Conventional Loans in Tennessee

What is a conventional loan?

A conventional loan is any mortgage not backed by a government agency. Unlike FHA, VA, or USDA loans, conventional loans are originated and funded by private lenders and typically sold to Fannie Mae or Freddie Mac on the secondary market. This means they follow the underwriting guidelines set by those two entities — guidelines that govern credit scores, debt ratios, down payments, and property standards.

Conventional loans are the most common mortgage type in Tennessee and nationally. They're available for primary residences, second homes, and investment properties, and they can be used for purchases, rate-and-term refinances, and cash-out refinances.

Conforming loan limits in Tennessee

A conforming loan is a conventional loan that falls within the limits set by the Federal Housing Finance Agency (FHFA). For 2026, the conforming loan limit in Tennessee is $806,500 for a single-family home. This limit applies uniformly across all Tennessee counties — unlike some high-cost states where limits are higher in expensive metro areas. Limits are adjusted annually by the FHFA and may change each year.

Loans above this limit are called jumbo loans and require separate qualification standards. Most Tennessee home purchases fall within the conforming limit, though Nashville's higher price points are pushing more buyers toward jumbo territory.

Down payment requirements

Conventional loans offer more down payment flexibility than many borrowers expect:

• 3% down — available through Fannie Mae's HomeReady and Freddie Mac's Home Possible programs for qualifying borrowers, typically first-time buyers or those at or below area median income
• 5% down — the standard minimum for most conventional purchase loans
• 10% down — reduces PMI cost significantly and improves rate pricing
• 20% down — eliminates private mortgage insurance entirely

Down payment funds can come from savings, gift funds from family members, or certain down payment assistance programs. Conventional guidelines allow gift funds for down payment — the specific rules on minimum borrower contribution vary by LTV, occupancy type, and AUS findings. Investment properties and second homes have more restrictive gift fund rules than primary residences.

Private mortgage insurance (PMI)

When a conventional loan has less than 20% down, the lender requires private mortgage insurance. PMI protects the lender if you default — it doesn't protect you. The cost varies based on your credit score, loan-to-value ratio, and loan term, but typically runs between 0.2% and 1.5% of the loan amount annually.

The key advantage of conventional PMI over FHA mortgage insurance: it's cancellable. Once your loan balance reaches 80% of the original appraised value, you can request PMI removal. It automatically terminates at 78% LTV based on the original amortization schedule. FHA mortgage insurance, by contrast, typically lasts the life of the loan for borrowers who put down less than 10%.

Credit score and qualification

Conventional loans are underwritten through Fannie Mae's Desktop Underwriter (DU) or Freddie Mac's Loan Product Advisor (LPA). A 620 credit score is a common minimum for many lenders, though some lenders set overlays higher. Rate pricing is risk-based — Fannie Mae and Freddie Mac apply loan-level price adjustments (LLPAs) that increase the effective cost as credit scores decrease or LTV increases. Borrowers above 740 typically receive the most favorable pricing; those in the 620–679 range may face meaningfully higher costs.

Debt-to-income ratio limits are driven by the AUS result rather than a single universal cap. DU and LPA can approve loans with back-end DTI above 45% when the overall file is strong — significant reserves, a large down payment, or excellent credit can support higher DTI approvals. Lender overlays may impose stricter limits than the AUS finding.

Fixed vs. adjustable rate

Conventional loans are available in both fixed-rate and adjustable-rate (ARM) structures. The 30-year fixed is the most common choice for Tennessee buyers who plan to stay in their home long-term. The 15-year fixed offers a lower rate and faster equity buildup at the cost of a higher monthly payment.

ARMs — typically 5/1, 7/1, or 10/1 structures — offer a lower initial rate that adjusts after the fixed period. They can make sense for buyers who expect to sell or refinance before the adjustment period begins, but carry rate risk if plans change.