A conventional loan is the most common loan used to buy a home. With a decent credit score and solid minimum down payment, a conventional loan might work for you. But how much money do you need for a minimum down payment for a conventional loan?
Here’s how to tell how much you need for a minimum payment for a conventional loan
- The minimum down payment for a conventional loan depends on several factors, including the sales price and the borrower’s qualifications.
- In general, the minimum down payment for a conventional loan can be as low as 3% of the sales price.
- Borrowers who want to avoid paying private mortgage insurance should plan to pay at least 20% of the sales price as a down payment.
What Is a Conventional Loan?
Conventional loans are mortgages that aren’t insured or backed by government agencies. Conventional mortgages come from private lenders and while most follow government rules and regulations (these conform to agency requirements and are called “conforming loans”), they aren’t offered or backed by government entities.
Conventional loans usually require private mortgage insurance (PMI) if you spend less than 20% of the sales price as a down payment. Private mortgage insurance is an additional premium added onto your monthly mortgage payment. It offers protection to the lender in case you fall behind or miss mortgage payments.
You can remove PMI once you reach 20% equity in your home, based on the original sales price. Your lender is required to remove it when you reach 22% equity in your loan.
Minimum Down Payment for Conventional Loans
While 20% is often suggested for a minimum down payment, it’s not a requirement. You can put as much down as you’d like, or as little as 3%, depending on your lender and the loan.
A 20% down payment avoids PMI, which means your monthly payments will be lower compared to a borrower who does pay PMI. Here’s what the difference looks like for a home with a sales price of $200,000, a 30-year fixed rate mortgage, and a borrower with a good credit score, using our mortgage calculator:
|Down Payment||Interest Rate||Principal & Interest||Taxes & Insurance||PMI||Monthly Payment|
|20% = $50,000||3.125%||$856.75||$444.33||$0||$1,301.08|
|5% = $12,500||3.125%||$1,017.39||$444.33||$148.44||$1,610.16|
The difference in monthly payment is $309 more for the buyer with PMI compared to the one who doesn’t have to pay it. This amount includes the PMI payment itself, plus additional interest expense. Say you pay this until you’re midway through your 30-year loan (when your lender will remove PMI regardless of your equity). That’s an extra $3,708 per year or $55,620 over 15 years.
While PMI is required for conventional loans that don’t have a 20% down payment, having that much as a down payment isn’t required to get the loan. But keep in mind you’ll have an additional PMI expense if you choose this option.
There’s no one minimum down payment for everyone since each homebuyer brings their own financial situation to a home loan, including debt-to-income ratio, income, and credit score.
Other Conventional Loan Requirements
Conforming conventional mortgages adhere to underwriting guidelines set by the mortgage financing giants Fannie Mae and Freddie Mac. These Government Sponsored Enterprises (GSEs) play a major role in the mortgage market. In 2020, the GSEs purchased 62% of the loans originated, shaping the entire market. Because of the GSEs influence, 97% of loans originated in the first half of 2020 were conforming.
- Your credit score: Conventional loans have credit score requirements, which vary based on lender and loan. The higher your credit score, the lower your interest rate. Getting the lowest interest rate available means you’ll pay less in interest over the total life of your mortgage. You should have at least a 620 credit score if you want to get a conventional loan.
- Your DTI: Your debt-to-income ratio, or DTI, is another factor lenders look at. This ratio is all of your monthly debts divided by your gross monthly income. Your DTI shouldn’t exceed 43%, but the lower it is, the more likely you are to get approved for the full loan amount you’re requesting. A low DTI tells lenders you can comfortably pay your mortgage in case of an emergency.
- The full loan amount: Conventional conforming loans have a maximum amount you can borrow. For 2021, it’s $548,250 for most counties, or $822,375 for high cost-of-living areas. If you think your home price exceeds these amounts, you may want to explore other financing options.
While conventional loans might work for a lot of people, they may not work for everyone. Make sure you meet the minimum requirements before completing a conventional loan application. Talk to your realtor or mortgage broker to see if you qualify, and if you don’t, they may suggest other options.
Unconventional Loan Options
- 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 have 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.
Frequently Asked Questions (FAQs)
How much do you have to put down on a conventional loan without PMI?
If you want to get a conventional loan without private mortgage insurance, or PMI, you’ll need a down payment of at least 20%. It’s not required to qualify for a conventional loan, but it does help you avoid the extra PMI expense.
What credit score do you need to get a conventional loan?
For most lenders, you’ll need at least a 620 credit score to qualify for a conventional loan. If you don’t meet the minimum credit score requirements, you may want to try a USDA loan, which doesn’t have a credit score requirement, or an FHA loan, which lets you borrow with a credit score of at least 500.