Unlocking Homeownership With A 5% Down Conventional Loan in 2023

Saving up enough for a down payment is often one of the biggest hurdles for first-time homebuyers. The idea that you need to put 20% down to buy a house has become ingrained in many people’s minds. But what if I told you that you may only need 5% down to purchase your dream home?

It’s true – with a conventional mortgage loan, you can buy a home with as little as 5% down This can significantly accelerate your path to homeownership. Keep reading to learn everything you need to know about 5% down conventional loans.

Why is 20% Down a Myth?

Where did this myth come from that you need to put 20% down on a house? It likely started decades ago when lenders were stricter about down payments. But times have changed, and that’s no longer the case.

The reality is that with a conventional loan you can qualify for a mortgage with a down payment as low as 3-5%. Many first-time homebuyers are unaware that conventional loans offer low down payment options.

Putting less than 20% down used to be domain of government-backed FHA and VA loans. But conventional loans now compete head-to-head with government mortgages.

In today’s housing market holding out for 20% down can actually put you at a disadvantage. Home prices are rising so fast in many areas that a 20% down payment target can be demoralizing. By the time you save up that much your target home price may have risen out of reach again.

Additionally, putting less money down leaves you with more cash reserves after closing. This gives you a financial cushion in those critical first years of homeownership.

Overview of 5% Down Conventional Loans

Also called a conventional 95 loan, this program allows you to buy a home with just 5% down. The rest is funded with a conventional mortgage.

Here’s a quick rundown of the key details:

• Down Payment: 5%
• Loan Types: 30-year and 15-year fixed-rate mortgages
• Eligible Properties: Single-family homes, condos, townhomes
• Occupancy: Must be owner-occupied as your primary residence
• PMI: Required until you reach 20% equity

Conventional loans are backed by Fannie Mae and Freddie Mac. They offer competitive interest rates and have flexible qualification guidelines. This makes them a great option for low down payment borrowers.

Benefits of 5% Down Conventional Loans

Putting less money down to buy a house may seem risky. However, today’s low down payment conventional loans offer many advantages:

1. Easier to Qualify

Since conventional loans are not government programs, the approval guidelines are more flexible than FHA or USDA loans. Minimum credit scores are lower and debt-to-income ratios can be higher.

2. Lower Monthly Mortgage Payments

With a bigger down payment, you’ll borrow less and have lower monthly payments. On a $300,000 home, a 5% down payment saves you about $40 per month compared to 3% down.

3. Build Equity Faster

When you put down less money upfront, you start building equity sooner. Equity is the portion of your home you own outright. With a 5% down conventional loan, you’ll typically reach 20% equity in less than 5 years.

4. Cancel PMI Sooner

Conventional loans with less than 20% down require private mortgage insurance (PMI). But with 5% down, you can request PMI cancellation after just 2 years of on-time payments if you’ve built up 25% equity.

5. Keep More Savings

A smaller down payment preserves more of your cash. This gives you a cushion for moving expenses, home repairs, and those inevitable new homeowners costs.

**6. Lock In Lower Interest Rates **

Interest rates often trend up over time. So putting less down now allows you to get into a home and lock in a low mortgage rate before rates rise further.

7. Stop Throwing Money Away on Rent

The sooner you can purchase a home, the less money you waste on rent. Buying a house allows rental payments to be invested in your own property.

What Are the Requirements for 5% Down?

While conventional loan requirements are flexible, you still need to meet some standards to be approved:

• Credit Score: Typically at least 620, but scores of 720+ get the best rates
• Debt-to-Income Ratio: Generally allowable up to 45%
• Loan Amounts: Conforming loan limits apply ($726,200 for single-family homes in 2023)
• Homebuyer Education: Not required but highly recommended for first-time buyers
• Property Types: Single-family homes, condos, townhomes are eligible in most cases

You’ll also need to be able to document stable income. Self-employment, commission, and rental income can be used to qualify if you can prove it is consistent.

And don’t forget, you’ll need private mortgage insurance with less than 20% down. More on that next.

Private Mortgage Insurance With 5% Down

The tradeoff of putting down less upfront is that lenders require private mortgage insurance (PMI). This protects the lender if you default on the mortgage.

PMI costs vary based on your down payment amount, loan amount, and credit score. With 5% down, PMI typically adds between 0.25% – 1.75% to your interest rate.

On a $300,000 loan amount for a borrower with a 740 credit score, monthly PMI would be around $95. PMI can be canceled once you build 20% home equity through appreciation and mortgage paydown.

Some lenders let you cancel PMI with just 10% equity if you have good payment history. With a 5% down conventional loan, you can request cancellation after just 2 years if your home value has risen enough to reach 25% equity.

Alternatives to 5% Down Conventional Loans

While 5% down conventional mortgages offer flexibility, you do have other options too:

FHA loans allow down payments as low as 3.5%. They are government-backed and have flexible qualifying guidelines. However, FHA loans require mortgage insurance for the entire loan term.

VA loans offer 100% financing for qualifying veterans and military members. Income and credit standards are also lenient. But you must pay a VA funding fee.

USDA loans provide 100% financing for low-income borrowers buying in designated rural areas. Credit standards are flexible and no monthly mortgage insurance is charged.

Down payment assistance programs through non-profits or housing authorities provide grants or low-cost loans to cover some or all of your down payment. These programs have income limits and other requirements.

Be sure to shop around and compare mortgage rates and fees across multiple lender options. This will help you identify the best loan program and down payment strategy for your situation.

Tips for Successful Homebuying with 5% Down

If you’ve decided a conventional 95 loan is right for you, here are some tips for making it through the homebuying process smoothly:

• Get pre-approved – Being pre-approved shows sellers you’re serious. It also gives you a realistic budget for home shopping.

• Know your numbers – Have a budget and know your max monthly payment. Compare payment affordability across loan programs.

• Mind your credit – Keep credit scores high and avoid new credit lines while loan shopping. Check for errors on your reports.

• Document gift funds – Money from family for your down payment must be documented as a gift, not a loan.

• Research down payment help – If you’re still short on down payment funds, look into down payment assistance programs in your state or city.

• Inspect before closing – Do a thorough final walkthrough before closing to identify any issues or repairs needed.

• Buffer closing costs – Closing costs often run 3-5% of the total loan amount. Have extra savings to cover these fees.

The bottom line is that the 20% down payment “rule” is a thing of the past. Conventional loans now offer low down payment options that can get you into a home faster.

If homeownership is your dream, don’t let the lack of a large down payment deter you. Explore your options – you may be surprised at just how achievable buying a house can be.