How Much Do I Need For a Conventional Loan Down Payment?

What does “conventional loan” mean?

A conventional home loan is a standard mortgage overseen by the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac.

Unlike government-backed loans, such as FHA, VA, and USDA loans, Fannie Mae and Freddie Mac set the borrower criteria that lenders use to approve borrowers for conventional loans.

Because the government doesn’t insure conventional loans, the requirements can be stricter than the federal mortgage programs. Lenders may require higher credit scores and lower debt-to-income ratios (DTI) for conventional borrowers.

And although the minimum required down payment is 3%, borrowers may sometimes need to put down more to qualify for a conventional mortgage, especially if they have less-than-perfect credit.

Still, the benefits of conventional loans can outweigh the higher barriers to entry — especially for borrowers with strong credit profiles.

Conventional loan benefits

  • Low minimum down payments: Put down as little as 3%
  • No upfront mortgage insurance: Unlike USDA, FHA, and VA loans, conventional mortgages do not require an upfront mortgage insurance premium or funding fee
  • Cancellable PMI: Unlike FHA or USDA loans, private mortgage insurance (PMI) falls off of a conventional loan once you have 20% home equity. You can also avoid PMI altogether if you put 20% down
  • Fewer property restrictions: Conventional home loans are go-to products if you’re buying an investment property or a second home since government-backed loans, including USDA, VA, and FHA, do not allow those property uses
  • Higher loan limits: Compared to FHA loans, conventional loans have higher loan limits so you may be able to finance a more expensive home

Qualifications And Requirements For A 3% Down Conventional Loan

Each lender has different qualifying requirements for the 3% down conventional loan, but on average, here’s how you might qualify.

Average Credit Score And Report

Your credit report and credit score are the first things mortgage lenders look at when determining if a borrower is eligible for the loan program. On average, lenders require a credit score of at least 620, but a credit score of 680 may give you an even better chance at loan approval.

Your credit history and credit score are both important factors. Your credit history shows lenders if you make your payments on time, especially any monthly mortgage payments. Lenders also consider your credit score, which determines if you qualify for the Conventional 97 program.

Your credit score also determines your interest rate, which affects your mortgage payment. Higher credit scores, especially those over 680, provide access to the best interest rates. If you’re approved with a lower credit score, you’ll likely pay a higher interest rate.

A Low Debt-To-Income Ratio

Ideally, all borrowers should have a debt-to-income ratio below 43%. Your debt-to-income ratio compares your monthly debts (on your credit report) compared to your gross monthly income (income before taxes).

Lenders use your DTI to determine if you can afford the loan. If your DTI is too high, it could mean you have too many debts outstanding. If you have too much money committed to your debts, you can be at a higher risk of default moving forward.

Keep in mind, your DTI includes all existing debts plus the new mortgage payment. The new mortgage payment includes principal, interest, monthly real estate taxes, monthly homeowner’s insurance, mortgage insurance, and HOA dues if applicable.

Good Employment History And Steady Income

Lenders typically want 2-year stable employment and income history. Employment stability shows you are lower risk because you don’t change jobs often. When you change jobs, your income typically changes, making it harder to afford your loan payment if your income falls or if you have significant gaps in employment.

A 2-year history provides lenders with enough reassurance that you’re a stable borrower. However, if you change jobs within the last 2 years but stay within the same industry, lenders may accept it as part of a 2-year stable history. When you change industries, they hesitate to approve your loan until you have a more stable history.

Doesn’t Exceed Conforming Loan Limits

Conventional loan lenders must abide by the conforming loan limits for Fannie Mae or Freddie Mac to invest in them. If they lend more than the annual limits, they’ll be stuck with the loan on their books, which reduces their liquidity to offer more loans and make more money.

In 2022, the conforming loan limit is $647,200. If you need a larger loan, you’d need a jumbo loan, which is a non-conforming loan and has different qualifying requirements.

An Education Course For Home Buyers

Most first-time home buyers must undergo a home buyer education course before taking on the Conventional 97 loan program. This ensures that home buyers understand what they’re getting into and the risk of borrowing 97% of the home’s value. The educational course is meant to help home buyers understand how mortgage loans work and ensure it’s the right financial choice for them.

No Recent Bankruptcies Or Foreclosures

It’s important that you don’t have any recent bankruptcy discharges or foreclosures on your credit report. If you had one or the other in the past, it might still allow you to qualify. However, 4 years must have passed after a Chapter 7 bankruptcy and 7 years after a foreclosure.

Must Be A Primary Residence

To use the 3% down conventional loan, the home you’re buying must be a primary residence. This means you must live in the home full-time. If it’s a second home, vacation home, or investment home, you can use traditional financing, but not the Conventional 97 loan program.

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What Type of Credit Score is Required for a Conventional Loan?

In order to qualify for a conventional loan, typically, the minimum credit score is 620. The higher your credit score, the more favorable interest rate you will receive. 

Is a low down payment conventional mortgage better than FHA?

FHA loans are backed by the federal government and issued by participating lenders.

When you get a conventional loan, there are no such governmental guarantees. That means the full risk of your potential default on the loan is assumed by the lending bank or loan company — rather than shared by a government agency.

Combined with the smaller down payment requirements, the mortgage lender’s exposure is simply higher on these low-down payment conventional loans. So they don’t issue them to just anyone.

That means the underwriting guidelines are tougher. To qualify, borrowers will need a pretty good credit score, lower loan-to-value ratio, good income and future income, and a nearly unblemished credit history.

If you plan on getting one of those 3 percent down payment conventional loans offered by Fannie Mae or Freddie Mac, you need at least a 680-700 credit score, and you need to pay your bills on time, Stevenson says.

Click here to check your 3% down eligibility.

“It’s a great program. If you are approved, you can get your down payment through gift money, too,” she says. “The guidelines have been tweaked. It used to be that if you were putting down 5 percent on a conventional loan, that 5 percent had to come from you.”

Stevenson works with all kinds of borrowers who have everything from more than 20 percent down to those who have nothing to put toward a down payment. Believe it or not, there are loans for those who have saved zero dollars. Plus, there are lots of down payment assistance programs to help people across the country to become homeowners.

Other Low Down Payment Programs

USDA and VA loans require no down payments, but you have to be eligible for them. To qualify for a USDA loan (backed by the U.S. Department of Agriculture), you must be buying a home in a designated rural or suburban area and have a low- to moderate-income for the area. And of course, to receive a VA loan (backed by the Department of Veterans Affairs), you have to be a current or retired military person or spouse.

It’s worth noting that these programs are intended to help borrowers finance a primary residence. They’re meant to make homeownership more accessible so it’s unlikely you’ll be able to buy a second home with no money down.

Benefits of Larger Down Payment

While not always available for a homebuyer, making a larger down payment can be a smart strategy to lower both the monthly cost of carrying the home, as well as the overall cost of interest paid over the lifetime of the loan. This also means that you will have a larger amount of home equity in your house to draw on if you need to access it through a home equity loan or HELOC. This can be helpful if you need to remodel or just need the cash for a large expense or emergency.

In addition to the lower financial costs of owning your home, a larger down payment can also qualify you for a lower interest rate on your mortgage, especially if you can get the loan amount down below the jumbo loan threshold. You also won't need to pay for PMI mortgage insurance and you may have an advantage over other potential buyers in the case of multiple bids by making a more attractive offer.

While there are benefits to a larger down payment, one must balance the pros and the cons. With a larger amount down, that money is no longer available to make other purchases or investments, so there is an opportunity cost. That money will also be tied up in your home, making it less liquid than cash.

Types of loans

You can choose from a wide variety of loans. However, the four common types of mortgage loan programs are:

1. Conventional Fixed-Rate Mortgages

With this type of mortgage, you keep the same interest rate for the life of the loan, which means the principal and interest portion of your monthly mortgage payment stays the same. These types of loans typically come in 10, 15, 20 or 30-year terms.

If you put less than 20% down on a conventional loan, you may need to pay private mortgage insurance (PMI). The most common way to cover this cost is to pay for it in a monthly premium that’s added to your mortgage payment. PMI usually equals 1% of your loan balance per year. Many lenders offer conventional loans with PMI for down payments as low as 5%, and some as low as 3%.

2. Conventional Adjustable-Rate Mortgage (ARM)

Unlike a fixed-rate loan, an adjustable-rate mortgage has an interest rate that can go up or down based on market conditions. The down payment is typically between 3 and 20%, and will require PMI for buyers who put down less than 20%.

With an ARM, the initial rate is often lower than a fixed-rate loan. However, the interest rate may go up over time.

3. Federal Housing Administration (FHA) Loan

This is a type of loan insured by the federal government. An FHA loan is ideal for first-time buyers with less-than-perfect credit scores and offers down payments as low as 3.5%. Unlike conventional mortgages, mortgage insurance includes both an upfront amount and a monthly premium.

4. VA Loans

This type of loan is only available for U.S. military veterans and active-duty servicemembers.

VA loans are funded by a lender and guaranteed by the Department of Veterans Affairs. The primary benefit of pursuing this type of loan is it may not require a down payment.

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What Are Rates For A Conventional Mortgage?

Interest rates for conventional mortgages change daily. Conventional mortgage interest rates are usually slightly lower than FHA loan interest rates and slightly higher than VA loan interest rates. However, the actual interest rate you get will be based on your personal situation.

While many sites can give you estimated conventional loan interest rates, the best way to see your actual interest rate for a mortgage is to apply. When you apply with Rocket Mortgage®, you’ll be able to see your real interest rate and payment without any commitment.

Government-Insured Loans

FHA loans (3.5% down)

You can put as little as 3.5% down on FHA loans if you have a minimum credit score of 580. FHA-approved lenders also will consider borrowers with non-traditional credit histories as long as you’ve had on-time rent payments in the past 12 months, no more than one 30-day late payment to other creditors, and you haven’t had any collection actions (medical bills being the exception) filed in the last 12 months. 

Also, the property you’re buying must comply with the property standards set by the U.S. Department of Housing and Urban Development for single-family and condo homes and be within FHA loan limits. Another benefit of FHA loans is that you can use a financial gift from a relative or friend toward all or part of your down payment if you provide documentation stating it’s a gift and not a third-party loan.

VA loans (0% down)

U.S. military service personnel, veterans, and their families can qualify for zero-down loans backed by the U.S. Department of Veteran Affairs. Other benefits include a cap on closing costs (which may be paid by the seller), no broker fees, and no MIP. VA loans do require a “funding fee,” a percentage of the loan amount that helps offset the cost to taxpayers. The funding fee varies depending on your military service category and loan amount.

USDA loans (0% down)

The U.S. Department of Agriculture guarantees loans to help make homeownership possible for low-income buyers in rural areas nationwide. These loans require no money down for qualified borrowers—as long as properties meet the USDA’s eligibility rules.

Conventional loan vs. government loans

Home buyers have dozens of mortgage loan options today.

In general, though, mortgages can be divided into two broad categories — government-backed loans and conventional loans.

The rule of thumb is that if you have good credit (680+) and a large down payment (5% or more), a conventional loan is often best. If you have lower credit and/or a smaller down payment, a government-loan can help.

But those are not universal rules. The best type of mortgage for you will depend on your budget, your credit, and your home buying goals.

To help guide you in the right direction, here’s a broad overview of conventional vs. government loans, and who they’re best for:

  • Conventional loans: Privately-backed loans that tend to be most affordable for people with credit scores above 680 and down payments of 5% or more. However, conventional loans are also available with credit as low as 620 and a down payment as low as 3%
  • Jumbo loans: Jumbo loans may be the right option for people buying high-priced homes. That includes any loan amount above $[conventional_loan_limits] in most areas. You typically need a credit score of 700 or higher for a jumbo loan
  • FHA loans: FHA loans are typically best for people with credit between 580-680 and a down payment of at least 3.5%
  • VA loans: VA loans are almost always best for qualified veterans and military members. They let you buy a house with 0% down, exceptionally low interest rates, and no monthly mortgage insurance
  • USDA loans: These zero-down loans are available in select rural and suburban areas. They’re reserved for home buyers with low- to moderate-income, and typically have below-market interest rates

If you’re not sure which type of loan is best for you, read up on your options or chat with a loan officer about what you might qualify for.

Are Conventional Loans Backed by the Government?

Conventional loans are purchased by Freddie Mae and Fannie Mac which are Government Sponsored Entities (GSE) but are not government-owned. However, since the financial crisis in 2008, these entities have been in government conservatorship. They have different lending standards and requirements than FHA, VA, or USDA loans and are not government-insured.

Nonconforming Loan Options

Conventional loans might work for a lot of people, but they may not be the right fit for everyone. Make sure you meet the minimum requirements before completing a conventional loan application. Talk to your realtor or mortgage broker to find out if you qualify. They may suggest other options if you don’t.

  • FHA: The Federal Housing Administration backs loans for borrowers with credit scores as low as 500, depending on the lender, and with down payments as low as 3.5%.
  • USDA: The U.S. Department of Agriculture backs home loans for buyers in rural areas on low or moderate incomes. You can make as little as $0 as a down payment with a USDA loan. There’s no credit requirement.
  • VA: The Department of Veterans Affairs backs VA loans, available to military personnel and their families. There’s no down payment required and you can use it many times throughout your life if you qualify.

Minimum down payment for a conventional loan

It’s a common myth that you need a 20% down payment for a conventional loan. You can actually get one with as little as 3% down.

All told, there are six major conventional loan options that can range from 3% to 20% down.

Conventional loan down payment requirements:

  1. Conventional 97 loan: 3% down
  2. Fannie Mae HomeReady: 3% down
  3. Freddie Mac Home Possible: 3% down
  4. Conventional loan with PMI: 5% to 19.99% down
  5. Piggyback loan (no PMI): 10% down
  6. Conventional loan with no PMI: 20% down

From the 10% down piggyback loan to 3% down HomeReady and Conventional 97 loans, low-down-payment options not only exist but are extremely popular with today’s conventional loan borrowers.

So, how do you qualify for a conventional loan? Simply by meeting requirements set out by Fannie Mae and Freddie Mac.

Once you do that, you can join the club of conventional loan homeowners who make up the majority of the market.

The 20% down payment myth

Where does the myth about the 20% down payment requirement come from? Probably from shoppers who want to avoid paying private mortgage insurance premiums.

When you put less than 20% down on a conventional loan, your lender will require private mortgage insurance (PMI). This coverage helps protect the lender if you default on the loan.

PMI does increase monthly mortgage payments. But that’s OK if it allows you to get a conventional loan with a down payment you can afford.

Also note that conventional PMI can be canceled later on, once your home reaches at least 20% equity. So you’re not stuck with it forever.

Benefits of a Conventional Mortgage

Traditional mortgages offer low interest rates, flexible upfront payment options, and lower mortgage insurance rates.

Traditional loans are the cheapest and most beneficial mortgage option for borrowers, so if you have the financial footing to qualify for conventional financing, it’s best to avoid government mortgage loans.

When you take out a conventional mortgage, you’ll be able to select a 15 or 30-year term.

Many financial experts advise borrowers to select a 15-year term to save money on interest and private mortgage insurance.

Taking out a conventional, 15-year loan with a large down payment is by far the most efficient, affordable way to purchase your dream home.

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