qualified on personal DTI. After 4-6 financed properties, most investors shift to DSCR (Non-QM) loans — covered in our Non-QM playbook.
For buyers under 80% AMI, the 3% down HomeReady or Home Possible options often beat FHA on long-term cost. Reduced PMI rate, removable PMI, no UFMIP. We run the side-by-side every time both programs are available.
For buyers targeting properties between $832,750 and roughly $2,000,000 (varies by lender), jumbo conventional is the natural path. Best fit: 740+ credit, 6+ months reserves, DTI under 43%. Portfolio jumbo lenders often offer attractive rates against the GSE-backed conforming market.
Purchase: $345,000. 3% down: $10,350. Reduced HomeReady PMI: $94/month. Comparison to FHA on same file: FHA would have required $12,075 down + $156/month MIP + $5,250 UFMIP. HomeReady saved $4,375 at closing + $62/month + future PMI removal at 78% LTV.
Original FHA loan: $268,000 balance with $145/month MIP. Home appreciation: $325,000 current value. New conventional refi at 80% LTV: $260,000 loan, no PMI. Rate dropped 0.75% in the process. Total monthly savings: $312/month. Break-even on refi closing costs: 11 months.
Purchase: $1,250,000 in Marin County. Conforming limit for county: $1,209,750. Loan amount: $1,000,000 (with 20% down). Structure: Jumbo conventional with portfolio lender at 6.125% — better rate than the second-best quote. No PMI given 20% down. Closed in 23 days.
Conventional wins when: Credit 680+, 5%+ down, DTI under 45%, no recent credit issues, single-family primary residence at conforming-limit price point.
FHA wins when: Credit 580-680, DTI above 45%, 2-4 unit owner-occupied strategy, recent past credit issues.
VA wins essentially every time — if you're eligible. $0 down, no PMI/MIP, lower rates. Choose conventional only if you've used your VA entitlement or aren't eligible.
USDA wins when: Property is in USDA-eligible rural area AND household income is under USDA limits. $0 down + low MI typically beats conventional.
Conventional wins when: Property isn't USDA-eligible OR income exceeds USDA limits.
Up to 4 financed properties, conventional is typically the right path (lower rate than DSCR). At 5+ financed properties, transition to DSCR for portfolio scaling. We model the breakpoint on every investor file.