Forced to put your homebuying plans on hold because you're struggling to save for a down payment? Think again. There's a common misconception that conventional loans require a 20% down payment, but the reality is far more flexible than you may have guessed. Here's what you need to know about minimum down payment requirements for a conventional loan.

What Is a Conventional Loan?

Conventional loans are unique from VA, USDA, and FHA loans in that they are not backed by the federal government. This means that if you default on your loan, the private lender is responsible for absorbing the loss. Because conventional lenders inherit more risk, they typically have stricter lending requirements.

Conventional Loan Lending Requirements

Lending requirements will vary between financial institutions; however, most require:

• A minimum credit score of 620
• A debt-to-income ratio of less than 45%, meaning that your monthly debts should not exceed 45% of your gross monthly income
• Proof of consistent employment
• A 3-20% minimum down payment for a conventional loan

Factors Determining Down-Payment Requirements

Many first-time buyers mistakenly believe they must make a 20% minimum down payment for a conventional loan. This is not true.

Many conventional borrowers purchase homes with as little as 3% down. And at JustChoice Lending, we have conventional products that require 0% down! That said, several financial factors do influence the required down payment for a conventional loan, including:

Credit Score

As a rule of thumb, the higher your credit score, the more flexibility you have with the required down payment for a conventional loan. While you can qualify for a 3% down payment, you’ll need a minimum credit score of 620 or higher, depending on the lender.

Property Type

The property type also affects the down payment amount. For example, if the home will be your primary residence, you may qualify for a 3% down payment. However, if the property is a second home, you typically have to produce a minimum 10% down payment. Investment properties usually require a 15-20% down payment.

Loan Term

The length of your loan can also affect down payment requirements. For example, if you choose a 15-year mortgage, you may be required to produce a larger down payment.

Loan Amount

Generally, the more money you borrow, the higher the down payment requirements. That’s because larger loans create more risk for lenders. Your down payment helps offset that risk.

What Is the Minimum Down Payment for a Conventional Loan?

The minimum down payment for a conventional loan can vary based on your circumstances and the lender. We’ll explain below:

0% Down Payment

Few lenders offer this option. Luckily, JustChoice Lending does. We also offer several specialty programs that can help buyers who might have difficulty qualifying for other types of loans.

3% Down Payment

Typically available to first-time home buyers with strong financial profiles. Keep in mind that lenders will require you to carry private mortgage insurance until you reach 20% equity in your home.

5% Down Payment

Five percent down payments are generally available to most homebuyers. As with 3% down conventional loans, you will be required to carry private mortgage insurance.

10%

A strong option for those who want to secure more favorable loan terms and lower monthly private mortgage insurance costs.

20% Down Payment

This traditional down payment amount gives you the lowest monthly payments and the best loan terms. It also means you don’t have to pay for private mortgage insurance.

Impact of Your Down Payment Choice

Your down payment amount impacts:

• Monthly payments: The more you put down, the lower your monthly payment will be—and the less interest you’ll pay over the lifespan of the loan.
• Private mortgage insurance: Unless you produce a 20% down payment, lenders will require you to carry private mortgage insurance.
• Interest: Generally, the larger your down payment, the lower your interest rate will be. Lenders view larger down payments as lower risk, often rewarding these borrowers with better rates.
• Total loan cost: Your down payment directly impacts the total cost of your loan by affecting the principal amount, potential PMI requirements, and interest rate. Long story short: The larger the down payment, the more you’ll save over the lifespan of the loan.

Looking for a Conventional Loan That Works for You?

Looking for competitive terms and low down payment options? You're in the right place. JustChoice Lending helps clients of all income levels, including those from lower-income backgrounds, find favorable terms and down payment options. Contact us today to speak with one of our conventional mortgage experts.