What Are Conventional Loans?

A conventional loan is a type of mortgage loan that is not insured or guaranteed by the government (like FHA, VA, or USDA loans). Instead, conventional loans are offered by private lenders (banks, credit unions, mortgage companies) and are often subject to the guidelines set forth by Fannie Mae and Freddie Mac, which are government-sponsored enterprises (GSEs). These two organizations purchase, bundle, and sell mortgages to investors, which helps provide a continuous flow of funds for home financing.

Conventional loans can be conforming (i.e., they meet the limits set by Fannie Mae and Freddie Mac) or non-conforming (i.e., they exceed these limits, such as jumbo loans).

Types of Conventional Loans:

1. Fixed Rate Loans:

   • With a fixed-rate mortgage, the interest rate remains the same for the life of the loan, making your monthly payments predictable.

   • Typical terms: 15, 20, 30 years.

2. Adjustable Rate Mortgages (ARMs):

   • ARMs have interest rates that are initially lower than fixed-rate loans but can change periodically based on market conditions.

   • They typically have an initial fixed period (e.g., 5 years, 7 years) and then adjust annually.

3. Combination (Hybrid) Loans:

   • A hybrid mortgage is a combination of a fixed-rate and adjustable-rate mortgage, where the loan starts with a fixed interest rate for a set period and then adjusts.

4. Balloon Mortgages and Pledge Asset Loans:

   • Balloon mortgages have low monthly payments but require a large lump sum payment (balloon payment) at the end of the loan term.

   • Pledge asset loans allow borrowers to use investments or assets as collateral to secure a loan with a lower interest rate.

5. Jumbo Loans:

   • Jumbo loans are non-conforming loans that exceed the limits set by Fannie Mae and Freddie Mac. These loans are typically used for luxury homes or properties in high-cost areas.

   • In 2026, the loan limit for conventional loans is $832,750, and anything above that amount qualifies for Jumbo loan guidelines.

6. Reverse Mortgages:

   • Reverse mortgages are for seniors aged 62 and older, allowing them to convert part of the equity in their home into a loan without monthly payments. The loan is repaid when the homeowner sells the home, moves out, or passes away.

Advantages of Conventional Loans:

1. Flexibility in Property Types:

   • Conventional loans can be used to finance a variety of property types, including primary residences, second homes, and rental properties, unlike government-backed loans that typically only allow primary residences.

2. Down Payments as Low as 3%:

   • Many conventional loan options, like Fannie Mae's HomeReady® program, offer 3% down payment for qualified borrowers, making them an attractive option for first-time homebuyers.

3. No PMI with 20% Down:

   • If you make a down payment of 20% or more, you can avoid private mortgage insurance (PMI), which can save you hundreds of dollars per month.

   • PMI can be canceled when you reach 20% equity in the home.

4. Flexible Loan Terms:

   • Conventional loans offer a variety of loan terms, including 10, 15, 20, 25, and 30-year options. You can choose the term that best fits your financial situation and goals.

5. Mortgage Insurance Cancellation:

   • For loans with a down payment of less than 20%, conventional loans require PMI. However, unlike FHA loans, PMI can be canceled once your equity reaches 20% of the home's value.

6. Lower Interest Rates for Strong Credit:

   • Conventional loans typically offer lower interest rates for borrowers with strong credit scores, especially when compared to government-backed loans.

7. Higher Loan Limits:

   • Conventional loans have higher loan limits than FHA loans, allowing borrowers to purchase more expensive homes.

   • In 2026, the conventional loan limit is $832,750, and for amounts above this, Jumbo loans apply.

Conventional Loan Terms:

1. 10-Year & 15-Year Loans:

   • These options allow you to pay off your mortgage more quickly and build equity faster, but they come with higher monthly payments due to the shorter term.

   • Lower interest rates make these options attractive for those who can afford the higher monthly payments and want to own their home outright quickly.

2. 20-Year, 25-Year, and 30-Year Loans:

   • These longer terms typically offer lower monthly payments compared to 10- or 15-year loans, but they also tend to have higher interest rates.

   • 30-year loans are the most common, offering lower monthly payments and longer repayment periods, making them an ideal choice for homeowners planning to stay in their home long-term.

3. Flexible Payments:

   • Many conventional loans allow you to make extra payments toward the principal without penalty, helping you pay off the loan faster if you choose.

Conventional Loan vs. Other Loan Types (FHA, VA, USDA):

FeatureConventional LoanFHA LoanVA LoanUSDA LoanDown PaymentAs low as 3%3.5%0%0%Private Mortgage Insurance (PMI)Required if less than 20% downRequired if less than 20% downNoneNoneCredit Score Requirement620–700+580620–640640Loan LimitsUp to $832,750 (2026)Varies by countyVaries by countyVaries by countyEligible Property TypesPrimary residence, second homes, rental propertiesPrimary residence onlyPrimary residence onlyPrimary residence onlyMortgage InsuranceCancels when 20% equity is reachedUpfront and annual MIPNoneLow annual MIPInterest RatesTypically lower for high-credit borrowersHigher than conventionalLower ratesLow ratesEligible BorrowersAll buyersFirst-time buyers, low-incomeVeterans and service membersLow-to-moderate income, rural areas

Conventional Loan Limit in Texas (2026):

• The 2026 loan limit for conventional loans is $832,750 in most areas of Texas. In areas where the cost of living is higher (like parts of Austin, Dallas, and Houston), the limit may be higher.

• Jumbo loans are used for properties that exceed these limits. Jumbo loans often have stricter qualifications and higher interest rates.

Why Choose a Conventional Loan?

• More Flexibility: Conventional loans can be used for a variety of property types, including second homes and rental properties, which are not allowed with most government-backed loans.

• No PMI with 20% Down: Avoiding monthly PMI payments is a major advantage for borrowers with a larger down payment.

• Choice of Loan Terms: You can choose a loan term that fits your financial goals, whether you're aiming to pay off your mortgage quickly (10 or 15 years) or want a longer term to keep monthly payments lower (20 or 30 years).

• Higher Loan Limits: Conventional loans allow for higher loan amounts, which can be especially useful for purchasing homes in areas with high housing costs.

Conclusion

A conventional loan is an excellent option for buyers with strong credit and some savings for a down payment. It offers a wide range of loan terms, the possibility to avoid PMI with a 20% down payment, and flexibility in property types. Whether you're looking for a primary home, a second home, or rental property, conventional financing provides many options to fit your needs.

For more information about conventional loans and how they might work for you, it's a great idea to speak with a mortgage professional to discuss your options and get a Quick Quote based on your situation.