If you're refinancing a conventional loan, you'll need more than 3% equity. In all cases, you'll need at least 5% equity. If you're doing a cash-out refinance, you'll need to leave at least 20% equity in the home.
Conventional loans require as little as 3% down (this is even lower than FHA loans). For down payments lower than 20% though, private mortgage insurance (PMI) is required. (PMI can be removed after 20% equity is earned in the home.) The more you put down, the lower your overall loan costs.
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.
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.
Conventional Loans
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.
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.
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.
No down payment is required for VA, USDA and doctor loan programs detailed above. What credit score do I need to buy a house with no money down? No-down-payment lenders usually set 620 as the lowest credit score to buy a house.
It's better to put 20 percent down if you want the lowest possible interest rate and monthly payment. But if you want to get into a house now and start building equity, it may be better to buy with a smaller down payment — say 5 to 10 percent down.
Homebuyers with 5% down can qualify for fixed-rate mortgages and adjustable-rate mortgages for single-family homes, condos, townhouses, and planned unit developments (PUD). As the down payment is less than 20%, you'll likely need to pay PMI until your home equity reaches at least 20%.
Before buying a home, you should ideally save enough money for a 20% down payment. If you can't, it's a safe bet that your lender will force you to secure private mortgage insurance (PMI) prior to signing off on the loan, if you're taking out a conventional mortgage.
To summarize
The difference between putting down 20% versus 5% is obvious. The amount of interest and private mortgage insurance you save is significant. The difference between a 5% down payment and 10% down payment becomes less significant. Going into home ownership with a solid savings balance is necessary.
A conventional loan requires a credit score of at least 620, but it's ideal to have a score of 740 or above, which could allow you to make a lower down payment, get a more attractive interest rate and save on private mortgage insurance.
The mortgage approval process can take anywhere from 30 days to several months, depending on the status of the market and your personal circumstances.
Sellers' Own Perceptions
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.
Alternatively, PMI can be canceled at your request once the equity in your home reaches 20% of the purchase price or appraised value. “Or, PMI will be terminated once you reach the midpoint of your amortization. So, for a 30-year loan, at the midway point of 15 years PMI should automatically cancel,” Baker says.
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.
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.
The more money you put down, the better. Your monthly mortgage payment will be lower because you're financing less of the home's purchase price, and you can possibly get a lower mortgage rate.
A 750 credit score generally falls into the “excellent” range, which shows lenders that you're a very dependable borrower. People with credit scores within this range tend to qualify for loans and secure the best mortgage rates. A 750 credit score could help you: Qualify for a mortgage.
Interest rates for FHA loans will be lower than a conventional loan when the borrower has a high credit score and a small down payment. With conventional loans, putting down just 5% will not only result in PMI, but there will be a rate add-on for the high loan to value ratio.
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.