Unlocking Homeownership With A Conventional 5% Down Loan

Saving up enough for a 20% down payment on a home can feel like an impossible feat these days. Skyrocketing home prices coupled with stagnant wages have put the dream of homeownership out of reach for many aspiring buyers. But what if I told you that you may be able to buy a home with as little as 5% down using a conventional loan? It’s true – conventional loans with 5% down provide a more accessible path to homeownership.

In this article, we’ll dive into everything you need to know about securing a conventional mortgage with 5% down. You’ll learn about:

• The benefits of putting 5% down on a conventional loan
• Who qualifies for a 5% down payment conventional loan
• Requirements and costs to expect
• How to compare 3% down conventional loans
• Tips for getting approved and buying successfully with 5% down

Let’s get started on demystifying the conventional 5% down home loan so you can determine if it may be the right fit to make your property dreams a reality!

Why Putting 5% Down On A Conventional Loan Is A Game Changer

Traditionally, lenders have wanted buyers to put down 20% on a home to get a conventional loan. But in recent years, guidelines have loosened, and it’s now possible to buy with as little as 3-5% down on a conventional mortgage. This increased accessibility is a total game changer if you’ve been discouraged by the down payment hurdle.

Here are some of the biggest benefits of securing a home with a conventional 5% down loan

• Gain access to homeownership sooner You likely don’t have tens of thousands of dollars just lying around A 5% down conventional loan allows you to purchase sooner rather than face years more of skyrocketing rents,

• Avoid FHA mortgage insurance: FHA loans are one of the other most common low down payment options. But they come with high monthly mortgage insurance you pay for the life of the loan. A conventional 5% down loan has lower private mortgage insurance (PMI) that you can cancel once you build 20% equity.

• Take advantage of rising home prices: As home values rise, you benefit from equity growth rather than throwing money away on rent. With only 5% down, you can get your foot in the door.

• Potentially lower interest rates: Conventional loans often come with lower interest rates than FHA or USDA loans. This means you pay less interest over the life of the loan.

• Investment opportunity: Real estate has proven to be a solid investment over decades. Owning builds wealth through equity and appreciation.

Clearly, conventional 97 5% down loans open doors that otherwise may seem locked for hopeful homeowners. But who exactly qualifies for these mortgages?

Conventional 5% Down Loan Requirements And Costs

The great news is that conventional 5% down loans are available even if your finances aren’t perfect. Here are some key requirements and costs to be aware of:

Down payment funds: Lenders want to see your down payment is from your own savings or gift funds rather than borrowed money.

Private mortgage insurance: You will need to pay for private mortgage insurance, also called PMI. This protects the lender if you default. On a $300,000 home, PMI may cost $95-$150 per month depending on your credit score.

Credit score: You’ll need a minimum credit score of usually around 620. But scores of at least 720 get the best rates and lowest PMI.

Debt-to-income ratio: Lenders want to see that no more than 45% of your gross monthly income goes toward your mortgage payment and other monthly debt payments.

Occupancy requirements: To get a conventional 5% down loan, you must plan to make the home your primary residence and live there for at least one year.

First-time home buyer status not required: You don’t have to be a first-time buyer unless putting down 3% with certain conventional loan programs.

Homeownership education not required: Taking a homebuyer education course is recommended but not required.

Property restrictions: Single family homes and condos are generally eligible. Non-owner occupied and 2-4 unit properties require a larger down payment.

As you can see, the barriers to get approved for a conventional 95 loan are definitely surmountable for many buyers. Working to improve your credit and save up 5% for downpayment and closing costs are very realistic goals!

How Do Conventional 3% Down Loans Compare?

Wondering whether to go for a 5% or 3% down conventional mortgage? The differences are relatively small, but here’s what you should know:

• Lower down payment needed: You’ll only need $9,000 down instead of $15,000 on a $300,000 home purchase. This frees up cash.

• Potentially higher mortgage payment: With a bigger loan amount, your principal and interest payment may be $25-$50 per month higher with 3% down compared to 5% down.

• Similar PMI costs: Private mortgage insurance is required for both loan types. PMI is only $10-$20 higher per month on a 3% down conventional loan for a borrower with a 740 credit score.

• Earlier PMI cancellation: Those with a 3% down conventional loan can request PMI cancellation after only 2 years once they reach 25% equity versus 20% equity for a 5% down loan.

• Tougher approval criteria: You may need a higher credit score, income and reserves to qualify for a 3% down conventional mortgage. First-time buyer programs are common.

For buyers who only have enough saved for 3% down, know that you still have an option besides FHA. But carefully consider if you can stretch your savings to 5% down for an easier path to approval and ownership.

5 Tips For Success With A Conventional 5% Down Loan

Follow these homebuying best practices when securing a property with only 5% down:

1. Check your budget carefully

Know your full monthly payment including principal, interest, taxes, insurance and any HOA fees. Make sure it aligns with your budget so you don’t end up house poor.

2. Shop multiple lenders

Work with a loan officer who is an expert on low down payment programs including conventional 95 loans. Get multiple quotes to find the best rate.

3. Explore down payment assistance

Down payment assistance programs offered by local housing authorities and non-profits could potentially help cover your down payment and closing costs.

4. Have reserves post-closing

While you don’t necessarily need reserves to close, lenders want to see you’ll still have emergency savings left over after your downpayment.

5. Monitor your credit profile

Keep tabs on your credit report and FICO mortgage scores. Continue paying bills on time and lowering debts. Any credit blips can impact approval or your interest rate.

Buyers who educate themselves and take the right steps can absolutely attain their homeownership dreams with as little as 5% down using a conventional mortgage. It provides a realistically achievable path to finally stop renting and enjoy the benefits of owning your own property.

Do you think a conventional 5% down loan may be the right move for your home purchase? Reach out to get pre-approved and start viewing homes! Our team can guide you through the process from start to finish.