Conventional Loans

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Conventional Mortgage Financing for Homebuyers, Homeowners & Real Estate Investors

Conventional home loans offer flexible mortgage financing for primary residences, second homes, and investment properties. Qualified buyers may be able to purchase a home with as little as 3% down, while borrowers with larger down payments may avoid private mortgage insurance entirely.

At Fairhope Mortgage, we help borrowers compare conventional mortgage options throughout Alabama, Florida, and Louisiana, including Fairhope, Daphne, Spanish Fort, Foley, Gulf Shores, Orange Beach, Mobile, Pensacola, and New Orleans.

My experience has been that the conventional loans are best for clients with 680 to 850 credit scores, those with higher down payments, lower debt to income ratios, or a combination of the three. There is no longer a minimum credit score requirement, however it does favor those with higher scores. 

Case Study

A client reached out to me after being turned down by 2 other mortgage lenders and multiple roofing companies lenders. Their insurance company  was cancelling their insurance due to the age of their roof and they did not have the cash to put a new roof on.  They had 539 credit and could not get approved for an FHA cash out refinance. We worked with a local insurance company to get them coverage right away and then came up with a strategy to make a conventional cash out refinance work.  We used the cash to pay off 16 credit lines, leaving them with only the mortgage to pay each month, reducing their total monthly payments by well over $1,000.  We worked with a local roofing company to get a new roof, and they had enough left over to have a $20,000 emergency fund just in case of any future needs.  DTI (debt to income ratio) after these changes was 20.5% and loan to value was 64.95%. 

Quick Answers About Conventional Loans

Minimum Down Payment: As low as 3% for qualifying buyers and eligible programs.

Credit Score: Requirements depend on the underwriting method, loan program, and lender. Not every conventional loan has the same minimum credit score.

Debt-to-Income Ratio: Fannie Mae's Desktop Underwriter may permit a total DTI up to 50%, subject to eligibility and underwriting findings.

Mortgage Insurance: Private mortgage insurance is generally required when the down payment is less than 20%, although exceptions and alternative structures exist.

First-Time Buyer Requirement: Conventional loans are not limited to first-time homebuyers. Some 3% down programs have additional eligibility requirements.

Eligible Properties: Primary residences, second homes, investment properties, qualifying condominiums, townhomes, and certain manufactured homes.

Loan Terms: Common options include 15-year and 30-year fixed-rate mortgages, along with eligible adjustable-rate mortgages.

Official References: Fannie Mae Selling Guide and Freddie Mac Seller/Servicer Guide

A conventional mortgage is a home loan that is not insured or guaranteed by a federal government mortgage program such as FHA, VA, or USDA.

Many conventional mortgages follow the underwriting and eligibility requirements established by Fannie Mae and Freddie Mac.

These loans are commonly called conforming conventional mortgages when they meet applicable requirements, including conforming loan limits.

Other conventional mortgages, including certain jumbo and non-agency loans, may have different underwriting requirements.

Conventional financing is frequently used for purchasing a primary residence, buying a second home, financing an investment property, or refinancing an existing mortgage.

Because different conventional programs have different requirements, choosing the right mortgage involves more than simply comparing interest rates.

One of the most common mortgage misconceptions is that conventional financing always requires a 20% down payment.

In reality, certain conventional programs allow qualified buyers to purchase a primary residence with as little as 3% down.

The minimum down payment depends on the loan program, property type, occupancy, number of units, underwriting findings, and other eligibility requirements.

3% Down Conventional Loans

Certain Fannie Mae and Freddie Mac programs permit financing up to 97% loan-to-value for eligible borrowers purchasing qualifying primary residences.

These options can be particularly useful for first-time homebuyers and qualifying borrowers who prefer to preserve savings.

5% Down Conventional Loans

A 5% down payment is another common conventional financing option for eligible primary residence transactions.

Some borrowers may prefer this structure because it can reduce the loan amount and potentially lower mortgage insurance costs.

10% Down Conventional Loans

A 10% down payment may provide additional financing flexibility and reduce the amount of mortgage insurance required.

It can also be relevant for certain eligible second-home transactions.

20% Down Conventional Loans

A down payment of 20% generally allows a qualifying borrower to avoid borrower-paid private mortgage insurance on a standard conventional purchase loan.

However, making a 20% down payment is not always the best financial decision. Buyers should consider cash reserves, other debts, and overall financial goals.

Official Reference: Fannie Mae HomeReady Loan Eligibility

The following examples illustrate a 3% minimum down payment for an eligible conventional purchase transaction.

$200,000 Home Purchase

Down payment: $6,000

Base loan amount: $194,000

$250,000 Home Purchase

Down payment: $7,500

Base loan amount: $242,500

$300,000 Home Purchase

Down payment: $9,000

Base loan amount: $291,000

$350,000 Home Purchase

Down payment: $10,500

Base loan amount: $339,500

$400,000 Home Purchase

Down payment: $12,000

Base loan amount: $388,000

$500,000 Home Purchase

Down payment: $15,000

Base loan amount: $485,000

A 3% down payment is available only when the borrower and transaction meet the requirements of an eligible loan program.

Credit scores are an important part of conventional mortgage underwriting, but they are not the only factor.

Conventional mortgage eligibility depends on the specific loan program, underwriting method, credit history, loan-to-value ratio, debt-to-income ratio, and overall financial profile.

For Fannie Mae loans evaluated through Desktop Underwriter, credit eligibility is assessed through the automated underwriting process rather than applying a universal minimum score to every transaction.

Manually underwritten loans have separate minimum credit score requirements published in Fannie Mae's eligibility standards.

Individual lenders may impose additional credit requirements.

Borrowers with lower credit scores should not assume they are automatically ineligible for conventional financing.

Fairhope Mortgage can help compare available conventional options with FHA and other mortgage programs.

Official Reference: Fannie Mae General Requirements for Credit Scores

Debt-to-income ratio, commonly called DTI, measures qualifying monthly debt obligations as a percentage of qualifying gross monthly income.

For example, a borrower earning $7,000 per month with $2,800 in qualifying monthly debts has a total DTI of 40%.

For Fannie Mae conventional loans, the maximum permitted DTI depends on the underwriting method.

Desktop Underwriter

Fannie Mae's automated underwriting system may permit a total DTI up to 50%, subject to applicable program requirements and underwriting findings.

A 50% DTI is not an automatic approval.

Official Reference: Fannie Mae Selling Guide — Debt-to-Income Ratios

Private mortgage insurance, commonly called PMI, protects the mortgage lender against certain losses if a borrower defaults.

PMI is generally required on standard conventional mortgages when the borrower finances more than 80% of the property's value.

Unlike FHA mortgage insurance, conventional PMI can often be canceled when applicable requirements are satisfied.

PMI costs depend on factors including credit score, down payment, loan type, mortgage insurance coverage, and other risk characteristics.

Some borrowers may benefit from lender-paid mortgage insurance or alternative mortgage structures, although these options should be evaluated carefully because they may affect the interest rate or overall borrowing cost.

Official Reference: Consumer Financial Protection Bureau — How Mortgage Insurance Works

One of the major advantages of conventional financing is the possibility of removing private mortgage insurance.

For many qualifying conventional mortgages on principal residences, federal law provides specific PMI cancellation and termination protections.

Requesting PMI Cancellation at 80%

A borrower may generally request PMI cancellation when the principal balance reaches 80% of the property's original value, subject to payment history, current loan status, property value, and other applicable requirements.

Automatic PMI Termination at 78%

For many covered loans, the mortgage servicer must automatically terminate PMI when the loan is scheduled to reach 78% of the property's original value, provided the borrower is current.

PMI Cancellation Based on Property Appreciation

Some conventional loans may qualify for earlier PMI removal based on current property value under applicable investor and servicer requirements.

These rules are not identical to the federal cancellation requirements based on original value.

Borrowers should contact their mortgage servicer to determine the specific requirements for their loan.

Official Reference: CFPB — When Can I Remove Private Mortgage Insurance?

HomeReady is a Fannie Mae conventional mortgage program designed to expand financing opportunities for eligible borrowers.

The program offers low down payment options and additional underwriting flexibility for qualifying households.

Potential HomeReady Benefits

Down payments as low as 3% for eligible transactions.

Flexible treatment of certain eligible income sources.

Gift funds and other permitted sources of down payment assistance.

Mortgage insurance options that may be favorable for qualifying borrowers.

Financing for eligible primary residences.

HomeReady Income Limits

HomeReady generally limits qualifying borrower income to 80% of the area median income for the property's location.

The applicable income limit depends on the property's geographic area and current program requirements.

HomeReady is not limited exclusively to first-time homebuyers.

Some transactions also require homeownership education.

Official Reference: Fannie Mae HomeReady Eligibility Requirements

Home Possible is Freddie Mac's affordable conventional mortgage program for eligible borrowers.

It provides low down payment financing and additional flexibility for qualifying households.

Potential Home Possible Benefits

Down payments as low as 3% for qualifying transactions.

Eligible gift funds and assistance options.

Financing for qualifying primary residences.

Mortgage insurance benefits under applicable program rules.

Flexible treatment of certain income sources.

Home Possible generally has income eligibility requirements tied to area median income.

The exact requirements depend on the current Freddie Mac program guidelines, property characteristics, and borrower profile.

Official Reference: Freddie Mac Seller/Servicer Guide

Yes. Eligible gift funds can help qualifying borrowers purchase a home using conventional financing.

Gift funds may be used toward permitted down payments and closing costs when applicable requirements are satisfied.

Acceptable donors, documentation requirements, and minimum borrower contribution rules depend on the loan program, occupancy, property type, and transaction.

For example, certain eligible one-unit primary residence transactions may permit the entire down payment to come from acceptable gift funds.

Different borrower contribution rules may apply to some two- to four-unit properties.

Gift funds must be documented appropriately, and repayment generally cannot be required.

Borrowers should discuss gift funds with their mortgage professional before transferring money.

Official Reference: Fannie Mae HomeReady Underwriting and Borrower Contribution Requirements

Yes. Conventional financing generally permits sellers and other interested parties to contribute toward eligible borrower closing costs.

However, the maximum contribution depends on the property occupancy and loan-to-value ratio.

Primary Residences and Second Homes

When the loan-to-value ratio exceeds 90%, interested-party contributions are generally limited to 3%.

When the loan-to-value ratio is greater than 75% but does not exceed 90%, the limit is generally 6%.

When the loan-to-value ratio is 75% or less, the limit is generally 9%.

Investment Properties

Interested-party contributions are generally limited to 2%, regardless of the loan-to-value ratio.

These percentages apply to the lower of the sales price or appraised value under Fannie Mae's rules.

Seller contributions cannot be used to satisfy the borrower's required down payment or financial reserve requirements.

They also cannot exceed the actual eligible costs.

Example: $300,000 Home With 5% Down

Purchase price: $300,000

Down payment: $15,000

Loan-to-value ratio: 95%

Maximum interested-party contribution under the standard Fannie Mae limit: $9,000

The seller could potentially contribute up to $9,000 toward eligible costs, provided the transaction actually has sufficient allowable expenses.

Official Reference: Fannie Mae Selling Guide — Interested Party Contributions

Conventional financing may be combined with eligible down payment assistance programs.

These programs can help qualified borrowers cover part of the required down payment or eligible closing costs.

Fairhope Mortgage offers access to a down payment assistance program that may provide up to 5% of the purchase price, with no income limit under that specific program.

The program generally requires a minimum credit score of 640 and is not restricted exclusively to first-time homebuyers.

Assistance terms, property eligibility, repayment requirements, and program availability must be reviewed for each borrower.

Some conventional assistance programs have income restrictions, geographic requirements, homebuyer education requirements, or additional eligibility criteria.

Conventional mortgages can finance eligible second homes, including qualifying vacation properties.

This can be particularly relevant for buyers purchasing beachfront or coastal properties in Gulf Shores, Orange Beach, or the Florida Panhandle.

Certain eligible conventional second-home purchases may permit financing with as little as 10% down.

However, minimum down payment requirements depend on the property, loan program, and underwriting criteria.

Second-home financing generally requires the property to meet applicable occupancy and use requirements.

A second home is not automatically treated as an investment property simply because it is located in a vacation destination.

However, a property primarily intended for rental or investment purposes may not qualify as a second home under conventional underwriting standards.

Borrowers should discuss expected occupancy and rental arrangements before choosing a financing program.

Official Reference: Fannie Mae Selling Guide

Conventional mortgages can also finance eligible residential investment properties.

These loans may be used to purchase or refinance qualifying rental homes and multi-unit residential properties.

Investment property financing generally involves higher down payments, different pricing adjustments, and potentially additional reserve requirements compared with primary residence financing.

The minimum down payment depends on the number of units, loan purpose, underwriting findings, and program eligibility.

Qualifying rental income may be considered when permitted by the applicable underwriting requirements.

Borrowers should also evaluate whether conventional investment property financing or a debt service coverage ratio (DSCR) loan is more appropriate.

Conventional Investment Property Financing

Typically considers the borrower's qualifying personal income, debts, credit, and other financial obligations.

DSCR Financing

Certain non-agency DSCR programs primarily evaluate the property's qualifying rental income relative to the proposed housing payment, subject to program requirements.

Fairhope Mortgage can help investors compare these financing structures.

Self-employed borrowers can qualify for conventional mortgages when they meet applicable income documentation and underwriting requirements.

Self-employed income is generally evaluated differently from standard W-2 employment income.

Lenders may review federal tax returns, business financial information, business ownership, and income stability.

The qualifying income calculation can depend on whether the borrower operates as a sole proprietor, partnership, S corporation, or other business structure.

Certain eligible borrowers may qualify using one year of personal and business tax returns, while others require a longer income history.

A borrower with substantial business revenue may still have lower qualifying mortgage income after applicable business expenses and underwriting adjustments.

Official Reference: Fannie Mae Selling Guide — Income Assessment

Conventional financing may be available for eligible condominium units.

However, the borrower's personal mortgage qualification is only one part of the process.

The condominium project must also satisfy applicable eligibility requirements.

Potential concerns include association insurance, deferred maintenance, structural issues, reserve funding, litigation, commercial space, and other project characteristics.

These issues can be especially important in coastal condominium markets such as Gulf Shores, Orange Beach, and Pensacola.

Warrantable Condominiums

A warrantable condominium generally satisfies the applicable agency project eligibility requirements for the intended conventional mortgage transaction.

Non-Warrantable Condominiums

A non-warrantable condominium does not satisfy one or more applicable agency requirements.

Some non-warrantable properties may still qualify for alternative non-agency condominium financing.

Condominium eligibility should be evaluated before a buyer becomes contractually committed whenever possible.

Official Reference: Fannie Mae Selling Guide — Project Standards

Conventional financing may be available for eligible manufactured homes.

Fannie Mae and Freddie Mac establish additional property and underwriting requirements for manufactured housing.

Eligibility can depend on the home's construction standards, installation, title, foundation, property classification, and other factors.

Certain manufactured homes may qualify for specialized conventional financing programs.

Borrowers purchasing a manufactured home should verify the home's eligibility before entering into a purchase contract.

Official Reference: Fannie Mae Manufactured Housing Loan Eligibility

Conventional financing can also support certain renovation and construction transactions.

HomeStyle Renovation Loans

Fannie Mae's HomeStyle Renovation program may allow qualifying borrowers to finance eligible improvements as part of a home purchase or refinance.

The program includes specific requirements for rehabilitation costs, property eligibility, contractors, project administration, and completion.

Construction-to-Permanent Loans

Certain conventional construction loan programs allow borrowers to finance construction and transition into permanent mortgage financing.

Some programs offer a one-time closing structure, while others require separate construction and permanent loan closings.

The available structure depends on the lender, property, construction plans, and underwriting requirements.

Official Reference: Fannie Mae HomeStyle Renovation Loan Eligibility

Conventional refinancing may help homeowners change mortgage terms, adjust monthly payments, eliminate certain mortgage insurance expenses, or access available home equity.

Rate-and-Term Refinance

A rate-and-term refinance generally replaces an existing mortgage with a new mortgage intended to change the interest rate, loan term, or other eligible financing terms.

Cash-Out Refinance

A cash-out refinance may allow qualified homeowners to borrow against available home equity.

Cash-out refinancing generally has different loan-to-value and underwriting requirements from standard rate-and-term refinancing.

Refinancing From FHA to Conventional

Some homeowners with FHA mortgages may benefit from evaluating a conventional refinance, particularly when sufficient equity or improved credit may allow them to reduce or eliminate mortgage insurance costs.

However, refinancing involves closing costs and potentially different interest rates.

Borrowers should compare the new interest rate, APR, monthly payment, mortgage insurance, closing costs, and expected time in the property.

Both conventional and FHA mortgages can provide low down payment financing.

The best option depends on the borrower's credit profile, income, down payment, property, and financial goals.

Conventional Financing

Certain programs permit as little as 3% down.

Eligible borrowers may purchase primary residences, second homes, and investment properties.

Private mortgage insurance may be removable when applicable requirements are satisfied.

Mortgage pricing and PMI costs depend on credit, down payment, and other factors.

FHA Financing

Qualified borrowers may purchase with as little as 3.5% down.

FHA offers different credit underwriting requirements.

FHA loans generally require upfront and annual mortgage insurance.

FHA purchase financing is primarily intended for owner-occupied principal residences.

Neither option is automatically better.

Fairhope Mortgage can help compare both programs using actual loan terms, mortgage insurance costs, and estimated monthly payments.

Do conventional loans require 20% down?

No. Certain conventional mortgage programs permit down payments as low as 3% for qualifying borrowers.

Can I get a conventional loan with 3% down?

Potentially. Eligible borrowers may qualify for a 97% loan-to-value conventional mortgage under applicable program requirements.

What credit score do I need for a conventional mortgage?

The requirements depend on the underwriting method, loan program, and lender. Some automated underwriting transactions do not use a universal minimum credit score, while manually underwritten loans have specific requirements.

What is the maximum conventional loan DTI?

Fannie Mae Desktop Underwriter may permit up to 50% total DTI for eligible transactions. Manual underwriting generally has lower limits.

Can I remove PMI from a conventional loan?

Often, yes. PMI cancellation and termination depend on the loan, applicable law, investor requirements, and payment history.

Can I use gift funds for a conventional down payment?

Yes, when the gift comes from an eligible source and meets applicable documentation and contribution requirements.

Can the seller pay conventional closing costs?

Yes. Interested-party contribution limits depend on the loan-to-value ratio and whether the property is a primary residence, second home, or investment property.

Can I use conventional financing for a second home?

Yes. Eligible second-home purchases may qualify for conventional mortgage financing, subject to occupancy and underwriting requirements.

Can I buy an investment property with a conventional loan?

Yes. Conventional financing is available for qualifying investment properties, subject to applicable down payment, reserve, and underwriting requirements.

Can self-employed borrowers qualify for conventional financing?

Yes. Qualifying income is calculated using applicable documentation and underwriting rules.

Can I purchase a condominium with a conventional loan?

Yes, if the borrower, unit, and condominium project meet applicable financing requirements.

Can conventional financing be used for manufactured homes?

Potentially. Eligible manufactured homes must satisfy additional property and program requirements.

Can I refinance an FHA loan into a conventional mortgage?

Potentially. Eligibility depends on the borrower's qualifications, available equity, property, and current conventional mortgage requirements.

Is a conventional loan better than an FHA loan?

Not necessarily. The best choice depends on the total financing costs, credit profile, down payment, mortgage insurance, and individual goals.

Fairhope Mortgage helps borrowers explore conventional mortgage financing throughout our service areas.

In Alabama, we serve homebuyers and homeowners in Fairhope, Daphne, Spanish Fort, Foley, Gulf Shores, Orange Beach, Bay Minette, Robertsdale, Mobile, Huntsville, and surrounding communities.

In Florida, we assist borrowers in Pensacola and other Florida Panhandle communities.

In Louisiana, we serve borrowers in New Orleans and surrounding markets.

Property location can affect insurance costs, property taxes, condominium requirements, loan limits, and other financing considerations.

For Gulf Coast borrowers, wind and flood insurance costs can materially affect the qualifying mortgage payment and overall affordability.

Fannie Mae Selling Guide

Official conventional mortgage eligibility, underwriting, income, asset, credit, and property requirements.

https://selling-guide.fanniemae.com/

Freddie Mac Seller/Servicer Guide

Official Freddie Mac mortgage eligibility and underwriting requirements.

https://guide.freddiemac.com/

Fannie Mae HomeReady Mortgage Requirements

Official guidance for HomeReady eligibility, income limits, and low down payment financing.

https://selling-guide.fanniemae.com/sel/b5-6-01/homeready-mortgage-loan-and-borrower-eligibility

Fannie Mae Conventional Debt-to-Income Requirements

Official DTI requirements for Desktop Underwriter and manually underwritten conventional loans.

https://selling-guide.fanniemae.com/sel/b3-6-02/debt-income-ratios

Fannie Mae Credit Score Requirements

Official conventional credit score guidance.

https://selling-guide.fanniemae.com/sel/b3-5.1-01/general-requirements-credit-scores

Fannie Mae Seller Contribution Limits

Official rules for interested-party contributions and financing concessions.

https://selling-guide.fanniemae.com/sel/b3-4.1-02/interested-party-contributions-ipcs

Consumer Financial Protection Bureau — PMI Cancellation

Federal consumer guidance about requesting and obtaining private mortgage insurance cancellation.

https://www.consumerfinance.gov/ask-cfpb/when-can-i-remove-private-mortgage-insurance-pmi-from-my-loan-en-202/

Federal Housing Finance Agency — Conforming Loan Limits

Official annual conforming loan limit information.

https://www.fhfa.gov/data/conforming-loan-limit

Fannie Mae Manufactured Housing Eligibility

Official manufactured housing financing requirements.

https://selling-guide.fanniemae.com/sel/b5-2-02/manufactured-housing-loan-eligibility

Fannie Mae HomeStyle Renovation

Official conventional renovation mortgage requirements.

https://selling-guide.fanniemae.com/sel/b5-3.2-02/homestyle-renovation-mortgages-loan-and-borrower-eligibility

Whether you're purchasing your first home, buying a second home, financing an investment property, refinancing your existing mortgage, or comparing conventional financing with FHA, Fairhope Mortgage can help you evaluate available options.

Tom Kalagher

Mortgage Loan Officer & Branch Manager

Individual NMLS #2028566

Fairhope Mortgage, LLC

314 Magnolia Ave, Suite 101

Fairhope, AL 36532

Phone: 251-391-5618

Prepared: October 2026

Content attribution: Fairhope Mortgage — Tom Kalagher, Mortgage Loan Officer, NMLS #2028566

This page references official mortgage program guidance from Fannie Mae, Freddie Mac, the Federal Housing Finance Agency, and the Consumer Financial Protection Bureau.

Mortgage requirements, interest rates, loan limits, mortgage insurance, program availability, and lender-specific guidelines may change.

All financing is subject to applicable credit, income, asset, property, underwriting, and program eligibility requirements. This information is educational and does not constitute a commitment to lend or guarantee of approval.