What Is a Conventional Loan?
A conventional loan is simply a mortgage that is not backed by a government agency. It is the most commonly used home loan in California — and understanding how it works is the first step toward using it to your advantage.
The basic definition
A conventional mortgage is a home loan not insured or guaranteed by a federal government agency such as the FHA, VA, or USDA. Instead, conventional loans follow guidelines set by two government-sponsored enterprises: Fannie Mae and Freddie Mac. Lendia is a California mortgage broker, so we compare conventional options from the wholesale lenders we work with. Lenders typically sell these loans into the secondary market, where Fannie Mae and Freddie Mac purchase them.
Because the government does not insure conventional loans, lenders rely on the borrower’s creditworthiness — credit score, income, assets, and debt levels — to assess risk. In exchange, conventional loans offer significant flexibility: they can be used for primary residences, second homes, and investment properties, and come in a wide range of loan amounts and structures.
Conforming vs. non-conforming
Not all conventional loans are the same. Within the category there is an important distinction:
- Conforming conventional loans stay within the loan limits set annually by the FHFA. For 2026, the standard limit is $832,750 for a single-unit property.
- High-balance conventional loans exceed the standard limit but stay within the elevated caps for high-cost areas. In many California counties, this limit is up to $1,249,125 for a single unit.
- Jumbo loans exceed even the high-balance limits and follow different, lender-specific guidelines.
How a conventional loan works
When you apply, your lender collects income, employment, asset, and credit documentation. The file is run through an automated underwriting system — Fannie Mae’s Desktop Underwriter (DU) or Freddie Mac’s Loan Product Advisor (LPA) — which analyzes risk and issues an approval recommendation. If approved, you close the loan with a private lender, which then sells it to Fannie Mae or Freddie Mac. This keeps capital flowing and mortgage money available.
Who uses conventional loans?
Conventional loans serve the broadest range of borrowers of any loan type — first-time buyers putting 3% down, repeat buyers, self-employed borrowers, second-home purchasers, and real estate investors. Because they carry no upfront mortgage insurance premiums like FHA loans, they are often the most cost-effective option for borrowers who meet the credit and down payment requirements.
Terms you will hear
- Loan-to-value (LTV): the loan amount divided by the property value or price. Lower LTV generally means lower risk and better pricing.
- Debt-to-income (DTI): monthly debts divided by gross monthly income.
- PMI: private mortgage insurance, required when LTV is above 80%.
- LLPA: loan-level price adjustment, a pricing add-on based on risk factors such as score and LTV.
- Reserves: verified savings left after closing, expressed in months of payments.
- Automated underwriting: the software findings from Desktop Underwriter or Loan Product Advisor.
Loan-to-value and debt-to-income, worked out (illustrative example, not a quote)
You buy a $600,000 home with $60,000 down. The loan is $540,000, and $540,000 ÷ $600,000 = 90% LTV, so PMI applies. Your gross income is $10,000 a month. The projected housing payment is $4,200, your car payment is $400, and your student loan is $300. Total monthly debts are $4,900, and $4,900 ÷ $10,000 = 49% DTI. That sits under the 50% ceiling for automated underwriting, though strong credit and reserves would be needed.
Conventional, FHA and VA side by side
| Feature | Conventional | FHA | VA |
|---|---|---|---|
| Who backs it | Private; follows agency guidelines | FHA insurance | VA guaranty |
| Typical minimum down | 3% for eligible buyers; 5% typical | 3.5% with 580+ score | Up to 100% financing for eligible borrowers |
| Occupancy | Primary, second home, investment | Owner-occupied | Owner-occupied |
| Mortgage insurance | PMI, removable | Upfront plus annual MIP | No monthly mortgage insurance |
What happens after you close
Your loan may be sold to Fannie Mae or Freddie Mac, but you keep making payments to a servicer, and your rate, term, and payment on a fixed-rate loan stay the same. Servicing can transfer to another company, and you receive written notice when it does. Keep your closing package; it holds the note and the terms you will rely on when you refinance, request PMI cancellation, or sell.
Frequently asked questions
Is a conventional loan always a fixed-rate loan?
No. Fixed terms are most common, but adjustable options such as 7/6 and 10/6 ARMs also exist. See the loan terms guide.
What is the difference between conventional and conforming?
Conventional means the loan has no government insurance. Conforming means it also fits within the loan limits that allow Fannie Mae and Freddie Mac to buy it.
Can I use a conventional loan for a second home?
Yes, with at least 10% down. Second homes have their own rules on occupancy and distance, which we review with you.
Related guides
- Pros and cons of a conventional loan
- Who qualifies
- Conforming vs high-balance
- VA vs FHA vs conventional
Key takeaways
- A conventional loan is not insured by the government — it follows Fannie Mae and Freddie Mac guidelines.
- Standard conforming limit: $832,750. High-balance limit in California high-cost counties: up to $1,249,125.
- Works for primary residences, second homes, and investment properties.
- Down payments start as low as 3% for qualified first-time buyers.
- PMI removal can be requested at 80% LTV of the original value and terminates automatically at 78% if payments are current — unlike FHA mortgage insurance.
- Automated underwriting (DU or LPA) drives the approval decision.
- Loan-to-value divides the loan by the property value; debt-to-income divides monthly debts by gross income.
- Conventional allows second homes and rentals; FHA and VA are for owner-occupied homes.
- Automated underwriting weighs your whole file, so one weak number does not decide the outcome.
Ready to explore your conventional loan options? Lendia can walk you through what you qualify for and find the right program for your goals.