What the minimum down payment requirement for a conventional loan?

Although most people assume they need a 20% down payment to buy a home, there are low down payment conventional loans available, including the Conventional 97 loan program which allows qualifying borrowers to get a conventional loan with as little as 3 percent down.

In fact, this low down payment program can be a competitive option for homebuyers with limited down payment funds who are considering an FHA loan.

Low down payment home loans: Conventional 97 & FHA loans

Choosing between a conventional mortgage or a loan backed by a government program like the Federal Housing Administration (better known as FHA) may seem a little ambiguous and confusing.

The FHA offers 3.5 percent down payment mortgage loans. That sounds great especially if you don’t have a lot of money to spend upfront on home buying. But conventional loan programs now give qualifying borrowers the opportunity to put just 3 percent down for a mortgage.

With so many loan options, how do you choose the right type of mortgage for your financial situation?

“It’s all about who you are talking to,” says Susan Stevenson, president of the Ohio Mortgage Bankers Association. “You really have to educate yourself on the different loans and get options. As a loan officer, I could take the same options and make them look different than someone else. There are a lot of variables in mortgages, and plus it also depends on what kind of house you buy and where you buy it.”

Check your eligibility for a low down payment loan. Start here (May 31st, 2023)

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.

“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.

Typical conventional mortgage down payment amount

“Conventional loans are very popular still. Older people usually have 20 percent down because they are downsizing or upsizing, and they sell a house. They put that money towards a new place,” Stevenson says.

But she usually sees the majority of people putting down between five and 10 percent of the loan amount. With a down payment of at least 5%, conventional loan rates drop compared to the 3% down payment option.

Minimum down payment requirements for jumbo loans

Jumbo loan down payments are typically at least 10 percent of the loan amount but some lenders are likely to require a down payment of as much as 30 percent.

Because these loans are non-conforming (meaning the lender can’t sell them to Fannie Mae or Freddie Mac), the lender is already assuming additional risk by offering a loan above conforming loan limits. As a result, it’s unlikely they’ll be willing to take on the added risk of a loan down payment.

FHA vs conventional mortgage payment showdown

For many people without 5% down, who only have money for a small down payment, the dilemma is whether to get a conventional loan or an FHA loan.

Both loans require mortgage insurance. Conventional loan borrowers making a down payment of less than 20 percent will need to get Private Mortgage Insurance (PMI). The good news is that once you reach a loan-to-value ratio of at least 78 percent, you can cancel the insurance.

The bad news with an FHA loan is you’re stuck paying PMI over the life of the loan unless you refinance.

Here’s an example of how close monthly mortgage payments can be, comparing an FHA 3.5 percent down payment loan with a conventional 3 percent down payment loan:

Stevenson says that if someone is buying a $200,000 home with a conventional loan and a 3 percent down payment, the interest rate might be about 4.62 percent – which is a higher interest rate than the 3.5 percent an equivalent borrower might get on an FHA loan. But remember, all of this really hinges on your credit score — with a higher credit score, you get a lower interest rate.

Fannie Mae charges points — also known as extra fees — to do their 97 percent loans. Typically borrowers pay those fees by accepting a higher rate rather than paying out of pocket. So the rate ends up quite a bit higher than that of the FHA option.

The monthly mortgage insurance premiums or PMI for the conventional loan will be $151 a month.

With an FHA loan on the same $200,000 house, PMI will be a little lower ($137 a month) than with the conventional loan. Before taxes, you would pay $1,148.43 for the conventional loan each month. The FHA would be a little less at $1,018.82. The upfront mortgage insurance for FHA is rolled back into the loan and the monthly mortgage cost is reduced, she says.

But remember that once you hit that 78% loan-to-value point (in other words, once you have 22% home equity), that $151 monthly PMI payment goes away on the conventional loan.

Viewed side by side, here’s what each loan would look like, before taxes, home insurance, and HOA dues:

• 3% down conventional: $1,148 per month
• FHA: $1,018 per month

After 22% equity attained

• 3% down conventional: $997 per month
• FHA: $991 per month (FHA mortgage insurance decreases based on current principal owed)

“Every scenario is going to be different. But those with lower credit scores probably would head toward a FHA loan,” Stevenson says. “If you have a 750 credit score and have 3 to 5 percent down, you most likely would go with a conventional loan.”

And with a conventional loan, you can put down as much as you can afford, which will help lower your monthly payments. But remember not to leave yourself without any money for emergencies such as a busted water heater or broken window. Stuff happens, and you need a fund set aside for such purchases and repairs.

FHA and conventional 97 rate quotes available

It’s hard to tell if an FHA or conventional loan is the best mortgage option for your home purchase just by reading an article. To help you determine which type of loan is best for your financial situation, you can receive live quotes from real lenders now.