Everything You Need to Know About Down Payment Percentage for Conventional Loans

Putting down 20% is often seen as the gold standard for a home down payment. But contrary to popular belief, that high percentage isn’t required for most conventional loans.

In fact, you can get approved for a conventional mortgage with a down payment as low as 3-5% in many cases. The catch? You’ll pay an added cost called private mortgage insurance.

Understanding down payment options for conventional loans is key for first-time homebuyers. A lower percentage down makes it easier to overcome the biggest hurdle to homeownership – saving up enough cash.

In this comprehensive guide. we’ll explore

• What is a conventional loan?
• Conventional loan down payment options
• 20% down pros and cons
• Lower down payment conventional loans
• Private mortgage insurance (PMI)
• Tips for saving for a down payment
• Alternative low down payment mortgages

Let’s dive in!

What is a Conventional Loan?

A conventional loan is a home mortgage not backed by the government. These common loans come from private lenders like banks and credit unions.

Conventional mortgages adhere to underwriting standards from Fannie Mae and Freddie Mac. Loans meeting their criteria are called “conforming loans.”

Here are some quick facts on conventional loans:

• Not government-insured
• Issued by private lenders
• Must meet credit score requirements
• Loan limits apply
• PMI usually required under 20% down

Now let’s break down your down payment options.

Conventional Loan Down Payment Options

Contrary to popular belief, you don’t need a 20% down payment to qualify for a conventional loan. Here are the most common down payment percentages:

20% Down Payment

Putting down 20% or more of the home’s purchase price avoids private mortgage insurance. This option has pros and cons:

Pros:

• No PMI saves monthly costs
• Builds equity faster
• Shows financial strength

Cons:

• Must have large cash savings
• Higher upfront costs
• Ties up more money vs. investing

A 20% down conventional loan provides the best rates and lets you skip PMI. But it requires substantial savings.

10% Down Payment

Putting 10% down on a conventional loan is relatively common.

Pros:

• More affordable than 20% down
• Reasonably builds equity

Cons:

• Still pays PMI
• Higher monthly costs than 20%

While not as strong financially as 20% down, 10% is more achievable for buyers.

3-5% Down Payment

Many conventional loans allow down payments as low as 3-5%.

Pros:

• Very low cash needed
• Easier to save small amount

Cons:

• Pays PMI for life of loan
• Interest rates may be higher
• Less equity built

A small down payment gets you in the door affordably. But you pay the price long-term with higher PMI costs.

Now let’s look closer at PMI and its impact.

Private Mortgage Insurance (PMI)

Private mortgage insurance is a premium added to your monthly payment if your down payment is less than 20% of the purchase price.

PMI protects the lender if you default. Rates typically range from 0.3% – 1% of the total loan amount annually.

Here’s how PMI impacts monthly costs on a $250,000 home purchase:

As you can see, PMI adds significantly to your monthly mortgage costs. You’ll pay it for at least 5 years until you reach 20% equity.

Now let’s look at tips for saving up your down payment.

Tips for Saving for a Down Payment

Setting aside cash for a down payment takes diligent saving. Here are some tips:

• Make a budget – Track income and expenses to find areas to cut back. Look for discretionary spending to eliminate.

• Use a savings app – Automate regular transfers into a high-yield savings account. Apps make it easy.

• Save windfalls – Tax refunds, bonuses, and gifts all provide lump sums to grow your down payment fund.

• Delay big purchases – Put off buying a new car or expensive trips until after you close on the home.

• Take advantage of down payment assistance – First-time buyer programs provide grants, loans, and other help.

With consistent savings over months and years, you can build up cash for a healthy conventional loan down payment.

Now let’s look at alternatives if you don’t want to save up 20% down.

Alternative Low Down Payment Mortgages

Conventional loans give you options if you don’t have 20% down. But you can also consider these alternative mortgages:

• FHA loans – Allow down payments as low as 3.5% from the Federal Housing Administration.

• VA loans – Offer 0% down payment options for military families from the VA.

• USDA loans – Provide 0% down loans for rural buyers from the USDA.

The trade-off is you must pay mortgage insurance for the life of FHA, VA and USDA loans. But they provide other advantages like flexible credit requirements.

Talk to a lender to weigh all your low down payment mortgage options.

Wrap Up

While 20% is considered ideal, you can get a conventional loan with as little as 3-5% down. Just prepare to pay the added cost of PMI.

Careful budgeting and diligent saving makes lower down payments possible. And alternative mortgages like FHA, VA and USDA loans allow even smaller minimums.

Frequency of Entities:
Down payment: 18
Conventional loan: 19
Private mortgage insurance (PMI): 11
20% down: 7
Monthly payment: 5