Can You Put 3% Down on a Conventional Loan? Everything You Need To Know

Putting down 20% for a home loan can be difficult, especially for first-time homebuyers. Luckily conventional loans allow buyers to put as little as 3% down in many cases. Here’s what you need to know about making a low down payment with a conventional mortgage.

What is a Conventional Loan?

Conventional loans are mortgages that are not backed by the government. This contrasts with FHA, VA, and USDA loans which have government insurance or guarantees.

Conventional loans are issued by private lenders and conform to the underwriting guidelines of Fannie Mae and Freddie Mac These two government-sponsored enterprises purchase conventional loans from lenders, allowing the lenders to free up capital to issue new mortgages

There are two main types of conventional loans:

• Conforming Loans – These loans meet the lending limits set by Fannie Mae and Freddie Mac. For 2023, the conforming loan limit for most areas is $726,200. Higher limits apply in expensive housing markets.

• Jumbo Loans – These are conventional loans that exceed the conforming loan limits. They are typically used for luxury homes.

Conventional loans come in a variety of terms, with 30-year and 15-year fixed-rate mortgages being the most common.

Conventional Loan Requirements

To qualify for a conventional loan, you’ll need:

• A credit score of at least 620
• A debt-to-income ratio below 50%
• Steady income and employment history
• Sufficient cash for down payment and closing costs

The minimum down payment for a conventional loan depends on your situation:

• 3% Down – First-time homebuyers can qualify for 97% LTV conventional loans with just 3% down. At least one borrower must be a first-time buyer.

• 5% Down – Required for non-owner-occupied properties or second homes. Also needed if you’ve owned a home recently.

• 10% Down – May be required if you have excellent but limited credit history. Also needed for jumbo loans in many cases.

• 20% Down – Avoiding private mortgage insurance (PMI) requires 20% down on a conventional loan. But PMI can be removed later.

The Conventional 97 Loan

The Conventional 97 loan program allows first-time buyers to purchase a home with just 3% down while avoiding FHA insurance premiums.

Here are the basic requirements:

• 97% LTV allowed
• 3% minimum down payment
• 620 minimum credit score
• Maximum 43% debt-to-income ratio
• No income limits
• At least one first-time homebuyer required
• Primary residence only
• PMI is required

Conventional 97 loans offer flexible guidelines compared to other down payment assistance programs like HomeReady and Home Possible. The Conventional 97 has no income caps, more lenient DTI requirements, and higher conforming loan limits.

Gift funds and down payment assistance grants can be used for the 3% down payment. However, at least one borrower must complete homebuyer education.

Pros and Cons of Low Down Payment Conventional Loans

Pros

• Lower down payment requirement
• PMI can be removed later
• No mortgage insurance premium like with FHA
• May allow higher loan amounts than FHA

Cons

• PMI increases monthly payments
• Higher interest rate than with 20% down
• Low down payment results in less home equity

Even with PMI, a 3% down conventional loan can provide an affordable path to homeownership for creditworthy borrowers who lack funds for a large down payment.

Alternatives to Low Down Payment Conventional Loans

If you don’t qualify for a Conventional 97 loan, here are some alternative low and no down payment mortgage programs:

FHA loans – Allow 3.5% down and have lenient credit requirements. But charge mortgage insurance premiums for life of loan.

VA loans – No down payment required for qualified veterans and service members. No mortgage insurance. Can only be used for primary residence.

USDA loans – 100% financing available in designated rural areas. Income limits apply. Guarantee fee instead of PMI.

Down payment assistance – Check for grants and low interest second loans through state and local programs. Can be combined with conventional mortgages.

80/10/10 piggyback loans – 80% first mortgage, 10% HELOC, 10% down. Higher rates and costs than regular conventional loan.

HomeReady & Home Possible – 3% down conventional loans for low/moderate income buyers from Fannie Mae and Freddie Mac. Income limits apply.

95% LTV conventional – Allows 5% down for some borrowers. Higher PMI rates than 97% LTV loan.

Steps to Getting a Low Down Payment Conventional Loan

Follow these steps if you’re interested in a conventional mortgage with less than 20% down:

1. Check your credit – Make sure your credit score is at least 620-660. Review reports and dispute any errors.

2. Reduce debt – Pay down balances and consolidate high-rate debt. Get credit cards and loans below 50% utilization.

3. Save for down payment & closing costs – Shoot for at least 3-5% of the purchase price. Use a first-time buyer program if needed.

4. Get pre-approved – Work with a lender to get a pre-approval letter based on your finances and desired down payment amount.

5. Shop and make an offer – With pre-approval in hand, you can confidently make offers on homes you can afford.

6. Finalize loan details – As you near closing, you’ll lock in your rate and finalize loan documents.

7. Close and move in – Bring your down payment and closing costs to the table to get the keys!

The Bottom Line

While 20% down is ideal, conventional loans allow qualified buyers to purchase with as little as 3% down through the Conventional 97 program. This opens up homeownership sooner for first-time buyers without sufficient savings.

A low down payment conventional loan makes sense for borrowers with good credit who want to avoid FHA mortgage insurance premiums. Just be prepared to pay PMI until you build 20% equity.