Yes. The Conventional 97 program allows 3 percent down and is offered by most lenders. Fannie Mae's HomeReady and Freddie Mac's Home Possible programs also allow 3 percent down with extra flexibility for income and credit qualification. FHA loans come in a close second, with a 3.5 percent minimum down payment.
It is a common misconception that in order to obtain a conventional loan, you must pay a 20% down payment, but that is not the case. In fact, you can qualify for a conventional loan by putting down as low as a 5% down payment.
You Can Get a Conventional Mortgage with 10% Down
A 20% down payment is recommended, but it's not required for getting a mortgage. Lenders can underwrite conventional, 30-year, fixed-rate loans for buyers who bring 10% to the table, too. That's great if you want to stick with a conventional loan.
Cons: Why a conventional mortgage may not be right for you
The eligibility requirements for conventional loans are more stringent than government-backed loans. Conforming loans are sold to Fannie Mae or Freddie Mac soon after being created to help keep mortgages affordable for homebuyers.
A conventional loan is often better if you have good or excellent credit because your mortgage rate and PMI costs will go down. But an FHA loan can be perfect if your credit score is in the high-500s or low-600s. For lower-credit borrowers, FHA is often the cheaper option.
Sellers often prefer conventional buyers because of their own financial views. Because a conventional loan typically requires higher credit and more money down, sellers often deem these reasons as a lower risk to default and traits of a trustworthy buyer.
Even though a conventional loan is the most common mortgage, it is surprisingly difficult to get. Borrowers need to have a minimum credit score of about 640 in order to qualify—the highest minimum score of all mortgage products—and have a debt-to-income ratio of 43% or less.
Conventional Loan Requirements
It's recommended you have a credit score of 620 or higher when you apply for a conventional loan. If your score is below 620, lenders either won't be able to approve your loan or may be required to offer you a higher interest rate, which can result in higher monthly payments.
For example, if you apply for a conventional mortgage you're typically allowed a mortgage payment up to 28% of your gross monthly income. Your debt-to-income ratio (which factors in all monthly debt payments, including the new mortgage) cannot exceed 36%.
A conventional loan is a mortgage that's not insured by a government agency. Most conventional loans are backed by mortgage companies Fannie Mae and Freddie Mac. Fannie Mae says that conventional loans typically require a minimum credit score of 620. But lenders can raise their own requirements.
Typical Closing Times: By Loan Type
It takes approximately 47 days to close on a conventional mortgage loan in accordance with Fannie Mae's qualified lending standards. Conventional refinances are faster and take around 35 days to close on average.
FHA loans tend to have higher closing costs than conventional loans, but because FHA loans allow the seller to pay for more of your closing costs than conventional loans, they may actually be cheaper.
Reasons Sellers Don't Like FHA Loans
Both reasons have to do with the strict guidelines imposed because FHA loans are government-insured loans. For one, if the home is appraised for less than the agreed-upon price, the seller must reduce the selling price to match the appraised price, or the deal will fall through.
If you're unable to make a large payment upfront, conventional loans are available with a down payment as low as 3%. In most cases, borrowers save money in the long run with a conventional loan because there's no upfront mortgage insurance fee, and the monthly insurance payments are cheaper.
As a rule, most lenders require PMI for conventional mortgages with a down payment less than 20 percent. However, there are exceptions to the rule, so you should research your options if you want to avoid PMI.
Yes. To convert an FHA loan to a conventional loan you'll need to meet the conventional loan lending criteria and complete a mortgage refinance. You'll also need to provide documentation so the lender can verify your finances.
FHA loans are usually easier to qualify for, with a minimum credit score of 580 to be eligible to make a 3.5% down payment. If your credit score is 500 to 579, you may qualify for an FHA loan with a 10% down payment. Conventional loans typically require a credit score of 620 or higher.
Borrowers who take out FHA loans will likely face higher costs upfront and with every payment, and it could signal that they aren't ready for a mortgage. You'll also have to pay mortgage insurance, and FHA loans are less flexible than conventional loans.
"Typically, FHA is cheaper, with lower interest rates and cheaper mortgage insurance, though this is not always the case," says Henry Brandt, branch manager of Planet Home Lending in Irving, Texas. "However, you have the chance to remove private mortgage insurance on a conventional loan one day without refinancing.
The 3/7/3 Rule requires a seven business day waiting period once the initial disclosure is provided before closing a home loan (business days are everyday except Sundays and Holidays).
Q: Do lenders pull credit day of closing? A: Not usually, but most will pull credit again before giving the final approval. So, make sure you don't rack up credit cards or open new accounts.
The mortgage approval process can take anywhere from 30 days to several months, depending on the status of the market and your personal circumstances.
The Conventional Appraisal
Conventional appraisers base their valuation of a home's worth on three essential factors: location, condition and area comparables for similar houses. They'll also look for safety or health concerns in the home that would diminish the desirability of the home and thus reduce its value.