Conventional Loans with 5% Down – Benefits, Requirements, and When They Make Sense

Putting down 20% for a home purchase may not be realistic for many buyers today. Fortunately, conventional loans allow down payments as low as 5% in certain cases. This guide covers the key details on conventional mortgages with 5% down – from costs to eligibility requirements.

Overview of 5% Down Conventional Loans

Conventional loans backed by Fannie Mae and Freddie Mac normally require at least 5% down for borrowers who don’t qualify for 3% down programs. While 20% down avoids private mortgage insurance (PMI), a 5% down conventional loan offers more flexible eligibility.

Key features of conventional loans with 5% down include

• PMI is required – Monthly mortgage insurance premiums must be paid until 20% equity is reached. Costs range from 0.5% – 1% of the loan amount annually.

• Fixed or adjustable rates – Borrowers can choose between a fixed or adjustable interest rate mortgage with 5% down.

• Up to conforming loan limits – 5% down loans are available on conventional loans up to $726,200 in most areas, or up to $1,089,300 in high-cost housing markets.

• Credit and income requirements – Minimum credit scores around 620 and stable income documentation are typically required. Requirements vary by lender.

While PMI increases costs, the ability to buy sooner and lock in low fixed rates often offsets the premiums. Paying PMI also builds equity faster to eventually remove the mortgage insurance requirement.

Benefits of a 5% Down Conventional Mortgage

The main appeal of conventional loans with 5% down is the ability to buy with less cash upfront. But several other advantages exist over larger down payments:

• Lower upfront costs – 5% down keeps more savings intact for other expenses like moving, renovations, or emergencies.

• Access to adjustable rates – 5% down payments open eligibility for ARMs with lower initial rates during rising rate environments.

• Build equity faster – Paying PMI contributes to equity growth, allowing borrowers to refinance out of PMI sooner.

• Buy sooner – Smaller down payments assist buyers in purchasing before home prices and rates potentially rise further.

While PMI costs add to the monthly payment, buyers can remove the mortgage insurance in just a few years by making extra principal payments to build 20% equity faster.

Conventional Loan Requirements with 5% Down

Conventional loans with 5% down have similar qualifying criteria as other low down payment options. Requirements typically include:

• Minimum credit score of 620 – Most lenders require at least a 620 FICO score. Better rates are available at 640 and above.

• Debt-to-income ratio below 50% – Total monthly debt payments divided by gross monthly income should not exceed 50% in most cases.

• Sufficient income and assets – Documented income to support the mortgage payment and other costs of homeownership is required. Liquid assets should cover the down payment plus closing costs.

• Homebuyer education – Completion of an approved pre-purchase housing counseling course may be required by some lenders.

Meeting these standards demonstrates a borrower’s ability to manage the long-term expenses that come with low down payment financing. Having no recent late payments or collections is also key.

When Do 5% Down Conventional Loans Make Sense?

There are a few scenarios where taking advantage of 5% down financing on a conventional loan may be the best approach:

• You have 5-10% saved but not 20% – A 5% down conventional loan gets you in a home sooner without draining emergency funds.

• You need access to an ARM – The lower initial rates of 5/1 or 7/1 ARMs can provide payment savings when fixed rates are high.

• You won’t stay long-term – If you may move within 5-7 years, paying PMI for a few years before selling can save more than waiting to save 20% down.

• You have great credit – Exceptional borrowers can secure low PMI rates, making the premium costs worthwhile.

Conventional loans with 5% down carry costs, but also offer flexibility. Being able to buy into a rising housing market sooner or take advantage of adjustable-rate discounts can provide long-term financial benefits that offset PMI.

Alternatives to 5% Down on a Conventional Loan

Other low down payment options besides 5% for conventional loans include:

• 3% Down Programs – First-time buyers may qualify for 3% down conventional loans like HomeReady or Home Possible. These programs have income limits.

• 10% Down – Paying 10% down increases monthly savings versus 5% down and shortens the time until PMI can be removed.

• Piggyback Loan – This combines an 80% first mortgage with a 10% second mortgage to equal 90% total financing, avoiding PMI.

• VA Loan – For eligible veterans and surviving spouses, no down payment is required on VA loans and they offer competitive rates.

• USDA Loan – In designated rural areas, USDA loans offer no down payment financing for low to moderate income borrowers.

Conventional mortgages give borrowers options across a wide range of down payments. Comparing costs and requirements helps identify the right match for your financial situation.

Next Steps – Applying for a 5% Down Conventional Loan

A 5% down conventional loan allows buying a home sooner for borrowers who can meet credit, income, and debt requirements. Keep these tips in mind for the mortgage process:

• Check your credit – Review credit reports and scores from all three bureaus to understand your mortgage eligibility and interest rate outlook.

• Save for closing costs – In addition to the down payment, closing costs like origination fees, appraisal, and prepaid taxes will total 3-5% of the purchase price in most cases.

• Get pre-approved – Apply with multiple lenders to compare interest rates and costs. Pre-approval also makes your offer stand out when you’re ready to buy.

• Know your budget – Include mortgage payments, taxes, insurance, HOA fees, maintenance, utilities, and other homeownership costs when calculating housing affordability.

A 5% down conventional loan brings homeownership within reach for many buyers who can’t finance a full 20% down payment. Reaching out to experienced lenders simplifies getting approved for the best low down payment mortgage for your needs.