Typically, if a down payment is less than 20%, private mortgage insurance, (PMI) will be required in order to protect lenders in case you are unable to pay your loan, so PMI is required with a 5% down conventional loan.
Borrowers with lower credit scores might be required to make a down payment of 5% or more to get a conventional loan, meaning they'd need to finance 95% of the home's value. This is sometimes referred to as a “5 down conventional loan” or a “conventional 95 mortgage.”
The minimum down payment required for a conventional mortgage is 3%, but borrowers with lower credit scores or higher debt-to-income ratios may be required to put down more. You'll also likely need a larger down payment for a jumbo loan or a loan for a second home or investment property.
Options for putting down less than 20 percent
Here are some common options: A conventional loan with private mortgage insurance (PMI). “Conventional” just means that the loan is not part of a specific government program. Typically, conventional loans require PMI when you put down less than 20 percent.
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.
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.
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.
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. These are only general guidelines, though.
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.
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.
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.
Conventional home mortgages require down payments of anywhere from 3 to 20 percent of the purchase price. The minimum down payment requirement is contingent on the home loan amount and the homebuyer's credit score and income.
One way to avoid paying PMI is to make a down payment that is equal to at least one-fifth of the purchase price of the home; in mortgage-speak, the mortgage's loan-to-value (LTV) ratio is 80%. If your new home costs $180,000, for example, you would need to put down at least $36,000 to avoid paying PMI.
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.
A conventional loan is a great option if you have a solid credit score and little debt. You can avoid PMI by paying 20% of the loan upfront, which will lower your mortgage payments. If you're unable to make a large payment upfront, conventional loans are available with a down payment as low as 3%.
To convert an FHA loan to a conventional home loan, you will need to refinance your current mortgage. The FHA must approve the refinance, even though you are moving to a non-FHA-insured lender.
The mortgage approval process can take anywhere from 30 days to several months, depending on the status of the market and your personal circumstances.
While you don't need a perfect 850 credit score to get the best mortgage rates, there are general credit score requirements you will need to meet in order to take out a mortgage. Prospective home buyers should aim to have credit scores of 760 or greater to qualify for the best interest rates on mortgages.
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.
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.
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.
For conventional loans, mortgage insurance is temporary. It's only required until your home equity percent reaches 20% of your home's market value. In time, because your monthly mortgage payment includes principal repayment, you're likely to gain that home equity and petition your lender to cancel PMI.
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.
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.
Conventional Loans. FHA loans allow lower credit scores than conventional mortgages do, and are easier to qualify for. Conventional loans allow slightly lower down payments.